Protecting Your Company Against Lost Sales 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 do not consider how much it would cost them in lost earnings if their business could not operate for a period of time due to a disaster such as a fire, flood, burglary, or power outage. Continued business income is just as important to a "disabled" enterprise as continued wages are to a sick or disabled individual.
Business interruption insuranceis designed to do for the business what the business would have done for itself had no loss occurred. More specifically, its purpose is to pay for the lost net profits of the business plus any continuing expenses occurring after the business has been wholly or partially disabled by a disaster 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. While business interruption insurance is sometimes included in business owner’s package (BOP) policies, the type and amount of coverage provided by a standard policy may be insufficient for the needs of many companies.
A complete analysis is therefore necessary to determine which type of business interruption insurance is best suited to your business needs.
Most manufacturing firms require gross earningscoverage. When the value of a firm’s future gross earnings is properly estimated, any non-continuing expenses may be deducted to arrive at the firm’s net profit plus any continuing expenses had no interruption occurred. A continuation of a stream of profit is thus allowed to flow through to the firm, which can even be used to compensate key employees who might otherwise be lured away during an enforced shutdown.
Many commercial enterprises are unable to afford a shutdown and must remain in operation even though property has been damaged, either because of the nature of the business or because a shutdown might result in a permanent loss of business. For example, banks, dairies, bakeries, and newspapers typically need to make arrangements for continued operation even if a permanent location is damaged or destroyed. Under these circumstances, extra expenseinsurance would be more appropriate to help pay above normal expenses needed to keep the insured in business. Overtime wages for employees, extra travel, and the costs of working with substitute or makeshift facilities could be covered by extra expense insurance. In other words, extra expense insurance is intended to keep the name of the business "in lights."
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. Keep in mind, too, that, if the firm were forced to shut down temporarily, your company’s earnings could continue to suffer even after reopening. Check whether your business interruption policy provides 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 business interruption coverage you need before it is required.
