Business Interruption Coverage: Protecting Your Business
June 28, 2023
Planning ahead is essential for business owners. Learn how business interruption coverage can protect you against unexpected events.
Planning ahead is essential for business owners. Learn how business interruption coverage can protect you against unexpected events.
Owning a business can be both a fruitful and precarious venture. Most business owners would prefer to focus their energies on the successes. However, choosing to ignore the risks involved can prove costly; even catastrophic.
If your business was affected by a fire, a tornado, or was forced to close due to some sort of unforeseen event, could it survive a lengthy shutdown?
In such an event, Business Interruption Coverage (also known as Time Element and Extra Expense Coverage) can make or break your business.
Business Interruption Coverage is a part of your first party property coverage. It is placed to make your business whole in the event of a covered property claim.
For Business Interruption Coverage to be triggered, your business operations must be shut down (or partially shutdown) due to a covered cause of loss to property that is insured. Property policies have very specific language on defining this coverage trigger, so it’s best to review your own policy for specific coverage language.
With Business Interruption coverage there are four key policy terminologies you should be aware of; continuing expenses, non-continuing expenses, period of restoration and extra expense.
These are the normal operating expenses that are incurred during the period of restoration. For example, most commercial leases require you to pay rent even if your business is closed. In this case the cost for rent “continues.”
Another example of a continuing expense is payroll. If you decide to continue paying hourly employees after an event that shuts down your business, your payroll “continues.”
This type of expense is not incurred during the period of restoration. Examples of non-continuing expenses are transactional fees and maintenance service fees. If your building is closed, you likely would discontinue maintenance activities, thus those costs are no longer being paid, or are “non-continuing.”
This is the timeframe from when the covered claim occurs and the business is shut down, to the time when the business re-opens.
An additional coverage that should be explored is Extended Period of Restoration. Often referred to as “ramp up” time, this coverage extends the timeframe from when your business re-opens to the time it takes to restore your business to the condition it would have been in had no loss occurred.
This secondary coverage is provided by Business Interruption coverage. These expenses are necessary costs incurred during the period of restoration that exceed typical expenses. For instance, if you have to lease an alternate location to continue operations that is considered an extra expense.
This is the “insert your business’ revenue here” question. Some carriers request that you complete a Business Interruption (BI) Worksheet. These types of exercises provide a comprehensive answer to how much insurance you should purchase. It is recommended that you meet with your broker and potentially a forensic accountant to dive into your business’ operations. As a team, you can figure out if how a loss could potentially affect your business financially and its continuity post-claim.
Nonprofits have their own unique concerns in regard to Business Interruption. While nonprofits may not be as concerned with Business Interruption from an income perspective, Extra Expense Coverage will come into play if a physical location were shut down due to a covered loss.
Additionally, the ability to generate revenue that offsets expenditures is a fundamental principle of any business, including nonprofits. If the ability to generate revenue is reduced or halted completely due to a covered claim, being able to cover the expenses is why Business Interruption coverage should be in place.
When contemplating the placement of business interruption coverage for nonprofits, often reportable income from grants, public or private, is mis-categorized revenue which may overstate the amount of coverage that is needed. Moreover, in a claim situation, donations that are received post-event need to be reconciled appropriately to ensure the adjustment of the actual loss is not understated.
So, you have Business Interruption and Extra Expense coverage in place. Then a catastrophic event happens. What do you have to provide to prove your claim?
There are three steps you need to take to provide proof of a time element claim. These steps will not only reduce the probability for disputes but also provide ammunition for you as a business owner to maximize your coverage and get your business back to normal.
Your plan should start with purchasing the correct amount of coverage. If a claim occurs, putting that plan into action will be dependent on your understanding, and/or having an expert in place to understand the intricacies of the coverage.
Every Business Interruption claim is different. There are different operations, costs, expenses, revenue, etc. In short, it gets complicated. Understanding that each type of claim will take on a life of its own based on the circumstances of the loss.
To start the process of your plan, you’ll want to contact the team member(s) who hold access to your company’s financial data and operations. A plethora of documentation and information will need to be shared with the insurance adjuster to build your claim. Consider enlisting a forensic accountant during this process if possible.
Additionally, it’s worth checking your property policy for Claim Preparation Fees or a similar coverage. This coverage provides a specific amount of money to let you hire a third-party resource to aid you in preparing your claim to the carrier.
Understandably, you want your business to recover as quickly as possible after a bad event. However, adjusting a Business Interruption claim takes time to supply the information and for the carrier to absorb the information provided. Be patient as you want the most accurate information relayed to the carrier. This is because the Time Element portion of a claim is typically the most disputed part of a property claim between the insured and the carrier, and the details collected will be key.
At The Miller Group, our experts are eager to make sure you have the appropriate Time Element Coverage for your business. In the unfortunate event of a Time Element claim, we will be your advocate and work to make sure that your plan and process operate as efficiently as possible.
