For many organizations, the loss of income coupled with continuing expenses after a fire or other disaster can be even more devastating than the damage itself.
To increase the chances that a loss will not shut operations down permanently, organizations must assess their exposures accurately by asking some questions.
Key questions to assess exposure
- What is the most the organization could lose from a shutdown? Commercial Property insurance policies define “loss of income” as the sum of the expected pre-tax profit or loss and necessary continuing expenses. For example, if the expected profit is $300,000 and necessary continuing expenses are $100,000, the potential loss of income is $400,000. To calculate exposure to business interruption losses, organizations should refer to their balance sheets, profit and loss statements, and cash flow statements. Insurance companies also have worksheets available to assist with the calculation.
- How much insurance should be carried? Once the organization knows the dollar amount of its exposure, it must decide how much Business Interruption insurance to buy. The key considerations are the length of time the insurance is likely to apply and the coinsurance percentage the organization must meet. Coverage usually begins after a waiting period following damage to the property and ends when business resumes at another location or when the building should be repaired with reasonable speed, whichever occurs first. If the organization decided that the coverage period would be around six months, it could buy an amount of insurance that would satisfy a 50% coinsurance requirement. If the interruption would last longer, a higher coinsurance percentage and limits would be necessary.
- How long will it take business to return to normal? Even after operations resume, it could be some time before revenue returns to normal levels. Customers who had gone elsewhere during the shutdown might be slow to return. The standard insurance policy often extends coverage for a short period after operations resume, but some businesses might need more time than that, especially if their businesses are seasonal. For example, a seaside restaurant that makes most of its profits during the summer will need additional coverage even if it can re-open in November.
- How much of the normal payroll expense will continue during the shutdown? The organization will need the continuing services of some employees while it attempts to re-open, but other employees might not be necessary. For example, accounting staff will be needed to pay mandatory expenses such as property taxes and collect receivables earned before the shutdown. Employees who stock shelves will not be needed if there are no shelves to stock.
- Does the business depend on other businesses for revenue? A business can suffer a loss even if its own building is untouched. A loss that shuts down a key customer or supplier or damage to nearby property that causes authorities to close off access to the street can devastate a business’s bottom line. Special insurance coverage is available to protect against this possibility.
To understand policy details, limits, and common worksheets for estimating loss, see Business Income Coverage (Business Interruption Insurance).
For interruptions caused by events that affect a wider area or multiple businesses, consider related options such as Terrorism (Property and Business Interruption) coverage when reviewing your needs.
Our professional insurance agents can help you answer these questions and identify insurance companies that can meet coverage needs. If you want personalized help, talk to an agent.
Frequently Asked Questions
How do I calculate potential loss of income?
Combine expected pre-tax profit or loss with necessary continuing expenses, using balance sheets and cash flow statements to get a dollar estimate.
When does business interruption coverage typically begin?
Coverage usually begins after a waiting period specified in the policy and continues until the business resumes or the property is repaired with reasonable speed.
Will payroll continue to be covered during a shutdown?
Policies may cover necessary continuing payroll expenses, but organizations should identify which staff are essential and document those costs.
Can I insure against a customer or supplier shutdown?
Yes, there are coverages available for dependent business interruptions that protect against losses from a key customer or supplier being unable to operate.