Scott Simmonds, CPCU, ARM, CMC
Insurance Assurance Newsletter
Issue #116
Business Interruption Insurance - What You Need To Know
Business income insurance, loss of income, business interruption insurance; it's all the same thing - insurance protection for your cash flow and profits.
Part 1 - What is Business Interruption?
For many years I've used the same story to help business owners understand what exactly business income coverage does. It's a silly story, but it does the job.
Pretend you own a goose (a building). Your goose lays golden eggs (cash flow). If your goose is run over by a truck, it's going to take you nine months to get a new goose (get back into operation). You have insurance that will pay for the cost of the new goose (property insurance), but what about the value of the eggs you won't get in the nine months you're without a goose?
Business income coverage pays the value of the eggs while you're waiting for your new goose.
Part 2 - Different Types of Business Interruption
Loss of business income insurance pays your lost profits and continuing expenses while your business is shut down after a fire or other insured loss.
Extra expense coverage pays your increased costs of operation with the purpose of getting you back into business quickly. EE pays for renting temporary quarters, advertising to get customers back, costs of wiring and setting up your temporary quarters, costs of expedited shipping, etc.
Loss of rent insurance pays the income you would have received from renters had the fire or loss not occurred.
Business interruption from dependent properties pays you when a business you depend on is shut down. This could be a supplier, a customer, or a business that you depend on as a draw for customers (think about a restaurant outside of town, next to a museum - museum burns - the restaurant now has no customers).
All coverages above are triggered by damage to your property by a peril insured by your policy. If your building is damaged by a flood and flood is excluded by your policy, your lost income will also be excluded.
Part 3 - Business Interruption Land Mines
Here are some of the business interruption issues to discuss with your insurance agent:
Coinsurance - Does your loss of business income coverage include a penalty for under insurance? Ask your agent. If the answer is yes, find out how to get rid of it. You may have to fill out a worksheet that helps to determine the amount of coverage you should buy. Many agents (and many insurance buyers) hate these forms. However, filling them out is the best way to tell if you have the right amount of insurance. Tell your agent you want the agreed amount endorsement.
Running Out of Time - Does your policy limit the time that you can receive lost income payments? Most policies limit coverage to 12 months. Is that long enough? If your building were destroyed by a fire, you may have all kinds of contractors ready to help. However, if a windstorm hits, you may have to wait for some of your neighbors. Running out of coverage after a loss is as bad as having no coverage. Don't forget that your local zoning boards and inspectors are ready, willing, and able to slow things down for you too.
Running Out of Coverage - This is related to the worksheets I mentioned in the coinsurance item above. Talk with your agent about how you can be assured that you will not run out of coverage after a loss. Trust me. Few businesses really have enough coverage here. Fill out those worksheets!
Part 4 - How Much Business Interruption Insurance Should You Buy?
I have mentioned several times the idea of the business income worksheet - an almost mythic beast (according to many insurance people).
Actually, it's not that bad.
First, the worksheet is to help you, the insurance buyer, determine what amount of insurance is the correct amount. It will help you buy enough, but not too much, insurance. It will help you convince the insurance company to remove the coinsurance penalty (removal of that beast is a very good thing for you).
The form looks worse than it is (sample copy here). In most cases, you are only going to fill out two of the four columns.
Chris Boggs of the Insurance Journal and MyNewMarkets.com has written an excellent book on the subject of loss of business income. On his company's website, he shares his instructions on completing the worksheet here.
Follow Chris' instructions and you will have a much better feel for the business income coverage you need.
I recently helped my oldest daughter with her income tax forms. The IRS 1040 makes the loss of business income form look like a coloring book.
Part 5 - BOP Trouble For Small Business
Many small businesses buy insurance in the form of a package policy known as the business owner's policy (BOP). It is a great tool for insurance companies to provide common coverage to a multitude of businesses (mostly retail and office exposures). Included are the usually needed property and liability coverages.
Within most BOPs is business interruption insurance without limit. Ya-hoo! Nobody has to figure out how much insurance to buy! Nobody has to fill out an onerous worksheet (see prior section on the BII worksheet). No thought is needed! The coverage is already in there, and saints be praised!
Not so fast, Skippy!
Two big problems. (Yes, there are more than two problems. Let's keep it simple here.)
First, the BOP only provides coverage for loss of income and extra expense for 12 months. What if it takes 15 months for your building to be rebuilt? What if the damage done to your building was also done to many, many other buildings, like in a hurricane? You may have to wait in line for contractors, or your local zoning board may go on vacation and not get your building application approved for 4 months.
The second big problem is on the other side. Your business is up and running but the customers don't come to see you for a while. A damaged gift shop in Maine that reopens in February is going to be almost without customers until those nice tourists come up here in July. Your insurance company will pay loss of business income for March (most policies include 30 days of coverage to get up and running after your building is repaired). You are going to have a tough April, May, and June, though.
Your agent should be working with you on getting the right insurance. Sure, BOPs are nice and easy. There are issues that need adjusting though.
Your comments and suggestions are always welcome.
Scott Simmonds, CPCU, ARM, CMC
Consulting On, But Never Selling, Insurance
Scott@ScottSimmonds.com
www.ScottSimmonds.com
www.InsuranceAssuranceBlog.com
207-284-0085
Please Feel Free To Forward This Note To Your Business Associates
Copyright 2010, Insurance Consultants of Maine, Inc. All Rights Reserved.
We encourage sharing this newsletter with full attribution (including my web address) are included.
Do-It-Yourself Insurance Review
Concerned that you might not have the right insurance? Don't want to bring in other agents?
The $99 Business Insurance Review
We respect your privacy and will never spam you or redistribute your email address.