Understanding the Importance of Business Income Coverage
By: Tony Matera / twitter @WI_InsSolutions
Most commonly overlooked coverage and quite possibly the most important is Business Income coverage or BI. Do you even know if you currently have BI and if so what are your limits?
Business owners insure their real or tangible assets and property meaning buildings, vehicles, machinery, inventory, and electronic systems but what is the purpose of all these assets?
To run your business and generate profits correct? Business Income coverage insures that in the event that a covered loss occurs and you cannot conduct business as usual (because you suffered a loss to your building or a critical machine is not operational) you will not suffer a loss of future potential income. Putting it in Saturday afternoon on the couch language it is kind of like the AFLAC commercials for business. While your business is on hold BI maintains your bills, mortgage and employees can still be paid.
The insurance industry has long stated that 25 percent of businesses that suffer a catastrophic loss (causing a total shut down of more than 30 days) never reopen. The number could actually be much higher.
So what does Business Income cover? Typically Business Income policies include:
- Anticipated Net Profit- Profits that would have been earned (based on prior months' financial statements);
- Fixed Costs- Operating expenses and other costs still being incurred by the property (based on historical costs);
- Temporary Location- Some policies cover the extra expenses for moving to, and operating from, a temporary location;
- Extra Expenses- Reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operation while the property is being repaired.
Few businesses can remain viable without a source of income. Mortgages have to be paid, rental expenses continue (building, machinery and equipment rentals), employees want to get paid (or they will look for other jobs, and then you will need to train new employees). These and other expenses continue even if the business is not open.
So what do you need to do to make sure your business is adequately prepared in case of a temporary shut down? Work with an insurance agent and your management team and start brainstorming "What If" scenarios.
Here is an excerpt from an article in Camping Magazine by Ed Schirick with his brainstorming;
Consider what would happen if your dining hall burned to the ground two weeks before opening day. What would you do? How would you respond to this possible interruption of your business? Here are some issues to consider after the fire is out and everyone is safe:
- How quickly can your insurance company get a claims representative on site to authorize clean up?
- Who would you hire to clean up the debris and grade the site? How much would this cost? Could they complete the job in time for camp to open?
- If the site can't be cleaned up in time, should you cancel camp or delay opening?
- What should you tell your camper families? How would you do it? Who will help you with this task? What can you do to maintain their goodwill in this time of crisis?
- What are the obstacles to staying open and using a field kitchen, large tent, picnic tables, paper plates, and plastic utensils? How would you manage these obstacles? Is there anything you can do in advance to reduce these obstacles or eliminate them? Where would you find this equipment? How much will it cost?
- As an alternative to a field kitchen, is there another location or brother or sister camp nearby that you could use by transporting your campers to their site to eat? This is the mutual aid concept. Is there a firehouse, grange hall, or other facility you could use temporarily? How much would one of these solutions cost?
- If none of these alternatives is viable and you have to cancel the season or session, what are the implications for your business? How many employees are you obligated to pay? What other expenses would continue (i.e. mortgage, taxes, telephone, electric, automobile leases)?
- How would you deal with refunding tuition? Would you have enough financial resources to refund tuition immediately?
- Are you likely to lose customers to other camps? Will you be able to get them back next year? How long will it take you to recover from the closing and build your enrollment back to pre-loss levels?
- Would your situation be different if this fire occurred the day before camp opened? While camp was open and the campers were already there? In September?
Now that you have asked the question "what if?" where do you begin setting the limits? At Ansay for example we have developed a worksheet that helps simplify the process of establishing adequate limits for each individual business. Realizing each business is unique and has their own individual challenges and exposures to reopening.
In short Business Income insurance is just that it insures your business. Making sure your doors stay open and profit continues to be generated. Now you hopefully can see why I say Business Income insurance may be the most important protection any business purchases. A business that is shut down for six months due to a major property loss could be fully insured for the building damage claim and even the contents, but still be unable to reopen because there was no money flowing in to pay all the continuing, non-loss-related expenses.
So ask your agent when was the last time your BI coverage was reviewed and how was limits set? Don't wait for your renewal to discuss, your policies are a fluid contract and can always be updated and changed midterm.
I hope this week's look at Business Income has helped. As always if you want more information or have questions please feel free to contact me directly. Thanks for checking in.
Tony Matera is a licensed independent insurance advisor with Ansay and Associates out of Port Washington WI. And is the Servicing Agent for ONMILWAUKEE.COM For more information contact him at email@example.com or call directly at 262-376-3248 www.linkedin.com/in/TONYMATERA