Who Needs Business Income Coverage?

insurance continuing educationMany business owners wonder whether they need business income coverage. The following scenario shows what can happen if your business property is damaged by wind, a fire, or other peril, and your business is forced to shut down.

Bill owns a restaurant called “Bill’s Burger’s” in commercial space he rents downtown. Bill’s gross income is about $600 per day. He spends an average of $400 per day for rent, utilities, payroll, groceries, and other business necessities. The shop earns a pretax profit of $200 per day, which is acceptable to Bill. Bill has insured his restaurant under a commercial property policy. The policy does not include business income or extra expense coverage.

One day, a tornado damages Bill’s restaurant so severely that the building is now unusable. Bill submits a claim to his property insurer.

A few days later, an insurance adjuster arrives to inspect the damage. The adjuster refers Bill to a contractor who can do the repairs. However, the contractor cannot begin work for three weeks. The repairs will take a week and “Bill’s Burger’s” could be shut down for a month.

Many (but not all) of Bill’s expenses will continue after the disaster even though his business has shut down. Bill must pay his rent and utilities and is incurring about $300 per day in expenses even though the business isn’t generating any revenue. That amounts to $9,000 per month in continuing expenses ($300 per day times 30). Once the business is up and running again, it will need to generate profit for several months to make up for the lost income.

If the tornado had not occurred, the shop would have generated a net profit of $6,000 ($200 per day times 30 days). Because of the storm, Bill’s Burger’s has suffered a business income loss of $15,000 ($6,000 in lost profit plus $9,000 in continuing expenses). Had Bill purchased business income insurance, his $15,000 loss would have been covered.

When the business cannot earn income due to a covered loss, business income coverage replaces the lost earnings. Business income coverage includes expenses to avoid or minimize the suspension of business and to continue operations at the described premises, replacement premises, and temporary locations. Business income coverage may be written with or without extra expense coverage.

Note that some business income forms include a type of deductible called a waiting period. A typical waiting period is 72 hours. A 3-day waiting period would reduce Bill’s business income loss payment by approximately $1,500.

Business income coverage incomes expenses to avoid or minimize the suspension of business and to continue business operations at the:

  • described premises;
  • replacement premises; and
  • temporary locations.

Want to know more about business income insurance? Check out our commercial property insurance continuing education classes.

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