How to Pick the Right Amount of Business Income Insurance

May 28, 2015

When an organization considers buying property insurance, the focus is often on the building the organization owns or rents and its contents. While it is very important to carry the right kind of insurance on a building and personal property, and an adequate amount of it, there is another coverage that could prove to be more important after a loss. Not having enough of it could be the difference between the business carrying on or closing. That coverage is business income insurance.

Business income insurance pays for the net income or net loss the organization would have earned had it not shut down due to the damage to the building, plus necessary continuing expenses. It applies to the period starting 72 hours after the damage occurs and ending when the business should have resumed operations with reasonable haste. Many organizations carry this insurance, but they may not be certain they have the right amount. Selecting a business income limit of insurance is not easy and should be approached with great thought.

A good tool for the organization to use is a business income work sheet, such as the one published by the Insurance Services Office. Using this work sheet, the organization looks at its revenues and costs for the prior 12 months and estimates those amounts for the next 12 months. After completing the sheet, the organization's leaders should have a good idea of what its insurable income is for 12 months.

That may not be the final answer, however. The organization must consider how long it will take to resume operations. Several factors affect that answer:

  • How long will it take to rebuild or relocate the operation? An operation in a typical office building or retail complex may not take that long to rebuild or find a new location. A data center that can locate only in specifically zoned areas and that needs a climate-controlled environment and chemical-based fire protection may take longer.
  • Does the business use special equipment that may take a long time to replace? If a manufacturer cannot resume operations without special machines made in Europe, and it will take three months for the supplier to build them and ship them to the U.S., then that will impact the length of the business interruption.
  • Will the organization need additional time after re-opening to get revenue to where it was before the loss? Restaurants may take time to regain customers who have gotten in the habit of going elsewhere.
  • Does the operation get a large share of its revenue during specific times of the year? If a marina on one of the Great Lakes suffers a fire in January, it has time to recover before the next boating season. If it burns in April, its entire business for the year may be lost.

These are all examples of questions that an organization's leaders must ask. A professional insurance agent can guide them through the thought process and answer questions about the various coverage options.

Business income insurance can make the difference between business recovery and failure. Organizations that approach it carefully stand a good chance of weathering the storm.

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