Many business owners wish they had
a magic pause button they could
push when they’ve suffered a loss and need to recover. But suppliers, lenders
and employees often can’t wait. Business
income insurance holds the key to helping
business owners stay in business when
their companies suffer a serious business-threatening loss.
“Business income insurance helps with
the aftermath of an insured loss,” says Bill
Reedy, instructional designer at Westfield
Insurance. “It pays for lost income as a
result of a covered loss and provides for
the continuing expenses necessary to keep
the company going until operations are
restored. A related coverage, extra
expense, provides for the miscellaneous
expenses beyond normal day-to-day operations that are now necessary due to the
loss.”
Smart Business spoke with Reedy about
the purpose of business income insurance
and how to choose a policy.
How does business income insurance differ
from other types of coverage?
Most business owners are well aware of
the need to carry fire and related property
coverage on their building and business
property. Similarly, most insurance
agents, brokers or producers recognize
this as the first step in securing tangible
asset coverage.
Business income insurance, which goes a
step beyond property coverage, is designed
to make up for lost income and cover continuing normal operating expenses
incurred (indirect loss) as a result of a fire
or windstorm (direct loss). In so doing,
business income coverage responds to the
income statement and the expense (liability) side of the balance sheet of the business, while fire coverage protects the physical (asset) side of the balance sheet.
What features should companies look for in
business income coverage?
The basic features in this type of insurance are largely standardized across the
industry, so companies should focus on where they can receive the best customization for their specific needs.
For example, a retail store has different
needs than a manufacturing plant.
Consider a florist who has clearly defined
inventory and sales peaks. The florist
needs coverage with a business income
limit that is sufficient to protect the business from the highest amount of expense
and income loss that could occur during
the period of time she needs to recover
from a loss. On the other hand, if a manufacturer relies on other entities to supply
raw materials to make his product, the
manufacturer has ‘dependent property’
exposure. In this case, if a supplier has a
direct loss, the manufacturer would suffer
an indirect income loss. The manufacturer can purchase dependent property coverage to address this business income
risk.
Because dependent property coverage is
standard across most markets, the point of
differentiation for a manufacturer is finding a trusted insurance adviser that recognizes when this coverage is needed.
How can companies determine the proper
level of business income coverage?
An industry tool for determining coverage is a business income worksheet, but
insurance carriers vary on if and when they
have businesses complete this worksheet.
Insurance Service Office, the largest
standard insurance advisory organization
and forms author, only requires that a
worksheet be completed when a business
requests coverage on an agreed value
basis. Agreed value is simply a limit that
the policyholder, agent and company
agree is adequate, based on these work-sheet calculations.
Problems arise when the agent or producer simply asks the business owner or
accountant how much income they stand
to lose in a fire, and uses this number as the
limit for business income insurance. This
approach does not take into account the
expenses required (including payroll), nor
does it allow for allowable deductions
(such as non-insurable items) that work-sheets identify. The best approach for
determining the appropriate level of coverage is to have the person in charge of overall finances for the business work in concert with a trusted insurance adviser to
decide on the coverage and limit setting.
Quality insurance advisers, such as independent agents, can strategically customize coverage through endorsements to
work in the best interest of the business
owners.
How can companies obtain business income
insurance?
By seeking out professional insurance
advisers who are familiar with business
income coverage. A professional insurance
adviser, such as an independent insurance
agent, will not only be able to better advise
on coverage, but also will be aware of a
variety of markets available.
BILL REEDY, instructional designer, can be reached at (330)
887-2859 or [email protected]. In business for more
than 158 years, Westfield Insurance provides commercial and
personal insurance services to customers in 17 states.
Represented by leading independent insurance agencies, the
product we offer is peace of mind and our promise of protection
is supported by a commitment to service excellence. For more
information, visit www.westfieldinsurance.com.