No business wants to think about having a loss. In fact, in a recent client meeting, I was asked the question “why should I even insure that property, I don’t care if I have a loss; in fact, I wouldn’t even rebuild if it were destroyed.” No doubt, the client was surprised when I responded by saying “if you’re not going to rebuild after a loss, then it’s a waste of money to insure the property.”
The fact is, there’s no point purchasing insurance for anything – a house, a business, equipment, etc. – if you have no desire to replace the property if it’s damaged or destroyed. But for most of us, we do want to protect our assets – our house, business, equipment, etc. – so we want to know about our options for protecting all that’s important to us. In my opinion, one of the most important coverage options business owners should consider is business income and extra expense coverage. But this coverage, like most insurance options available, won’t be necessary for every business.
If your business suffers a major disaster that interrupts normal business operations, what effect will it have on your business over the long term? Will you be able to retain customers? Will you lose valuable employees? Alternatively, does your business allow you the flexibility to operate from a different location with equipment that is easily acquired? The answers to these questions allow a business owner to determine whether business income coverage, extra expense insurance or a combination of both, are needed.
Businesses, especially those offering a service that can easily be replaced by another business, may face permanent loss of customers if business is interrupted for an extended period of time.
Businesses whose operations depend more on employees than on location may not have a serious threat of income loss, since they can continue operating from a temporary location preserving income flow. However, operating from a temporary location and expediting delivery of replacement supplies and equipment can add up to a considerable extra expense. Additional advertising may also be necessary to let people know you aren’t out of business. In many cases, a business may need both business income coverage and extra expense coverage.
The promise of extra expense coverage is to pay the actual and necessary extra expenses needed to continue operations, which would not have been incurred if there had not been a direct physical loss to the business. The period of restoration begins on the date of loss and ends when the property should be repaired, if reasonable speed is applied while returning the property to its pre-loss condition. Interference by building ordinance, zoning law or environmental protection law does not extend the period of time when extra expenses are payable. The period of restoration is based on the period of time during which repairs should be completed. The expiration of the policy has no bearing on this period of time.
Like nearly all insurance options, business income and extra expense coverage is not a one-size-fits-all item. A business must first determine whether they have an exposure and if so, what limit of coverage is appropriate to best protect the income for their business. Make sure you’re having this conversation with your insurance advisor… assuming you want to protect the income your business earns.