Did you know:
- 43 percent of businesses suffering a serious loss never reopen
- 23 percent of those that do close within three years
- 95 percent of business income losses aren’t adequately insured*
Many companies skimp on business income and extra expense coverage, even though it could save them from going out of business. If your business is temporarily closed or interrupted, this type of insurance covers your ongoing bills, as well as extra expenses incurred to keep your customers.
Why is it so often overlooked?
"These losses are intangible, it’s hard to predict the correct amount of coverage, and the coverage is typically not required by lenders," said Jon Borgen, General Casualty’s assistant vice president of commercial lines. "Because it’s complicated, often misunderstood and adds to their premiums, customers don’t always understand the need for it."
Doug Nickerson, General Casualty’s claim program manager, has seen several devastating losses where policyholders didn’t have adequate coverage to carry them through a period of business interruption.
"It’s probably the least talked about and least understood component of a commercial insurance policy," Nickerson said. "But choosing not to have business income insurance is like choosing not to insure your building - it can be devastating. Businesses absolutely need this coverage to get back on their feet."
Success stories
This story doesn’t have to be all doom and gloom. There are plenty of examples of businesses who’ve used this coverage to recover after a serious loss.
- A warehouse for a mail-order business burned down right before its busy season, ruining several ready-to-go orders and stacks of catalogues. The owners used their coverage for a hurry-up reprint order, overnight shipping and temporary help to fill orders from a semi-trailer that they used as a make-shift workspace.
- A severely damaged restaurant took two weeks to reopen even though cleanup crews worked around-the-clock. Business income and extra expense coverage kept the bills paid and wait staff, cooks and bartenders on payroll. On reopening day, the same fully trained staff was ready to serve their customers.
- The machine that polishes car bumpers at an auto parts manufacturer was damaged by fire. To fill orders, workers had to polish the bumpers manually. This significantly increased the manufacturer’s cost per part and required extra shifts and overtime - at no extra cost to the company thanks to their coverage.
- An insurance agency was destroyed in a tornado. In order to service its customers, the owners rented office space, a fax machine, phones and computers. They also used lots of cell phone minutes - all covered on their policy.
Coverage nitty gritty
Business income and extra expense coverage is handled differently depending on your policy. Under some programs, the coverage is automatically included, with rates and limits built in. In other programs, you purchase it as an endorsement to your policy, which usually requires filling out a worksheet to determine coverage limits and other specifics. The worksheet incorporates annual sales and expenses to determine exposure, and also looks at continuing extra expenses incurred after the loss.
To estimate expenses, business owners need a thorough disaster recovery plan. For example:
- Would you rent out another facility if yours was unusable?
- Would you retain employees on payroll or risk letting them go?
- How long would it take to replace or repair machinery, and what would you do in the meantime?
- How would you keep your customers, and what would that cost?
In addition to carefully completing the worksheet, Borgen adds that you should update it with your insurance agent every year when your policy renews. Since business income coverage is based on sales, there’s no automatic annual coverage increase (like the inflation increase for property). "Especially for companies that are growing significantly, your coverage should keep pace with your exposures," Borgen said. "Otherwise, you risk being underinsured or even getting hit with a coinsurance penalty following a loss."
Even businesses operating at a loss need this coverage to pay for continuing expenses, like rent.
For more information
Business income and extra expense coverage is complicated, but it could be critical to the health of your company should you have a serious loss. For more information, contact your independent insurance agent.
* According to "Selling Business Income Insurance," by Bill Wilson, Independent Insurance Agents & Brokers of America, October 2003.
For more information contact Anne M. Smith.