Business Income Insurance (also called Business Interruption Insurance) can be one of the most misunderstood of all property coverages. What would happen to your business if there was a fire at your building and you were unable to bring in any revenue for 1-2 months? Do you have enough money in the bank to pay rent, salaries, utilities, and all of your other usual expenses? The more that you as a business owner understand about the details of this coverage, the less of an impact a loss will have on your business.
A typical property policy will cover the cost to repair or replace buildings or equipment, but will not cover the loss of income a business is likely to experience during the time period from the occurrence of the loss to the resumption of the business operation. Business Income coverage is designed to protect you against the loss of income or profits, resulting from a property loss or damage from a covered peril, such as a fire, natural disaster, theft or vandalism. Most Business Income policies will also include an Extra Expenses section to cover incidental costs such as temporarily relocating your operations or storing any equipment or inventory off premises to avoid further damage.
Determining the Amount of Coverage
To figure out your ideal coverage amount, you should start by envisioning how your business would be affected by a catastrophe. To start, examine all the costs that would continue even if your business couldn’t operate, such as loan or lease payments and taxes. If you would want to keep workers on the payroll while you rebuild your factory or store to avoid losing skilled labor, your insurance should reimburse you for their salaries as well.
If your company is growing quickly, it would be a good idea to document several months of profits to demonstrate that income is accelerating. If you suffer an interruption, this will allow you to project that income would have continued to grow. Otherwise, the insurer may limit your coverage to the amount of the past year’s profits, which could limit your growth for the time being.
Planning for Business Interruption
Adequate preparation can improve your situation dramatically when an unexpected loss occurs. Having a formal Business Continuity Plan, which lists the necessary actions that you must take in the event of a disaster, can prevent your business from shutting down or ceasing operations. The better the plan, the better your chances are of full recovery from a catastrophe. Some details that might come in handy at the time of the loss include ways to prevent further accidents and damages, what type of space and equipment you would need to continue operations, and the steps necessary to begin repairing your property.
Another major part of preparation is to keep accurate records of all your expenses and income. Business Income coverage can be very particular in respect to what is covered, and so the more documentation that you’re able to provide at the time of the loss means less uncertainty when it comes time for reimbursement. It would be a good idea to keep a set of records on the premises, as well as a set of records offsite in case your worksite records are destroyed.
Business Income coverage can be the deciding factor in whether you are able to recover from a loss or are forced to shut your doors. Having a Continuity Plan in place and keeping accurate records are great ways to prepare yourself for any unexpected occurrences that might threaten to stop operations. When it comes to insurance, preparation is always key when minimizing damage.