If you own, operate, or manage a business, you most certainly have fire insurance to protect your business property and liability insurance to cover your business in the event of a lawsuit. But what about the period of time when your business is out of business due to a fire or other property loss?
Rebuilding and getting you back in business could take two months, six months or a year. During that time, you and your employees will likely have no income or greatly reduced income. Consider the time it’s taken to reopen after recent fires that hit popular restaurants in our area. Sadly, too often these businesses just can’t survive the loss of income during the time it takes to rebuild.
If your business should have such a catastrophe, where will the money come from to pay your employees, property taxes, utilities and other continuing expenses? And what about you? Over the time your business is shuttered, what about the lost profits that you would have enjoyed had this event not occurred? And what about the extra expenses if you must rent other space temporarily to continue operations or limp along with skeleton staffing until repairs are completed?
Events and situations like these are the reason why business interruption insurance is a critical part of any business protection program. The trouble is, this is one of the most misunderstood areas of your business insurance program. Business owners struggle to get their heads around it, and finding expert advice in this area can be difficult.
For a small to medium-sized business, and particularly a business that qualifies for what is called a business owner’s or BOP policy, there is an easy solution. On this type of policy, the business interruption coverage is often written on what is called an actual loss sustained or ALS basis, and it covers whatever the business’s income loss happens to be, with no dollar limit, for up to a period of 12 to 24 months after a covered loss.
If you have a larger or more complex business model, this could get more complicated. Other than actual loss sustained, this coverage is written in one of several ways: monthly limit, maximum period or subject to coinsurance.
The monthly limit type of business income coverage is fairly simple. You pick the limit that you are comfortable will cover the longest possible time you’d be out of business. The limitation is that the insurance company will only pay a certain portion of that limit for any one month. Choices here are typically one-third or one-sixth per month. So be careful your income loss for any 30-day period won’t exceed the monthly limitation.
With maximum period coverage, you pick the limit, but there is a limit to what period of time the policy will continue to pay: typically 4 or 6 months. Here, there is no monthly limit, but once the chosen period of time elapses, coverage ends.
If you find your policy contains a coinsurance clause, this is a big red flag, and you better be paying attention or you and your business could be in for a very unpleasant surprise. The term “coinsurance” is code for “You better know what you’re doing.” Here, the insurance company requires that you insure your business income exposure to at least a certain percentage of what the actual exposure is. Coinsurance percentages can range from 50 percent to 100 percent, and if at the time of loss the insurance company finds that your coverage limits are not enough to meet this minimum percentage, you become a “co-insurer” and do not get full payment of your claim. Check with your agent to see if there may be a way to write this coverage without coinsurance.
Keep in mind, it’s not usually the fire and resulting repairs that put a business out of business. It’s often the period of time and resulting loss of income that prevent a business from surviving the disaster and bouncing back. Without the right business insurance and professional advice, a disaster that should be a temporary hardship may wind up putting you out of business completely.
Bill Ross is president and CEO of Ross Insurance Agency in Manheim Township, Lancaster County.