Business Income coverage (sometimes referred to as “Business Interruption coverage,” meaning Net Income and Continuing Normal Operating Expenses, including payroll), is protection against loss of income or profits, in which a business has suffered a property loss or damage from a covered peril, such as a fire, natural disaster (quake, flood, storm), theft, or vandalism. This covers the time when the business is shut down until the property is repaired or replaced. Business interruption and extra expense coverage provides insurance for lost profits from an interruption in business, and extra expenses incurred in getting operations back up and running.
Business Income coverage can – and at Novita, we recommend, should – include extra expense coverage as well. Extra expense insurance reimburses your company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period. Usually, extra expenses will be paid if they help to decrease business interruption costs. In some instances, extra expense insurance alone may provide sufficient coverage, without the purchase of business interruption insurance.
According to Gartner Research, fewer than 25 percent of the Forbes Global 2000 companies actually have a full interruption plan with appropriate coverages in place beyond their IT environments. In short, most businesses are very exposed, something that becomes painfully evident following horrendous disasters such as the 2018 Camp Fire and 2017 Tubbs Fire in Northern California, which continue to take their toll.
Why carry Business Income/Interruption Coverage?
A typical property policy covers the cost to repair or replace buildings or equipment, but it will not cover the loss of income the business is likely to experience during the time period from the occurrence of the loss to the resumption of the business operation. Additionally, the business may incur “extra expenses” during this time. This includes any expenses incurred to repair or replace any property, or expenses involving research, replacement or restoring lost information on damaged papers or records to the extent that it reduces the amount of loss paid under Business Income.
There are important points to consider and review with clients prior to writing Business Interruption coverage.
• Be sure to review the carrier forms and type of Business Income coverage necessary for the particular kind of business operation.
• How many months of rental income does the client’s carrier provide? Some only cover 1 year, and at stated value.
• Inform the insured they must resume operations as soon as possible, either at the same location or another location, or coverage could be denied.
• Understand the characteristics of the operation, such as can it easily be moved to another location to resume operation?
• Are there bottlenecks in the operation where a small physical loss can cause the operation to shut down and lead to a larger loss?
• Identify the business income “stream” of the operation and how a loss will interrupt the business, and how vulnerable the business is to an interruption.
• Hone in what the potential impact of a loss would be on your client’s business; download and fill out the Business Interruption worksheet here.
Business Income coverage is intended to compensate the business owner for lost income during the “period of restoration.” This period begins when the direct physical damage occurs and ends at the time the damaged property should be repaired, rebuilt or replaced.
The coverage then pays for the loss to anticipated net profit, as well as ongoing expenses (rent/mortgage; payroll; taxes; etc.) during this period of restoration. The standard property policy limits the Business Income restoration period to 30 days, but this period can be extended to 360 days by endorsement.
Novita’s package includes Extra Expense*
Novita’s Business Income coverage includes “extra expense” for additional peace of mind, and includes the following components:
1. Lost net income (bottom line profit, including from lost customers),
2. Necessary continuing expenses (key employee salaries, debt payments, etc.), and
3. Extra expenses that would not have been otherwise incurred (rental of temporary space, storage fees, overtime, etc.)
*Check any current or proposed policy language as all claims depend upon circumstance(s) at time of loss, and final determination by an adjuster.
Determining the Amount of Coverage
Calculating Business Income
The Business Income policy pays the “actual loss of business income sustained” during this period of restoration. Where real property (see our July 17 2019 blog post, Market Value vs Replacement Cost) and personal property values can be set as far as proper limit of insurance, the proper selection of business income values, or limits, is more difficult.
Business Income Worksheet
To help target and identify a client’s business income, Novita Insurance Solutions offers a Business Income Worksheet that can show past, current and future profit and losses as well as the same for income and expenses. The selection of the amount of limits for business income would be the anticipated income/ expenses for the selected period of restoration, or referred to as the maximum indemnity period.
Contact Novita for solutions to help assist your clients in keeping their footing should a covered loss occur.