Business income insurance (aka business interruption insurance) covers a company’s loss in net profit due to a disaster. It also covers continuing expenses (eg. rent and loan payments) that a company is obligated to pay during the time the company is unable to operate.
It is important to note that business income insurance is a contingent coverage. That is, it covers consequential loss resulting from a direct loss to property. Thus a company’s property (eg. building) must suffer a direct loss (eg. fire) which is covered under that company’s property policy. The consequential loss in profit and/or continuing expenses would be covered by business income insurance. If there is no direct loss to property, or that loss is not covered by the insured’s property policy, then the business income insurance would not respond.
The application of business income insurance is obvious. It reimburses a company the revenue it normally generates while it is unable to do so. This increases the chance of quick successful recovery and retention of customers. A question that should be asked when purchasing this policy is whether there is a time frame during which the policy will respond. For example, some policies will pay for losses up to only one year after the date of the disaster. Some policies will pay indefinitely, up to the purchased limit. This is an important consideration, as a company’s full recovery to the level of operation before it suffered the disaster could take several years.
There are other coverages, not usually included in the standard business income form, that can be purchased. One is extra expense coverage. This pays any expense a company incurs in an attempt to continue operations, over and above normal operational expenses. The obvious application would be to pay for implementation of a disaster plan: hot site fees, transportation and hotel costs for employees, purchase of cellular phones, use of subcontractors, etc..
Another coverage that may be purchased is ordinary payroll. This covers ordinary payroll expenses during the time a company is unable to operate. Thus if a company suffers a major disaster, they at least won’t have to worry about where the money will come from to pay their employees.
The above information details only time element coverages. Obviously a company needs to purchase the basic property coverages such as fire, flood, earthquake, etc., to properly protect their operation. Should a company need to file a claim, what are some of the questions their insurance company’s claims representative will ask? What are some of the documentation the claims representative will need? The following is meant to give a "feel" for the types of questions that can be expected from a claims representative regarding a large loss claim.
Cause: A claims representative will be interested as to the cause of the loss (unless it is a catastrophic type loss such as flood or earthquake). If the reported loss were fire, some questions would be: Where did it start? Who discovered it; can claims speak to that person? What Fire Dept. was called? What was the Fire Dept.’s opinion of the cause? If the cause was undetermined, an independent cause and origin investigation would be initiated, and the insured would be asked to leave the premises. The insured could be asked to secure the premises (eg. board it up and/or hire security guards), pending the investigation.
Alternate Location: If the damaged premises is not tenantable, claims would ask the following: Can a temporary location be used to set up temporary operations? Is there a current list of available properties; when was it last updated? Where can supplies be quickly obtained to continue manufacturing? Can temporary office equipment/machinery be rented? Have computer records been backed up and where are those records? Are vendors (telephone, computer, etc.,) available who can provide services quickly? If production machinery is damaged, are there repair facilities available which can expedite repair/replacement. One can see from that most, if not all, of these questions should already have been addressed in a company’s disaster recovery plan. Thus a company with such a plan would be better prepared when filing an insurance claim.
Building Damage: Is the building repairable? If so, is there a contractor with whom the insured prefers to work? Does the insured own the building? Is there a mortgagee; if so, who is it? What is the outstanding loan balance? Is a copy of the loan papers available? If the building is leased, who is the owner? Is there a copy of the lease which details the insured’s responsibilities? If the building is a total loss, and the insured owns it, what is their intent to rebuild at the same location with the same kind of building?
Personal Property/Inventory: Is there a current list of all personal property, and can the articles damaged/lost be identified? What are the values of the damaged articles? Can the articles be repaired? Can accounting books be reviewed to verify the values being claimed? What other supporting documentation is available to substantiate the articles being claimed? When was the last inventory completed, and is a copy available? Does any other party have an interest in any of the insured’s personal property? If so, who is that party, what is their interest, and a can a copy of the agreement be obtained?
If a company carries $5 Million dollars of property coverage, and a large loss is suffered, that company cannot put in an unspecific claim for the entire $5 Million dollars. Documentation will be required to substantiate the values of what are being claimed to be lost.
Business Income/Extra Expense: Can operations be resumed on a temporary basis? What are an insured’s continuing vs. non-continuing expenses? (Recall from above that continuing expenses are normally covered by business income insurance. Rent payments may or may not continue. Loan payments on the building generally continue as do all other "contract" type expenses. Electric, gas, phone, and ordinary payroll can be suspended until operations are resumed.) Are copies of a company’s Profit and Loss Statements from the past 2-3 years available? (This allows the insurance company to determine the profit that is lost due to the disaster. An independent CPA may be hired to assist in the analysis of the insured’s financial status, and their projected loss earnings.) How long does the insured anticipate being out of business, and how long does the insured estimate it will take to resume operations? What processes, if any, can be subcontracted out at an extra expense to meet sales obligations to the insured’s customers? What outstanding contracts are not going to be met by the insured as a result of the disaster?
Being prepared when filing a claim can greatly facilitate the claims process and increase the insurance company’s ability to assist at the insured’s time of need. Business income coverage can be an invaluable contribution to a company’s recovery after a disaster. The above information is meant to be a general guide regarding business income insurance and the claims filing process. More complete and more accurate information should be available from a company’s insurance agent and insurance company.
Our evaluations, reports and recommendations are made solely to assist the insurer in underwriting and loss control. No warranties or representations of any kind are made to you or any other party. Evaluation for any hazard or condition does not mean that it is covered under any policy. Any reports or certificates we provide in connection with any state-required pressure vessel inspection do not mean that all hazards or conditions were under control at the time of the inspection. Neither we nor the insurer shall be liable to you or any other person for the use of any information provided or statements made by any of our employees or agents during the performance of an evaluation.
Sandy Van Mill has been in the insurance industry since 1972, and has been with Chubb Group of Insurance Companies since 1985. She is a Property Claim Supervisor, and is responsible for adjusters in Missouri, Kansas, Iowa, and Nebraska. • Al Gliane, CBCP, CSP, is a Senior Loss Control Representative, and has been with Chubb since 1988. He is responsible for risk assessment involving property, liability, and workers compensation issues. He has been providing assistance to insureds in developing their business continuation plans for 5 years.