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Volume 32, Issue 1

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Coverage Could be the Difference Between ‘Staying in Business’ and ‘Out of Business’
A fire rages through a restaurant, destroying the structure and leaving employees with no work and the business owner with no income. A property insurance policy will cover the rebuilding of the structure, but will the business survive to occupy the new establishment? How will the owners handle the loss of income while still retaining their trained employees and established clientele? How will ongoing expenses such as payroll, taxes, and utilities be met?
The answers to these questions are as close as your insurance agent. Policies exist that can provide coverage for all of these scenarios and more.
Business interruption insurance is designed to minimize your risk in the event of a loss. Key benefits include protection against reduced income, payment of continuing expenses, and maintaining salaries of key employees. One restriction is that the interruption or suspension of business must be caused by a covered loss.
“I consider business interruption insurance to be business survival insurance. It is an important part of business recovery,” said Michael
Roney, senior director of commercial property at Fireman’s Fund Insurance Company.
Business interruption insurance, also known as business income coverage, covers the financial losses that result from a business suspension or interruption. If an adequate policy is obtained, it can restore a company to the same position it was in before the loss occurred.
In some cases, business interruption insurance is included as part of a package property insurance policy, but in most cases it is an addition to the existing commercial property policy.

Roney said business interruption insurance is a common purchase for business owners.

“It is rare to see someone turn down business interruption coverage,” he said. “It is such an essential part of business recovery. I would not be a business owner and not purchase this type of insurance.”

Roney quoted a statistic known in the insurance industry that reports “up to 50 percent of those businesses that choose to operate without business interruption insurance never recover following an interruption or suspension of business.”

Overall, purchasing the coverage is simple, explained Roney, but discerning an organizations’ needs can be difficult. Types and amounts of coverage may differ for different businesses.

“Business income insurance is common, but not necessarily well understood,” he said. “You need to dig into your coverage and determine what meets your needs. Do your homework and discuss it with your insurance agent.”

Types of coverage include:

Business interruption insurance – compensates the insured for income lost during the restoration period or the time necessary to repair the physical damage to the covered property. For example, a fire burns through a retail shop. If the business owner had insurance coverage for the fire, the business interruption insurance would cover lost income and continuing operating expenses, i.e. taxes, payroll, loans, and utilities until the structure was rebuilt.

Extended business interruption insurance – provides coverage for the income lost after the property is repaired but before a pre-loss level of income is reached. For example, once the retail shop owner opened for business again in the rebuilt structure, this insurance would provide additional coverage during a pre-determined time while the shop returned to its pre-loss income level.

Extra expense insurance – reimburses a company for money spent, over and above normal operating expenses, during the restoration period. For example, the retail owner needed to re-compile business records and legal documents lost in the fire or pay storage fees for merchandise sent from suppliers. This insurance would cover the extra expenses that would not have occurred if the loss had not occurred.

Contingent business interruption – provides coverage for the insured’s loss of income resulting from physical damage to the property of providers or suppliers or consumers of its product or services. For example, if the retail owner’s shop did not burn, but a supplier’s did, this insurance would cover the loss incurred by non-delivery of merchandise or supplies.

Obtaining the correct coverage is essential for a full recovery from a loss.

In addition to the above policies, specific adjustments or changes can be made to each policy. Possible coverage adjustments that should be examined include:

Extended period of indemnity – This may lengthen the period for extended business interruption coverage for a specified time beyond what is granted under the basic business interruption coverage (usually 30 days).

Coinsurance provision – Requires that the insured pay a share of the business income loss if the actual loss is substantially higher than the estimated income established at the time insurance was purchased.

Ordinary payroll exclusion – Excludes the payroll for employees other than officers, executives, department managers or employees under contract.

According to Roney, business income insurance can activate immediately following an interruption or after a waiting period, depending on the policy negotiated with the insurance company.

When calculating the amount of business interruption insurance coverage to purchase, Roney advises clients to obtain the maximum amount of protection by assessing future growth and peak periods sales or production.

For example, if a retailer sells holiday greeting cards, their income fluctuates since it is a seasonal business. If upon analysis of a yearly income total, the insured purchases 50 percent coverage. Yet the business interruption occurs during one of the peak periods; their losses could reach 80 percent. The retailer would actually be under-insured, even though the average income might have been covered.

“Look at the maximum amount of time for an outage and the maximum amount of income that could be lost to get accurate coverage,” advises Roney.

It is recommended that 12 months of business interruption insurance be secured in order to protect against loss of income. While smaller buildings may be rebuilt in less than a year, time will also be required for debris removal, obtaining bids and permits, and meeting building ordinances or codes. In addition, plan for weather or labor shortage delays.

“Often the insured may be focusing on pre-loss costs rather than on post-loss survival. But if an interruption occurs and it is discovered they are not fully covered, they realize the cost-cutting was not beneficial,” Roney said.

Because premium costs vary depending on individual organizations’ vulnerabilities, risks and circumstances, there is no set cost for the coverage. Each policy is individualized.

“Do not assume that premiums will increase dramatically with the proper coverage. If the insured does the homework and finds the right limits, they can be confident in their coverage.”

Awareness about insurance coverage has risen over the past few years, due in part to several large-scale disasters that have gained attention. But, awareness is only part of the formula for success, explained Roney.

  • He listed several key points the insured should heed when obtaining business interruption insurance.
  • View the insurance policies as a critical tool for business survival.
  • Know your coverage and be certain of its protection.
  • Don’t sweat the cost. Lesser payments often equal inadequate coverage.
  • Understand the limitations. Consider extra coverage and endorsements that are available.
  • Make insurance purchases on the basis of post-loss needs, not on pre-loss costs.

Roney also advised that the insured work closely with their insurance professionals to ensure all the key needs have been met.
“Use your insurance professional to your advantage,” he said. “There are resources there to help.”

Janette Ballman has served as an editor with Disaster Recovery Journal since 1991. She has reported on numerous disasters and business continuity issues during that time. Ballman received a journalism degree from Mississippi University for Women in 1989.