In continuing with our theme of reviewing different aspects of commercial insurance, I wanted to review the concept and coverage called Business Income and Extra Expense.
This isn’t a commonly talked about coverage because it isn’t used very often, however, it is an extremely important coverage when a situation arises that needs the Business Income and Extra Expense coverage.
Business Income is coverage used to pay for the actual loss of business income/revenue that you endure due to your business being unable to operate due to the damage or destruction of your business property.
For example, if a restaurant owner has a fire at his restaurant and the restaurant has to be shut down for two weeks while repairs are being made, the Business Income coverage will provide the restaurant owner with the actual lost revenue for the days he was shut down.
Extra Expense is coverage used to pay for the expense that arise from the physical damage to your location including things like: repair, replace any property, restore lost information or damaged papers, etc. Extra Expense helps to provide for expenses you wouldn’t normally have in the day to day operations, but you now have due to the loss to the property.
Most policies have a few stipulations to this type of coverage on the commercial property policy. The first common limitation is that most policies will only provide either 12 or 24 months of business income per event. For example, the above restaurant owner has a policy that provides 12 months of Business Income, however, it takes 13 months to get a damaged restaurant back up and running, the restaurant owner will still owner receive 12 months of income from the policy. The second common limitation is that most commercial property policies have a waiting period after the damaging event before they start paying any type of business income coverage. The majority of policies vary between 24-72 hour waiting periods. The third and final limitation some policies have is what’s called a “Monthly Limit of Indemnity”. This places a limitation on what the insurance company will pay you for lost income each month. The limitation fraction usually come in options of 1/3, ¼, and 1/6/. So if your business income limit is $60,000 and you have a 1/6 monthly fraction, you will only receive $10,000 per month for 6 months.
As a business owner, it is extremely important to review your business income and extra expense coverage especially if your operations depend on having a functioning physical location. Not only is it important to have make sure you have the coverage period, it’s also important to know how much coverage you have, and what limitations there are, if any.
Business Income and Extra Expense coverage can make or break a business. There are many examples of business owners that had to close to do damage to their property, but they were never able to reopen because they had no source of income while they were shutdown. This coverage could be the difference between being able to reopen and shutting down for good because there was no income to keep the business running.
Talk to your agent and make sure you are covered in the event something catastrophic happens to your business!