When a major fire strikes a business,
it is very traumatic, but it does not
have to be completely debilitating.
The recovery often depends on fore-thought and planning, says Christine Jones,
CIC, a commercial insurance broker with
Westland Insurance Brokers.
The need to insure the business’s financial stream is crucial in protecting it from
unexpected disasters. Business income
coverage is a form of property coverage
designed to pay the loss of income and
continuing expenses that allows a business to recover following a total or partial
shutdown of operations, Jones says. Its
purpose is to replicate the income stream
and cover expenses as if no loss had
occurred, replacing income, ongoing
expenses and payroll while the business is
out of commission.
Smart Business spoke with Jones about
business income coverage, how to determine the appropriate limit and how this coverage can potentially save your business.
How do business owners determine what
type of coverage they need?
There are two ways business income coverage is typically written.
The first is actual loss sustained. This
often provides the best form of coverage
for a business. There is usually no limit to
the amount reimbursed with this type of
coverage within the 12-month policy period. A company simply must prove it would
have made that amount of money.
If actual loss sustained is not available,
the insured will have to determine a limit
that is appropriate to his or her business.
This amount is determined by providing
the insurance agent with income history
and statements and completing a detailed
worksheet to calculate future income projections of the business.
How does a business owner determine the
correct limit of coverage?
Determining limits can be more cumbersome with business income and extra
expense coverage. It is not the same as
determining coverage for property or a
physical asset. There is not a tangible value
for future income. Therefore, worksheets
and projections must be worked out carefully to determine the most accurate
income amount possible and the correct
limit required.
To determine the correct limit, we start
by asking some questions:
How long will it take to reopen?
Keep in mind fire investigation, debris removal,
etc. Will you rebuild at the current site or
move to a new location? Would the new
facility require architectural changes?
What is the estimated time needed to draw
up new plans? How long will it take to
obtain proper building permits? How often
does the board meet if you need planning
and zoning approval to rebuild? It is important to factor in potential delays. Finally,
there is the time necessary for the building
process itself.
What are other cost issues?
Are you
planning to keep all employees or just key
employees? If you let your employees go,
new ones will have to be hired and trained
before reopening for business. Plus, you
may lose talented emloyee to a competitor.
You must also keep in mind the time
required to replenish stock and replace
machinery, equipment and furnishings.
What happens if a business loses customers
in the period that it is down?
Extended period of indemnity coverage
helps with that, as well. After the business
reopens, the income stream may continue
to be disrupted if customers have moved to
a competitor. Some may even not return.
Coverage typically only lasts until premises
are restored within the 12-month period or
the limit of insurance is exhausted,
whichever comes first. However, most carriers will provide an extended period of
indemnity, which kicks in after a business
reopens. Often, there is a gap when a business reopens between what a business was
earning before the loss and what it is earning after it reopens. This will help owners
recover. Extended periods of indemnity
are typically 30 to 120 days and will cover
any loss of income for that period but will
cease after that period whether you are
fully up and running or not.
Are there other types of coverage business
owners should utilize to help their business
reopen after a loss?
Extra expense coverage is also beneficial. This coverage includes those extra
expenses mentioned earlier. It is used to
avoid or minimize the shutdown of a business. This may mean moving down the
street to lease a facility close to your original location. This coverage would pay for
that new lease and to move any supplies
that were salvageable. It is also designed to
minimize suspension of operations if the
business cannot continue to operate. The
quicker you can get back in business, the
less likely customers are to leave for the
competitor.
Extra expense coverage is critical for any
company whose customers depend on it
on a daily basis. For example, an insurance
agency will have clients with claims every
day. It is crucial to find any means necessary to get up and running so customers do
not leave and are provided the customer
service they expect.
CHRISTINE JONES, CIC, is a commercial insurance broker with Westland Insurance Brokers. Reach her at (619) 641-3213 or at
[email protected].
