If you were asked what Business Income and Extra Expense coverage is, would you know? More importantly if your business suffered a major loss would you be protected, or would your business end up in financial ruin and possibly out of business?
The first part of this two part series we will discuss Business Income. The second part will focus on Extra Expense.
Business Income, also referred to as Business Interruption, is a property coverage that pays for the actual loss of business income (net income and normal continuing operating expenses) that your business sustains due to suspension of operations as a result of a covered loss. There is typically a waiting period or “deductible” before the policy will respond. In many cases (although this can be waived or lessened by endorsement) this waiting period is 72 hours – meaning coverage will not kick in until 72 hours after the loss.
The insurance carrier is only liable for the loss of business income during the period of restoration. The period of restoration is the length of time it should, with reasonable speed, take (beginning from the time the loss occurs) to rebuild, repair or replace the damaged property. In many cases, the policy form may include (or may be endorsed to include) Extended Business Income. This allows additional days (i.e. 30, 60, 90 – specified in your policy) after the period of restoration ends for you to fully resume operations to a pre-loss level.
It is critical to determine the coverage option that best fits your business needs/exposure. Below are a few common options:
- Coinsurance: Requires a business income worksheet. The worksheet is used to estimate the business’ annual business income for the upcoming 12 month period. The coinsurance clause is then chosen.
- Actual Loss Sustained: Avoids coinsurance. Typically with a 12 month payout, there is no actual limit stated; however, the loss must be proven and the proof is the amount that will be paid.
- Maximum Period of Indemnity: Avoids coinsurance and completing a business income worksheet. This limits the coverage amount to 120 days or until the purchased limit is paid out, whichever occurs first. This is a good option if you are certain they can return to full operation within 120 days.
- Monthly Limitation of Indemnity: Avoids coinsurance and completing a business income worksheet. This caps the amount of coverage available in any 30-day period. The chosen limit of coverage is multiplied by a fraction (1/3, 1/4, 1/6) to determine the maximum pay out during any 30-day period. Payments will continue until you use up the full chosen limit or returns to full operation whichever occurs first.
- Agreed Value: Requires a business income worksheet every year. This waives the coinsurance penalty as long as you are insured to the agreed amount and the worksheet is completed. You and the underwriter agree up front on the amount of “insurable” business income. You agree to carry the pre-determined amount and in return the underwriter agrees to pay the business income loss up to that limit.
It is important to understand that the terms of coverage can vary by policy and the information above is intended to be an overview. If you have questions on how your business is insured for this coverage, please give your agent a call. Stay tuned for part 2 on Extra Expense.