Business Interruption Coverage 101

Business Interruption Coverage

The idea of losing a property to fire or water damage is a frightening thought for any business owner. In the event that fire or water damages or destroys your facility, ideally you will move operations to a new location while repairs are being made.

Did you know that traditional property insurance alone does not cover a move or a loss of income when a business is forced to temporarily close? Business interruption coverage enables you to minimize potential damage to your bottom line by:

• Compensating for lost income if your business has to vacate its premises as a result of disaster-related damage that is covered under your property insurance policy
• Covering the profits that would have been earned based on previous financial records, had the disaster not occurred
• Covering operating expenses such as utilities, that must be paid even though business temporarily ceased
• Covering expenses of operating in a temporary location while repairs to the permanent location are completed

Annual Values And Business Interruption Coverage 101

Experts confirm that business interruption coverage is not fully understood by all business owners and accountants. For instance, when declaring annual values, this lack of understanding may lead to mistakes such as:

• Only insured for the net income of the business
• Failing to ensure all of the fixed and semi-variable expenses of the business
• Not insuring “non-cash” expenses of the business, such as depreciation

All too frequently, companies with a manufacturing income statement report lower values than necessary. The gross profit after reduction for the cost of goods manufactured is generally lower than the gross profit that should be reported for business interruption purposes because the cost of goods manufactured includes fixed costs such as rent and depreciation.

Working Through A Business Interruption Worksheet

1. When filling out insurable values, companies often do not adequately take into consideration their future operations. Business interruption values should take into account the expected gross profit of the business during a 1-year period of interruption up to 2 years into the future.

2. When estimating the future operations of your business, take into consideration the possibility of substantial sales growth or expanded operations in the coming year.

3. Be aware that you need to declare values based on 100% of the value of all of your locations, even if there is a small likelihood that there will be simultaneous losses at multiple facilities.

4. To the extent that your company’s operations are vertically integrated, you need to ensure the appropriate treatment of intercompany profits in order to avoid duplication in final profits reported for the purposes of business interruption values.

5. If your business is heavily reliant on third parties to supply and/or purchase goods, contingent business interruption insurance may be of value. This coverage will provide your company the opportunity to recover business interruption losses in the event of an interruption at a third party facility.

6. If your business is tied to the commodity market, consider expected commodity prices in the future, as well as any valuation clauses in your policy.

With appropriate business interruption coverage in place, temporary relocation, lost income, profits and various operating expenses can all be insured. An ALIGNED advocate can help you assess the amount of coverage your business needs to keep running in the event of a worst-case scenario.

Source: IRMI