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Business Income Insurance

Protect your company’s income stream following a catastrophe.

Business income insurance is probably one of the least understood components of an insurance program, yet it is probably one of the most important. It is akin to what disability insurance does for us personally should we become injured and unable to work—it protects our income stream and our ability to pay bills.

The same applies to a business if it becomes injured in a way that interrupts its operations and will ultimately affect cash flow, i.e. stream of income. To be clear, business income insurance is designed to replace income that would otherwise have been earned by the business had no loss occurred. Unfortunately, it has been found that businesses are not typically insured properly in this regard. Some businesses may be underinsured, over-insured, have detrimental exclusionary language contained in the policy, or they might not have the necessary endorsements in their policy that actually expand coverage to address specific exposures. A shortfall in coverage can have a disastrous effect on the future viability of the business.

Business income insurance is designed to replace income that would otherwise have been earned by the business had no loss occurred.

Business income is generally defined as net profit or loss before taxes, plus continuing normal operating expenses, including payroll. Coverage is usually limited to the loss of income sustained until the property is restored, or for 12 months following the physical loss or damage. Some questions to ask here are: What would happen if it takes longer than 12 months to repair the premises? What is meant by the term “restored”? Does that mean my business is fully operational just as it was prior to the loss?

Coverage, however, must be triggered by a covered peril described in the business income coverage section. If the event was not as a result of a covered peril, then there is no coverage. What is a covered peril? Are my exposures covered under my current policy?

Steps for Material Handling Dealers
The material handling industry encompasses a variety of operations including manufacturing, distribution, warehousing, construction and systems installation. Whatever your operation is, you have exposure. It should be addressed with attention to detail. The relevance of this is extremely important—according to the Insurance Information Institute, 75 percent of all businesses that experience a catastrophic loss are out of business within two years. This is mainly a result of improper business income insurance or an incomplete loss mitigation program.

Outlined here are some areas to investigate to help you better protect your business with regard to a potential business income loss.

Develop a Plan
Conduct a thorough review of your operations and exposure to risk. This is the staring point to get you to ultimately understand how to better protect your business. If you do not know what your exposures are, how can you expect to protect against loss? Draw maps and diagrams of your supply lines and income streams. Recognize and understand where a potential interruption could affect your business.

Research Your Exposure
Once you discover what your exposures are, seek to equate them with financial loss. For example, if your building were to burn to the ground tomorrow, how would that affect your business? What would that do to cash flow? How long would it take to rebuild and get operations (cash flow) to where they were prior to the loss? What if your main supplier suffered a loss that now cut off your supplies to complete your process? Would you still be able to operate? For how long? Are there other suppliers that you could tap into for the short term?

It is at this point where you complete a business income worksheet. The worksheet contains questions addressing your company’s income, continuing expenses and projections of how long you might be out of business should a loss occur. Some of these will provoke some thought while completing the worksheet. Some answers may be guesses, but they should be educated guesses. Do some research. The time to investigate is prior to a loss.

Determine the Appropriate Coverage
After you have assessed your exposures and completed the business income worksheet, it is now time to determine what the appropriate coverage design will be to properly cover your business. This is where it can become extremely complicated. There are a variety of coverage forms, such as business income with extra expense, business income without extra expense, extra expense coverage form and leasehold interest coverage form. Which form is right for you? There are the causes of loss forms to consider—basic, broad and special. Again, which one is right for you? However, there is no real good reason why you would not have the special form (the broadest).

According to the Insurance Information Institute, 75 percent of all businesses that experience a catastrophic loss are out of business within two years.

Then there are the endorsements to consider. There are endorsements that exclude coverage and there are endorsements that expand coverage. For example, does the policy you purchased contain exclusionary language with regard to “idle periods,” “loss of contracts,” “consequential losses,” “utility interruption” and “finished stock,” just to name a few? All of these could affect your recovery.

Some of the endorsements that expand coverage are “expanded limits on loss payment,” “business income from dependent properties (broad form),” “utility services,” “increased period of restoration” and many more. Which ones do you need? Which ones don’t you want to have contained in your policy? Again, this takes analysis and foresight.

Have a Backup Plan
At the same time you are considering the issues above, you should be thinking about backup and contingency plans in the event of a loss and how to mitigate the consequences. How do you get your business back in operation? Who do you call first, second and so on? Do you have a process to get your business back up and running should you experience a disaster? Are there other firms you can partner with to assist you in the process and keep your business productive? The answers to these questions are vital to a successful outcome should you experience a business income loss.

Business income insurance can be a very detailed and complex topic. There are many points to ponder and a variety of scenarios to consider. One could spend days on addressing one portion of coverage for a larger organization. The bottom line is to recognize that there are many questions that should be asked in order to come up with the appropriate solution to your business income insurance needs. Take the time to address it. Someday it may serve to save your business!

Material Handling Equipment Distributors Association
Meet the Author
R. Scott Wolff, CIC, CRIS, is a partner at Premier Risk Management LLC, an insurance consulting firm located in Hasbrouck Heights, New Jersey, and on the Web at www.premierriskmgt.com.

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