Time element insurances provide the income which would be derived from assets that are no longer available for production due to an insured loss.
Two main forms of business interruption insurance are:
- Loss of Income
- Extra Expense
The difference between the two is the financial approach: is the impact of loss derived from lower income or greater expense to achieve current income?
If the loss can be mitigated by spending marginally more overhead, extra expense insurance will often be more cost effective. If loss of vital assets means months of recovery with no commercial activity possible, loss of income is the better approach.
The deep and long-lasting nature of economic downturns offers an opportunity to revisit business interruption strategies and align coverage with projected operations.
For specialized policy issues, see Terrorism (Property and Business Interruption) Insurance.
Two scenarios are now commonplace:
- The economic situation has created decreased demand and lower sales, so a business may be over-insured and burdened with unnecessary premium.
- Market changes have eliminated competition and increased sales, leaving a firm under-insured and ill prepared for a loss.
Given recent market volatility, predicting your company's financial future is difficult. Below are thought-provoking questions to review with your team.
Questions to ask your team
- Are we introducing new products or withdrawing existing ones in ways that will significantly affect revenue or expenses?
- Have competitors entered or left our market in significant numbers?
- Are our traditional products or services performing well in the current economy?
- Is our supply chain vulnerable, especially for sole-source suppliers (relevant to contingent business interruption)?
- Is the company currently profitable?
- Would we significantly change operations if a major insured loss occurred?
Review your time-sensitive coverage today; the market demands attention to this detail. Using the above guideline will help you choose wisely between extra expense and loss of income.
For additional background on policy wording and income calculations, see Understanding Business Interruption Insurance and Business Income (Business Interruption) Coverage.
If you want professional help, review with an insurance agent.
Frequently Asked Questions
What is the difference between loss of income and extra expense coverage?
Loss of income replaces revenue lost while operations are suspended; extra expense reimburses reasonable costs to continue operating or to restore operations more quickly.
How long should the indemnity period be?
Choose an indemnity period that reflects realistic recovery time for your operations; many businesses review this period during renewals or after major changes.
Does business interruption insurance cover supply chain failures?
Some policies include contingent business interruption to cover losses from suppliers or customers, but coverage depends on policy wording and listed suppliers.
Should I change coverage if sales have dropped recently?
Policy limits and payroll bases may need adjustment when sales change, but consult an agent before reducing coverage to avoid unintended gaps.