How Do I Protect My Organization From Loss of Income?
What is Business Income?
Business income is a type of commercial property insurance. This type of insurance protects the business income of an organization that ordinarily would be generated had the loss not occurred such as physical damage or loss to property.
When does a business income loss occur?
A business income loss occurs when all three of the following occur:
- Direct physical damage to property from a “covered cause of loss”, based on the perils covered in the applicable causes of loss form. Covered causes of loss are insurance terminology that describes how the company will define the loss/peril and fall into three categories: “Basic,” “Broad,” or “Special.”
- Special” offers the broadest protection covering all perils except those which are excluded which typically include floods and earthquakes
- A suspension of the insured’s operations (or rents) during a “period of restoration;” and
- The insured must have an actual loss of income (or rents) due to the suspension of operations
All three actions must occur, or there is no insurable loss of business income, with one exception. If an insured chooses not to resume operations or does not resume operations as quickly as possible, then the business income will be based on the length of time it would have taken the entity to resume operations as soon as possible.
The period of restoration is the time required to replace or repair the damaged property so that normal operations can resume. This is generally based on due diligence and dispatch with reasonable speed. For each occurrence of business income loss, a 72-hour waiting period applies. This 72-hour waiting period is that portion of the business income loss the insured carries. The 72-hour waiting period applies to the “period of restoration” and begins at the time of direct physical damage to property. The waiting period applies in addition to any other property deductible(s) that might apply at the time of loss.
The “period of restoration” ends as soon as the property is rebuilt, replaced, or repaired with similar quality and reasonable speed, or when the business resumes at a new permanent location, whichever comes first.
Determining Loss Coverage
Generally, a direct physical loss must occur to the covered property or what the insurance world refers to as the “described premises.” The “described premises” can have several definitions depending upon the insured’s operations and insurance policy form. It can include the area within 100 feet of the premises, or 100 feet of the building (if the insured only rents, leases or occupies a portion of the building), and any area of the building that services the premises. If the organization only rents, leases, or occupies a part of the building, the “described premises” may also include the vicinity used to service or gain access to that portion of that building.
There can be a few situations where business income insurance will apply to property not located at the “described premises.” You should refer to the terms and conditions of the business interruption policy form.
How Much Do I Need?
Determining how much insurance your organization will need depends on a variety of factors. Working with a seasoned professional can help you navigate an appropriate option that closely aligns with your business needs. Below is a list of factors to consider before selecting a coverage amount:
- How much are your monthly operating expenses?
- What would a six month of expenses look like?
- If you suffered a loss, how long would it take you to get your business up and running? A week? Two weeks? Six months?
- Do you have a backup plan for relocation or would you need some time to find a proper temporary location?
Extra Expense Insurance
Extra Expense insurance provides for necessary expenses the insured incurs to continue their operations after a direct physical loss that will enable then to reduce the period of shut down. Under extra expense, your organization must make every effort to continue operations, and the expenses must be above the organization’s normal operating expenses.
For example, after a direct physical loss, an organization rents a separate space to continue part of their operations, extra expense insurance will cover the cost of rent during the time period that their permanent location is repaired. These additional expenses will reduce the amount of business income loss to the extent the insured can resume at least part of their operations. There is no waiting period for extra expense coverage to apply.
Extra expense insurance can be purchased in addition to or instead of Business Income coverage, depending on the needs of the organization. However, remember they are two separate and distinct types of insurance.
With the increase of wildfires and other natural disasters, you might want to consider adding business income and extra expense coverage. Do not assume that your property policy will cover your organization against loss of income. Let us know if you have any questions regarding business income and extra expense coverage or would like us to provide you with a quote. We are here to help!