Considering adding Business Interruptions Insurance to your business policy? Listed below are a few things to consider so you can get the coverage that fully sustains your business in the event of an interruption (e.g., flood, fire or cyber attack).
1. Calculate your minimum coverage needs:
Identify the operating costs that will still be incurred in the event of a disruption (e.g., rent, payroll). This is the minimum coverage you need in order to pay your bills and simply keep the lights on.
For a growing company, it is important that the business income will provide sufficient coverage in the event of an interruption. As such it is important to ensure that the insurer is not limiting the policy coverage to last years’ profit. Companies experiencing growth should demonstrate an increasing income by documenting months of profit.
2. Evaluate additional coverage options:
Your business can be impacted by interruptions in the businesses of your vendors. For instance, a textile manufacturer experiences a decline in production and sales because that supplier’s cotton farm was affected by a flood. To protect your business from any such occurrences, consider adding a “Contingent Business Insurance” endorsement to your policy.
If you have opted for “Extra expense” endorsement in your policy, the insurer will reimburse you for any expenses incurred to curtail the impact of the damage on business income. However, any expense that has a dollar value greater than the claim itself will not be paid.
3. Determine the type of coverage:
There are a number options for business insurances policies to choose from depending on the needs and impact on your business in the event of a specific risk.
Listed below are a few options to choose from:
• The actual loss of income coverage:
Business income coverage will cover the actual loss sustained by the insured due to damage to property. This includes loss of gross profit and operating expenses such as payroll and rent payment.
• Gross earnings coverage:
This type of coverage identifies the length of a period of restoration for which you are entitled to receive coverage and the dollar value payable per month. Coverage will be provided until the end of the period of restoration, and not until the business reaches its previous earning level.
• Extra Expense:
Any expense incurred by the insured to minimize/curtail the loss can be covered by business interruptions insurance. Such expenses keep the business afloat while recovering from the damage. For example, renting a temporary warehouse to store inventory or relocating offices to a temporary space. However, only expenses with dollar value less than the dollar value impact on the claim will be paid. Any expense that is greater than the claim itself will not be paid for. For example, a $20 additional expense incurred that reduces the claim by $10 will not be accommodated
• Profits from the policy:
This type of coverage pays business loss income beyond the period of restoration until the business reaches the pre-interruption net income. It is also a more expensive policy compared to gross earnings coverage.