Businesses have learned a painful lesson over the last three years. An emergency can shut them down with little or no warning. Revenue can evaporate overnight, leaving them grasping to somehow continue operating, cover their ongoing bills and pay employees so they won’t leave.
Property insurance will pay for repairing or replacing damaged buildings and equipment after a fire or water damage. It will not, however, make up for lost revenue or increased expenses to minimize the business’s downtime.
Fortunately, another kind of insurance exists that will cover those losses: Business income and extra expense coverage.
If an organization suffers property damage from a cause that the policy covers, such as a fire, and it is forced to reduce operations or shut down, business income coverage will reimburse it for the net profit it would have earned during the shutdown, plus necessary ongoing expenses. This reimbursement will not include normal operating costs, as those costs would have been incurred regardless.
The payment will be up to the amount of insurance purchased. The deductible on this policy type is somewhat akin to a waiting period. Depending on the specifics of the policy, up to 72 hours after the loss occurs may be excluded before reimbursement begins being calculated.
The policy may include an additional coverage called “extended business income.” This recognizes that, after a business resumes operations, revenue may not get back to its previous level right away. An extra 30 days’ coverage is standard, but that can be increased.
Extra expense coverage pays some of the increased costs the business may incur to minimize the length of the shutdown. This might include the unexpected purchase of computers and network equipment so that employees can work remotely while the office is repaired, for example.
To see how these coverages might work, imagine a small college that suffers extensive fire damage to two dormitories and an academic building. The displaced students will not pay room and board for living spaces they can’t use.
Students majoring in subjects taught in the damaged building may be forced to transfer (for example, physical science students who cannot access the building where they do labs). Here’s how the different coverages would play out:
Business income coverage — This would help offset the lost room and board revenue and tuition refunds to students who withdraw.
Extended business income coverage — This can help tide the school over until the student census returns to normal levels.
Extra expense coverage — This may cover the cost of quickly setting up remote learning arrangements and renting space from another college for the displaced science students to continue their lab work.
Virtually every kind of commercial enterprise that operates out of a central location needs these coverages. Some examples:
- Farms to cover the extra expense of storing harvested crops elsewhere after damage to their storage buildings.
- Restaurants would need extended business income insurance until their regular patrons get back into the habit of dining there after reopening.
- Manufacturers, particularly if they would take a long period of time to replace production equipment after an event, would need extended business income insurance.
- Theaters and concert halls to replace lost ticket sales.
- Hotels to cover lost ability to offer rooms to customers.
Having business income and extra expense coverage can make the difference between reopening after a disaster or shutting down for good. If you want to know more about this coverage, give us a call.