Business Income Insurance protects your business against lost profits due to damaged or destroyed property.
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This insurance is important for companies that rely on physical assets to operate their business, which includes most retail, restaurant, wholesale, and manufacturing businesses. Some service businesses, like hair salons, which require specialized facilities should purchase business interruption insurance. However, an appliance repair service that performs repairs at customers’ homes may not need this coverage.
For example, a retail bakery suffers a fire. It takes the bakery 2 months to clean up and reopen. The business has both property and business income insurance. The property insurance will cover the damages to the bakery’s equipment and storefront. The business income insurance will cover the lost profits for the 2 months that the bakery is not in business. If the bakery only had property insurance, and did not have business income insurance, it would have been in danger of going out of business while recovering from the fire.
Who needs Business Income Insurance?
Business income insurance is important for companies that:
- Depend upon physical properties and assets to operate their business
- Are located in areas with frequent natural disasters
- Have equipment or machinery that is heavily customized or time-consuming to purchase
What does Business Income Insurance Cover?
Business Income Insurance protects your business against a loss of income if your business is unable to operate due to damage or destruction of property by a covered peril. It will pay for the actual loss of business income due to a necessary suspension of business operations during a period of restoration.
A suspension in your business occurs if your business operations slow down or stop. The suspension in your business must be caused by the direct physical loss, damage or destruction to property used your by business. The loss or damage must result from a covered cause of loss in your property insurance policy, and the perils covered are identical to your property policy. For example, fire is covered in property insurance, but flood is usually not covered, so fire would be covered in the business income insurance policy, and flood would also be excluded. To learn more about covered risks, please read our article about Property Insurance.
If you lease your business premises, the building that houses your business may not be insured under your property policy. However, if the building suffers physical damage from a cause of loss that is covered in your policy, you will still receive coverage under your business income insurance policy.
Loss of Business Income
The insurer will pay your business for the actual loss or reduction of business income due to the covered cause of loss up to the limit of insurance. Business income is defined as the net profits of the business plus any fixed expenses the business incurs, including payroll expenses. Fixed expenses include items like utilities, rent, and employee salaries.
Because business income insurance covers your fixed expenses, it may help you retain valuable employees or pay for bills you are liable for while your business is unable to operate.
Period of Restoration
The period of restoration is the amount of time that is reasonably required to rebuild, repair or replace the damaged or destroyed property, or the amount of time required to move into a different property and permanently reopen, whichever is shorter. During this period, the insurance company will compensate your business for lost income under a business income policy.
For example, a factory catches on fire and is destroyed. It takes 3 months to move to a new building, purchase, install and configure new manufacturing equipment so that the factory can reopen. The period of restoration lasts from the time of the fire until the factory reopens in 3 months.
The period of restoration does not end if the policy expires or ends, as long as the physical loss or damage occurred while the policy was active. The insurer will continue to pay for losses to business income up through the end of the period of restoration. For example, assume your business experiences a loss on May 25, and the policy ends on May 31. The period of restoration for this loss is 2 months, so the policy will pay for your lost business income through July 25 even though the policy has expired.
On many policies, the period of restoration is limited to a maximum of 12 months. This maximum can usually be extended up to an additional 24 months when purchasing the policy by paying an additional premium.
Business Income Insurance is usually subject to a waiting period, which is most commonly 72 hours. None of the losses to business income during the waiting period are covered. The waiting period begins at the time of the loss.
What doesn’t Business Income Insurance cover?
Business Income Insurance is not meant to cover normal business risks such as economic risks or poor business decisions. It is meant to protect your business against accidents and disasters that are out of your control.
Some things that business income insurance does NOT cover include:
- Reduced profits due to competitors or changes in consumer preferences
- Poor company management
- Slowdowns in the economy
- Weather events that may close a business temporarily but not damage property, such as heavy rain or snow
Extra Expense Coverage
Extra Expense Coverage is an additional optional coverage that can cover extra expenses to keep your business running after an accident or disaster. It is valuable for businesses that need to operate right away after a disaster, or who can move to a temporary location to avoid a shutdown.
For example, your business sells office supplies, operating out of a warehouse you own. A windstorm damages one wall of the warehouse. In order to continue to service your customers without interruption, you rent a temporary warehouse. You also pay a moving company to move your inventory from your normal warehouse into your temporary warehouse. The extra expense coverage would provide coverage for these expenses.
Extended Business Income Coverage
Extended Business Income coverage is an optional coverage that can cover lost profits that occur after the business has reopened but has not yet gotten back to its pre-loss sales level.
The core business income insurance coverage only covers lost profits during the period of restoration. Once the business is reopened and able to operate at the same capacity as its pre-loss level, the period of restoration and business income insurance coverage ends. However, it may take some time before customers realize that a business has reopened, and the business may not immediately get back to its sales level before the loss occurred.
Extended Business Income coverage can compensate the business for the difference between the actual profits the business is earning after reopening and the profits the business earned before it closed. The term of this coverage can be elected by the policyholder, with longer terms requiring higher premiums.
Optional Additional Coverages
Several other coverages can be added on to your business income insurance that can provide protection against additional risks that can interrupt your business operations. These coverages require the payment of additional premium.
Service Interruption coverage can protect against direct physical loss or damage to utility lines that service your business. These utilities include electrical, gas, water, sewer and other types of utilities. If physical damage to these utilities causes your business to have interrupted or impaired operations, your income losses can be covered under Service Interruption coverage.
Contingent Business Interruption
Contingent Business Interruption provides coverage if your direct suppliers or customers suffer a physical loss to property caused by a peril listed in your policy which causes a reduction to your business income. For example, you have a manufacturing business that relies on custom precision parts from a ball bearings company, and their factory burns down. You cannot manufacture your product without their parts. Contingent Business Interruption would cover your business for the income losses you suffer while the part is not available.
Leader Location coverage protects your business if a direct physical loss occurs at a neighboring business that draws customers to your business. For example, you own an ice cream store at a shopping mall which is next to the anchor tenant, a major national department store chain. A fire at the department store closes it down for several months, causing your foot traffic and profits to suffer. Even though your property did not experience any damage, leader location coverage would cover your lost profits.
Interruption by Civil Authority
Interruption by Civil Authority covers your business if the government prohibits access to your business due to physical damage or destruction of neighboring or adjacent properties. For example, if a wildfire burns down properties near your business and continues to burn, the local government may not allow you to access your property for safety reasons. This coverage would compensate you for your income losses in this case.
When making claims on a Business Income Insurance policy, your company will need to provide records to substantiate the profits in the claim. The insurer may request records including financial statements, sales receipts, income tax returns, and rent and payroll records.
It is important to store a copy of these records off-site or in the cloud so that they are not destroyed when a disaster occurs.