Gregory S. DuPont
Protecting Against Loss with Business Interruption Insurance
How long could you afford to be out of business? Many business owners who would never think of leaving their buildings and contents uninsured overlook how much it would cost them in lost earnings if operations were down for a period of time due to a natural or man-made disaster, or power outage. Continued business income is just as important to a “disabled” enterprise as continued wages are to a disabled individual.
Business insurance may be considered accident or disability insurance for a business, since it helps to maintain a regular flow of earnings after the business has been completely or partially shut down by disasters, including fires, tornados, and theft. Business interruption insurance is designed to pay for the lost net profits of the business plus any continuing expenses occurring during “down time” caused by a peril covered by the policy.
There are many different forms of business interruption insurance, and the price can vary greatly based on the level of risk and the potential cost of getting the business up and running again after a disaster strikes. While business interruption insurance is sometimes included in business owner policies (BOPs), the type and amount of coverage provided by a standard policy may be insufficient for the needs of many companies. So, a complete analysis would be necessary to determine which type of business interruption insurance is best suited to your business needs.
Most manufacturing firms require gross earnings coverage. When the value of a firm’s future gross earnings is properly estimated, any non-continuing expenses may be deducted to arrive at a figure that represents the firm’s net profit plus any continuing expenses accrued had no interruption occurred. The continuation of a profit stream is therefore allowed to flow through to the firm, and can even compensate key employees who might otherwise be lured away by competitors during an enforced shutdown.
Many commercial enterprises are unable to afford a closure and must remain in operation even though property has been damaged, either because of the nature of the business or that a shutdown might result in a permanent loss of business. For example, banks, supermarkets, and health care facilities typically need to make arrangements for continued operation even if a permanent location is damaged or destroyed. Under these circumstances, extra expense insurance would be more appropriate to help pay more than the normal expenses that are needed to keep the insured in business. Overtime wages for employees, extra travel, and the cost associated with substitute or makeshift facilities could be covered by extra expense insurance, which would contribute to retaining company visibility.
Consider your business interruption policy options carefully. Due to the nature of some businesses, both gross earnings coverage and extra expense insurance may be necessary to cover overlapping areas of exposure. You may be able to lower the cost of the premiums—and reduce the chances that you will have to file a claim in the first place—by taking steps to protect your firm’s premises from natural disasters and crimes. You may, for example, want to consider improving the fireproofing or waterproofing of your buildings, or install a sophisticated security system.
While many plans include a 30-, 60-, or even 90-day waiting period, a review of your company’s situation may reveal that an extended waiting period would cause serious damage to your business. Remember that if the firm were forced to shut down temporarily, your company’s earnings could continue to suffer even after reopening. Be sure to review your business interruption policy for the provision of ongoing reimbursement for lower sales volumes after operations have resumed. The key is to complete an analysis of the specific needs of your business and then obtain the amount of business interruption coverage you need before it is required.