THURSDAY, MAY 2, 2013
A catastrophe, such as a fire, may shut a business down temporarily. While the business is not operating, business income can stop or decrease substantially. Yet, expenses can continue and may even increase during this period. This is where Business Interruption coverage steps in. It is intended to cover the loss of net income, temporary relocation expenses, and ongoing expenses such as payroll, electricity, rent or mortgage.
Insurance is designed to financially restore someone to where they would have been had the loss not occurred. Therefore, the business would be required to submit records that would provide a good indication as to what the business would have actually lost in net income. It is recommended that businesses keep a copy of at least 12 months of financial records offsite for this very reason.
Most policies include a waiting period, for example 72 hours, before coverage will begin. A maximum amount paid out each month as well as the amount paid out overall for the loss of net income is determined when the policy is purchased. The policy will also specify a maximum time the coverage will extend for. So for an example, a policy may state coverage will only apply for 120 days, include a limit of $120,000 with a monthly limitation of ¼. This would indicate the business owner would only be entitled to a maximum payment of $30,000 each month with a $120,000 maximum paid out over the course of 120 days.
Extra Expense coverage is used to provide relief from additional expenses a business incurs to keep the doors open, such as relocating to a temporary location while the primary location is being repaired. This coverage is provided in addition to Business Income coverage.
Extended Period of Indemnity
Typically, Business Income coverage will stop when business operations are resumed. Yet, just because business resumes, doesn’t mean the normal flow of income immediately resumes as well. Extended Period of Indemnity can provide coverage in the interim, from the time the business is able to re-open its’ doors to when the income resumes to normal income levels. However, there will be a time limit imposed as to how long the coverage will apply as the insurance company can not guarantee income restoration.
How to purchase Business Interruption Insurance
Business Interruption coverage is not sold individually. It can be added to a commercial property insurance policy or a business owner’s policy.