Business Income EXECUTIVE SUMMARY: What s The Big Picture? Why Should I Care? What s The Solution? From The Desk Of Bob Jones

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1 From The Desk Of Bob Jones Business Income EXECUTIVE SUMMARY: most businesses that do not survive after a major Property loss fail because of the ensuing loss of income. What s The Big Picture? In the event of a loss caused by a fire or other insured peril, Business Income coverage (sometimes referred to as Business Interruption coverage by those who have been around a while) pays for your lost income plus normal continuing operating expenses. The intent of Business Income insurance is to keep you in business! In fact, most businesses that do not survive after a major Property loss fail because of the ensuing loss of income. Sadly, many businesses that maintain Business Income coverage do so in inadequate amounts, and can find themselves in a precarious situation at the time of a loss. Why Should I Care? As mentioned previously, after a major Property loss, the most common reason that businesses do not recover is either inadequate or non-existent Business Income coverage. They can t operate (or can only operate at a reduced level) so revenue decreases or ceases altogether, and improper Business Income coverage will not replace the lost revenue. Inadequate Business Income coverage can quite literally be business ending. What s The Solution? First, be sure you have Business Income coverage on your current policy. Then, be sure you have the right form of Business Income coverage. Finally, be sure your limits are adequate see further discussion below.

2 How Much Will It Cost To Secure / Fix This Coverage? Probably not as much as you think. Business Income rates are typically a percentage of your Building or Business Personal Property rates, and unless you are currently significantly underinsured, it will probably cost you just a fraction of your current Property premium to fix this. INTRODUCTION: A Potentially Devastating Coverage Gap This Report will introduce you to the basics of Business Income insurance, and help you avoid some of the common pitfalls and mistakes both business owners and insurance brokers make. Business Income Coverage can be confusing, perhaps the most confusing of all Business Property coverages. Consequently, business-threatening gaps (usually discovered only at the time of a loss) can result from improper coverage forms, inadequate limits, or both. Don t simply assume you have the right coverage in place! Business Income Coverage is widely misunderstood. Many brokers and insureds take an overly simplistic approach when determining what amount of Business Income coverage to carry. Unfortunately, a Many brokers and insureds take an overly simplistic approach when determining what amount of Business Income coverage to carry. misstep here could literally be business ending! Some Online Solutions: Your current carrier probably has an easyto-use Business Income Worksheet you can complete that will help you evaluate your exposure to loss, and suggest an adequate limit of coverage. However, failing that here are a couple online solutions that can walk you through this process (there are many more you can find by doing a web search for Business Income Insurance Online Calculators ): 1) From Travelers Insurance, downloadable in MS Excel format for both mfg & non-mfg operations: -insurance/large-business/propertyinsurance/business-incomeworksheets.aspx If the above link doesn t work for you then you can go to then click on Large Business in the drop down menu under the For Business tab, then click on Property in the left column, then click on Business Income Worksheets in the left column. 2) From Zurich Insurance, downloadable tool in MS Excel format for 6 industries:

3 es/businessinterruption If the above link doesn t work for you then you can go to then click on Online Agent/Broker Services in the drop down menu under the Online Services tab, then click on Business Interruption Coverage Calculator in the drop down menu under the Services & Tools tab at the bottom of the page. DIGGING DEEPER: Don t worry, we won t dig too deep here, but you should be aware of some basics, definitions, and a half-dozen or so wrinkles and options. We ll take a quick look at these in alphabetical order. 12 Month Actual Loss Sustained Basis: This option available from many carriers typically comes automatically on a BOP form (Business Owners Policy) offered by most carriers for certain types of businesses. The 12 Month Actual Loss Sustained form is just what it sounds like, the policy will pay you for the actual loss of business income you sustain (without a Coinsurance Clause and in most cases subject to no $ limitation). However, you ll have to prove the $ amount that you lost), and the form only pays lost income for up to 12 months. Assuming you will be able to fully resume your operations within 12 months then this is a suitable form. If full resumption of Most business owners underestimate the amount of time it can take to get up and running again after a major Property loss. There can be a maddeningly byzantine maze of delaying factors to navigate operations would likely take longer than 12 months then you would probably be better off on a regular Commercial Property Policy form. Most business owners underestimate the amount of time it can take to get up and running again after a major Property loss. There can be a maddeningly byzantine maze of delaying factors to navigate including working with local fire authorities, insurance adjustors, building inspectors, architects, contractors, upgraded municipal codes, etc. to name just a few. Business Income Policy wording may vary, but a typical definition of Business Income included in a policy will read something like Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll. Coinsurance: Many policies will contain a Coinsurance Clause that works similar to the Coinsurance Clauses that often apply to

4 Building and Business Personal Property coverage in other words it can penalize you! If it is determined at the time of a loss that you are underinsured (i.e., that you do not meet the coinsurance requirements), then the amount that you ll receive from your insurance carrier will be reduced, sometimes drastically reduced. Completion of a Business Income Worksheet will enable you to secure an Agreed Value endorsement which will suspend the coinsurance penalty clause. Always secure the Agreed Value option. Common Policy Forms: Business Income coverage is most commonly written on one of three different forms: The Coinsurance form; a Monthly Limitation form; or the Maximum Period of Indemnity form. In the majority of cases the Coinsurance Form is the best and most appropriate way to go, but again be sure to secure the Agreed Value option to suspend the Coinsurance Clause. Contingent Business Income: Also sometimes called Dependent Properties Business Income, this often overlooked coverage is designed to cover the loss of business income caused by damage to property owned by others. For example, many businesses rely on key vendors or suppliers that cannot be easily or efficiently replaced. Conversely, some businesses might rely on one or two major customers who purchase the majority of their products. Therefore a major fire at one of these other locations could result in a significant loss of Business Income. Contingent Business Income provides Tip: Always secure the Agreed Value option when coverage is written on the Coinsurance Form. coverage for these situations. Typically for coverage to apply the cause of loss (e.g., a fire) must be of a type that would have been covered if that loss had occurred at your own property. When you depend on one or a small number of critical suppliers, manufacturers, or purchasers of your products Contingent coverage should be considered. Coverage can even be purchased when you rely on an anchor business nearby (referred to by insurers as a leader property ) to draw in customers. Examples of leader properties might be a shopping mall, a key destination retail store, or an amusement park, etc. Deductibles & Waiting Periods: In addition to Coinsurance Clauses, another policy feature which can reduce coverage is the standard 72-hour deductible that appears in most Business Income policy forms. The effect of this is that there is no coverage during the first 72 hours after a loss. These deductibles can vary from carrier to carrier, and are sometimes negotiable so you should see if any deductible can be eliminated. Extended Period Of Restoration or Extended Period Of Indemnity: The insuring clause of a typical Business Income policy states that the carrier is liable

5 for loss of Business Income only during the period of restoration, which is typically defined as the length of time required to repair, rebuild, or replace the damaged property. Even if the policy expires before the period of restoration is over, the policy will provide coverage as long as the actual physical loss occurred during the policy period. A potential problem is that the impact of a business slowdown or shutdown on Business Income can extend beyond the point where the damaged property is repaired or replaced. Standard policy forms typically only provide a 30 day Extended Period of Restoration beyond the standard period of restoration. In many cases this 30 day period may not be sufficient, therefore most carriers offer the option to increase that limit in various 30 day increments up to 720 days. If it s likely to take a considerable period of time to ramp up your sales again even after your damaged property is repaired, then you should consider purchasing an Extended Period Of Restoration. Ordinary Payroll: Note that the standard definition of Business Income above includes payroll. However, a business has the option to include or exclude Ordinary Payroll from coverage. Most policy forms define ordinary payroll expenses as "payroll expenses for all your employees except: officers; executives; department managers; employees under contract; and additional exemptions, shown in the schedule". If such ordinary employees are important to your unless your carrier has agreed to make interim payments, you could easily end up waiting a year or more to receive payment from your insurance company. operation, you may want to keep them on your payroll until you are ready to reopen. A HIDDEN DANGER Lengthy Claims Settlements Impact When You Receive Payment There is an insidious danger lurking within your Business Income policy that can seem to run counterintuitive to the intent of the coverage, namely the Loss Payment provision. The Business Income policy will include wording that reads similar to the following (emphasis added): Loss Payment: We will pay for covered loss within 30 days after we receive the sworn proof of loss, if you have complied with all of the terms of this Coverage Part and: a) We have reached agreement with you on the amount of loss; or b) An appraisal has been made So, what is the impact of this? The impact is that, unless your carrier has agreed to make interim payments, you could easily end up waiting a year or more to receive payment from your insurance company. Could your business survive 12 months of lost income? How about 24 months? Could

6 you obtain financing to get you through that period of time? The solution to this is to request interim payments from your carrier. Your carrier might agree to e.g., quarterly payments during the period of restoration while the final claim amount is being evaluated. That s an imperfect solution, but you definitely will not receive interim payments unless you ask. proper Business Income coverage becomes critical in the event of a business shutdown or slowdown due to a fire or other covered event. 5- Consider purchasing an Extended Period Of Restoration to add more time to the coverage; WRAPPING THINGS UP As stated at the outset, Business Income is commonly misunderstood, and consequently often inadequately addressed. However, proper Business Income coverage becomes critical in the event of a business shutdown or slowdown due to a fire or other covered event. Again, more businesses that never recover from a Property loss fail because of the resulting loss of business income. Key Takeaways: 1- Complete a Business Income Worksheet to determine your true exposure; 2- Eliminate the potential for a Coinsurance Penalty by securing an Agreed Value endorsement; 3- Be aware of the delayed payment phenomenon discussed above; 4- Don t forget to evaluate your exposure to Contingent Business Income losses;

7 DISCLAIMER THE MATERIAL PRESENTED IN THIS DOCUMENT IS OF A GENERAL NATURE, AND CANNOT BE CONSTRUED AS PROVIDING SPECIFIC INSURANCE ADVICE FOR YOUR SITUATION. AS INSURANCE CARRIER POLICY FORMS VARY WIDELY, CONTAIN VARYING ENDORSEMENTS AND OTHER CONDITIONS, AND ARE FURTHER MODIFIED / INTERPRETED BY VARIOUS COURT DECISIONS, THIS INFORMATION IS INTENDED AS A GENERAL GUIDELINE ONLY. WE ASSUME NO LIABILITY FOR ANY LOSS OR DAMAGE THAT IS ALLEGED TO HAVE BEEN CAUSED BY RELIANCE ON THE MATERAIL PRESENTED IN THIS DOCUMENT.