Business income insurance enables your company to weather an income-damaging claim.
When a building or critical piece of equipment is damaged, many times the expense of lost business is even greater than the expense of repairs. Orders go unfilled, regular customers move their business elsewhere while you rebuild, and all the while additional expenses crop up that are not otherwise covered. These extra expenses may arise from the need to rent temporary office space, pay double to expedite an order on a special piece of replacement equipment, or retain key employees during the outage.
The reduction of net income and increase in extra expenses are the reason why many businesses that experience a catastrophic loss never reopen. But this damage is not unique. Business income and extra expense insurance covers it and is available for income-critical buildings, equipment, and even vehicles. Business income insurance with extra expense pays for:
- Lost net income (bottom line profit, including from lost customers),
- Necessary continuing expenses (key employee salaries, debt payments, etc.), and
- Extra expenses that would not have been otherwise incurred (rental of temporary space, storage fees, overtime, etc.)
The reduction of net income and increase in extra expenses are the reason why many businesses that experience a catastrophic loss never reopen.”
Business Income Insurance Methods
There are several methods to cover business income with extra expense insurance. Below are the most popular.
- Business Income Insurance, Monthly Limit is a simplified coverage. You select the insurance limit and the amount of time for it to be available. The insurance limit is split evenly over the time period.
- This coverage is usually available with a time period of 3 months, 4 months, and 6 months. On the policy, these are termed 1/3, 1/4, and 1/6 monthly limits, respectively.
- Payment is provided one month at a time and there is no carry over from month to month.
- The longest available time period is 6 months.
- This method is usually more expensive than BI Coinsurance (see below).
- No coinsurance penalty applies. Thus, this is a great option if you simply want to receive a specific amount of money for a specific time period in the event a claim puts you temporarily out of business.
- Example: A restaurant estimates that if they lost their building, they would be out of business for 4 months and would lose $10,000 of business income plus extra expenses per month. Thus, the total loss would be $40,000. The proper way to insure for Monthly Limit would be $40,000 at 1/4 monthly.
Maximum Period of Indemnity
- Business Income Insurance, Maximum Period of Indemnity is available for time periods up to 120 days (four months). Thus, this method is not good if the business income stream cannot be restored by then.
- Coverage stops once business income is restored, even if less than 120 days.
- The main benefit of this method over Monthly Limit is it does not provide a per-month cap. Thus, if expenses are front loaded, this coverage is flexible enough to adjust.
- It costs more than 1/4 Business Income Monthly Limit.
- Coinsurance penalties do not apply to this method.
- Example: A restaurant estimates that if they lost their building, they would be out of business for 4 months and would lose $20,000 month 1, then $10,000 per month for the remaining 3 months. Thus, the total loss would be $50,000. The proper way to insure for BI Maximum Period of Indemnity would be $50,000.
- Business Income Insurance, Coinsurance is available for time periods of 6 to 12 months, and can go longer if needed.
- Penalties apply for not carrying enough insurance. Thus, it can be costly if the net income and time period are not estimated properly.
- This method is usually the least expensive of all options, but not always. It is smart to request a quote for this and Business Income Insurance, Actual Loss Sustained (below), if available.
- Example: A restaurant estimates that if they lost their building, they would be out of business for 9 months (75% of a single year) and would incur a loss of $100,000 of business income and extra expense during that time. The proper way to insure for Coinsurance would be at $100,000 with 75% coinsurance.
Actual Loss Sustained (ALS)
- Business Income Insurance, Actual Loss Sustained is by far the easiest method to understand.
- This method pays for all business income and extra expense loss, without specifying limits.
- Coverage is usually only available for 12 months.
- It has certain restrictions for extra expenses, such as dependent properties.
- The cost for this protection varies, so it may be less or more than other methods. The only real way to be certain is to ask for a quote.
We’ve created two tools to help you determine how much business income insurance coverage you need, and which method is available for you. Even so, contact us for advice. We are here to serve.