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Business Insurance

The Most Important Property Coverage: Business Income

Believe it or not, Business Income is often one of the most overlooked property coverages. It may be surprising to learn most businesses that close as a direct result of a catastrophic loss do not cease to exist because they lack adequate building or business personal property insurance. They close because there is no money coming in the door. Without the proper limits or structure, it can financially devastate an organization, and in many cases forcing them to close their doors.

When a business owner suffers a catastrophic loss to their building or its contents, it is easy to look at their property insurance to pay the claim. After all, if their agent has done a good job recommending adequate values over the years, a business owner can rest assured there will be enough money available to replace the building and its contents without any type of penalty. However, what happens to the business while the rebuilding takes place?

Few businesses can remain viable without a source of income. Seems fairly obvious, right? Mortgages and taxes must be paid, while rental expenses are incurred for the building, machinery and equipment. Oh yeah, and your employees expect a paycheck, or are forced to start looking for other jobs, and of course the insurance company wants their premium. All of these types of expenses continue even if the business is not “open for business.”

This is why proper Business Income coverage is the answer. It takes away the uncertainty of not knowing if there will be enough money available to reopen the doors. Even if the building and its contents were terribly underinsured, a business could still reopen and succeed following a catastrophe if it has sufficient Business Income coverage. Something as simple as obtaining a bank loan to account for the difference between the insurance proceeds and the actual cost of rebuilding a building or replacing its contents is much easier when the business can show the lender a viable and sufficient income stream.

Notwithstanding all of the above, Business Income remains one of the hardest coverages to get business owners to properly insure. First, the coverage usually only comes into play when there is a significant or catastrophic property loss, which hardly if ever happens in the life of an organization. An even bigger reason is that to arrive at the proper Business Income limit, additional work is required on the part of the insured usually by completing a Business Income worksheet. Without proper guidance from their agent, this can be a tedious annual exercise that may be done for a catastrophe that never happens.  This is why it is so important to have it done in order to have peace of mind knowing that your business will remain viable and that your employees will continue to be paid.

Simply put, a Business income worksheet is used to estimate the net profits plus continuing expenses that a business would have realized had no loss occurred. Most insurers require a completed worksheet as a condition of triggering the Agreed Value clause. This means the insurance company agrees with the amount calculated in the worksheet, and will pay 100% of a claim without any type of coinsurance penalty.  Completing a worksheet also gives an insured credibility with their insurance company, as they are taking a proactive approach to managing their risk of loss.

Business Income usually includes Extra Expense coverage. These are additional costs in excess of normal operating expenses that an organization incurs to continue operations while its property is being repaired or replaced after having been damaged or destroyed by a covered cause of loss. Extra Expense coverage is usually purchased in addition to Business Income coverage. If a building is damaged in a fire and the machinery and equipment becomes unusable, extra expense coverage can be used to rent these items on a temporary basis as well as the temporary space needed to continue operations.  If part of that same building included warehouse space, extra expense coverage can be used for the temporary storage of inventory, regardless of where it is in the manufacturing process.

Another important item mentioned above is whether to continue paying your employees during a Business Income loss. A business may opt to insure all labor, or it may choose to exclude or limit coverage for ordinary payroll. Ordinary payroll is typically defined as the entire expense of payroll for all employees of an insured entity, except officers, executives, department managers and employees under contract. All such payroll is covered as a necessary expense in the event of a catastrophic loss. There are a number of variables to consider, and the decision ultimately is with the business owner.

Despite the importance of having the proper Business Income coverage and limits, the additional premium for the coverage is usually very affordable. It is important to look at Business Income not as an expense, but rather an investment in the continued viability and health of your organization. Without an income flow or available cash reserves, your business may cease to exist following a major loss. It’s critical that business owners have adequate Business Income insurance. We are here to help get that process started for you.


Dave Chiaverini, CIC, AAI

Author Dave Chiaverini, CIC, AAI

Business Insurance Executive

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