Every community depends on its businesses to provide jobs to the members of the community. Those jobs pay for the needs of families in those communities, such as food, housing, school tuition, youth sports and arts as well as a multitude of other community organizations. Most business owners understand the impact that their jobs have on the community, and they work hard to grow their businesses, so that the income their companies produce is not disrupted.
Unfortunately, we all know that unexpected events occur and a company can lose its income stream as the result of just such an event. The Institute For Business & Home Safety has studied businesses that shut down due to an unexpected natural disaster or event. The institute concluded that at least 25% of the businesses do not reopen and that many that do reopen struggle to stay in business because of the financial strain. The insurance industry created an insurance coverage to replace that income stream and prevent damaging financial loss. It is known as business income insurance.
According to the standard Insurance Service Office (ISO) business income coverage form, business income insurance will pay the actual loss of business income sustained due to the necessary “suspension” of operations during the “period of restoration.” The suspension must be caused by a direct physical loss of or damage to property or premises which are described in the declarations of the policy. Property is defined to include buildings, and various types of business personal property. The insurance coverage forms do not cover many types of property including electronic data and the cost to replace or restore information. The direct physical loss or damage must be caused by a covered cause of loss. It’s important to understand that business income is defined as:
Like any insurance policy, the business income coverage form has a coverage grant and then adds limitations, exclusions and additional coverages. For the purpose of this article, the focus will be on the following limitations, exclusions and additional coverages found in the business income coverage form.
This world has changed dramatically in the reliance of automated systems to run the operations of most companies. Whether the company is a retail establishment using a centralized network, a service business performing project work for clients or a manufacturer using computerized production equipment, it relies on computer operations for the generation of business income. This limitation, coupled with the fact that electronic data does not qualify as covered property, creates a significant business income coverage gap for most companies. The good news is that this gap can be filled by purchasing a separate type of insurance known as network security or cyber insurance, and then adding business income coverage to that policy.
It is hard to imagine a business that does not rely on utility services for the generation of its business income. This exclusion requires further understanding of the business operations, because there are endorsements that can be added to a policy to remove the effect of this exclusion. However, it will require an understanding of how policy forms work together and the selection of the proper policy endorsements.
With competition coming from all over the world, most business owners will work as quickly as possible to get back into operation if they suffer a shutdown of their business from an unexpected event. If the business is not able to reopen quickly, its customers will be forced to start purchasing their products or services elsewhere. Once that occurs, there is no guarantee that the customers will return when the business begins operating again.
The standard business income coverage form will continue paying loss of business income for 30 days past the reopening date. Many businesses will require much more time to get their business back to the pre-shutdown level of profits. It’s important to evaluate this exposure to determine how much time is adequate to protect your business after it reopens. Additional time can be purchased by an endorsement to the business income insurance policy.
Recently, the Insurance Journal cited a study conducted by the Chartered Institute of Loss Adjusters concluding that 40% of the policy holders with business income insurance had a limit of insurance that was deemed to be 45% lower than needed. This statistic is alarming because business income insurance will provide the income flow for a business at the time of a tragedy to allow it to get back in business and meet its financial obligations during the rebuilding phase. Any business owner or risk manager responsible for structuring an insurance program should spend time learning about and understanding the business income coverage so the program is structured properly from both a breadth of coverage and limit standpoint.
For more information about business income insurance, contact us.
Steve Orme’s practice focuses on advising business owners in the areas of risk identification, risk management plan design and implementation, with an eye toward handling risk in the most cost-effective manner possible. Many times the plans may include an alternative to traditional insurance.
Steve Orme’s practice focuses on advising business owners in the areas of risk identification, risk management plan design and implementation with an eye toward handling risk in the most cost-effective manner possible. Many times the plans may include an alternative to traditional insurance. His client base includes construction, manufacturing, and general industry firms. Steve has over 30 years of experience in the business insurance and risk management consulting business. In his current role, he designs and implements risk management plans for clients in order to mitigate risk and reduce costs. Steve received his law degree from William Mitchell College of Law, and his BA from Metropolitan State University.
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