If your business experiences a fire, your property insurance would be there to help cover the costs of repairing or replacing your building and equipment, assuming you have the right coverage. But what if a catastrophic event meant you couldn’t operate your business for the next six months or longer? How would you recoup that lost income or pay for other associated expenses that aren’t covered as part of your general policy?
That’s where business interruption (BI) insurance, sometimes referred to as business income coverage, comes into play. However, there can be a lot of confusion about what types of events and circumstances apply. Let’s look at the purpose of business interruption insurance, various ways your operations might be affected, whether those incidents would typically be covered and other considerations.
Business Interruption coverage is an added layer of protection to help your organization remain viable until operations can get back to normal. Your general insurance policy helps cover the cost of replacing damaged property from a fire or major storm and business interruption insurance helps cover other bills and expenses that result from physical damage to a facility. This might include lost revenue, payroll, rent, taxes or expenses for operating from a temporary location.
Depending on the coverage you choose, the policy may also cover other associated expenses, such as advertising to inform patrons of a temporary location, obligations to key suppliers or payroll.
This is the most common type of business interruption that comes to mind for business owners — a facility is damaged or destroyed by a fire, natural disaster or other covered event. When that happens, production stops, and it could take anywhere from a few weeks to more than a year to get a business back up and running again.
Assume you’re a manufacturer that relies heavily on a supply chain vendor that provides custom fabricated metal components. Without those parts, you can’t get your finished product to market. If that supplier were to have a catastrophic event that destroyed its production line and it couldn’t operate for another six months, you would be left scrambling to find another supplier. Once you did find a new supplier, their engineers and production managers would have to go through the process of drafting specs, creating prototypes, testing, retrofitting machines, tooling and more before they could get your part into production. Because the parts you need aren’t off-the-shelf commodities, it could take months to resume production.
Such an incident made national news recently when Ford had to halt production of its best-selling F-Series pickup trucks because a fire knocked out production from one of its suppliers. It resulted in untold financial implications and 7,600 employees being told to stay home until further notice.
Maybe you acquired a major customer that now comprises 40 percent of your business revenue. Sounds great, right? But what if that customer shuts down because a tornado ripped through the community and now they have to cancel orders until they can resume business as usual? Could your organization take such a financial hit? Losing 40 percent of your revenue could have the potential to require layoffs and could even shut down your business.
Typically, business interruption insurance will only cover losses associated with physical damage that is covered. You can structure your policy to include coverage for losses due to a supplier’s inability to provide goods or services that are critical to your operations or even the loss of a major customer.
Other incidents can impact business as usual, too. For example, prolonged road construction could deter patrons from getting to a retail business or restaurant for months. Generally, there is no recourse for the financial strain imposed in this situation, so it’s important to sit down with a strategic risk advisor to create a proactive plan.
One of the most important features to consider is the protection of ordinary payroll. In today’s economy, most companies realize that if they were to move their employees to unemployment while recovering from a loss, they would struggle to replace them. It is very important to review this area in that a large number of policies exclude ordinary payroll.
Determining how long you’ll need business interruption insurance can be tricky — a month, six months, a year or longer? The time it takes to get back up and running can vary greatly. Whereas it might take six months to rebuild your facility under normal circumstances, it could take considerably longer if the damage was caused by a tornado that devastated an entire town. In that situation, contractors would be in high demand.
In other situations, some businesses have specialized equipment that may take 14 months to fabricate, deliver and install, meaning they could be down for a year and a half. Or, perhaps your business relies heavily on tourism during the summer, but a fire occurs and you miss an entire season’s worth of business and now have to make ends meet until the following year. Six months of coverage would be woefully inadequate in this scenario.
Whichever length of protection you choose, it is important to keep in mind that your business interruption coverage won’t kick in immediately when an incident occurs. Typically, your deductible time limit can be anywhere from 24–72 hours, after which you can file a claim and start receiving coverage.
Business interruption premiums are based on the length of time you want coverage for and the amount of coverage you want. This is why it’s crucial to sit down with a strategic risk advisor to help you weigh the possibilities and accurately assess the duration of coverage and the potential financial implications that could occur in addition to building replacement costs.
It’s important to note that increasing the amount of protection by 50% wouldn’t increase the price by 50 percent. That’s because insurance works similarly to a volume discount — the longer the time period, the less expensive it will be per unit, or per thousand of coverage. To determine proper coverage, it’s critical to keep accurate records so potential losses can be properly calculated.
There’s no doubt; if you’re in business, you need business interruption insurance. Granted, some businesses have less exposure, such as a contractor who goes to job sites and doesn’t have a big facility versus a manufacturer with several buildings and lots of equipment. The biggest dilemma is not necessarily determining if you need coverage; rather, it’s finding someone you trust to work with you to determine what the right coverage is for you.
Whoever you choose to work with, make sure they’re experienced in providing business insurance of all kinds and that you can form a trusting and strategic relationship with them. Your risk advisor will help you accurately calculate adequate coverage and identify potential threats to your operation. To discuss your business insurance needs, reach out to one of McClone’s strategic risk advisors today to set up a meeting.