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Have you reviewed your business income insurance coverage lately?

Will your current business income insurance coverage be enough?

Blog by Nancy Nicklow of Huff InsuranceWith the material shortage and labor shortage things are taking longer to get done then ever before.  It is time to re-evaluate your business income insurance limits.

Think of all of the claims scenarios.

    • Hurricane
    • Tornados
    • A fire rips through your premises
    • Etc.

If your business is marked as unsafe after a catastrophe, what recourse do you have?

Will all be lost?

Not necessarily, if you have business interruption insurance.

Unfortunately, many entrepreneurs are unaware of the true cost and impact a catastrophe can have on their business operations.

The Federal Emergency Management Agency (FEMA) reports that nearly half of businesses don’t reopen after a catastrophe or other disaster.  And another 25% fail within the year following the disaster.

Many businesses don’t survive because they either lack business interruption insurance coverage.  Or have inadequate business income insurance limits on their policy.

Disaster recovered

Property insurance primarily covers your building and the assets within it. What you need right now is to cover your missing revenue and your other business-related expenses.

Business interruption insurance covers:

  • Lost Income: Profits you would’ve earned during the interruption
  • Rent or lease payments: Payments owed to your landlord on your damaged location
  • Temporary relocation: Costs associated with moving to and renting a new location
  • Employee payroll: Wages for your workers
  • Taxes: Federal or local taxes that are due
  • Loan payments: Outstanding payments due to creditors
  • Losses caused by damage that prevents access to your building: Missing income due to authorities imposing curfews or evacuations in the area where your business is located

How is business income insurance paid?

There are several methods that business

Coinsurance Formula: Coinsurance can be anything from 70%, 80%, 90% or 100% or 125%

The lower the coinsurance the higher the cost. But the higher the coinsurance % the more accurate you must be for the coverage amount.

Monthly limitation:  You can choose 1/3, 1/4, or 1/6

With this calculation you have a total limit of coverage and then the most you would receive in any 30-day time period is the limitation you picked.  So if you have $100,000 limit and have a ¼ option the most you can collect In any 30 days is $25,000.

Actual Loss Sustained- this is the actual amount that your loss up to 12 months.  If it takes more than 12 months to restore, then you have no additional coverage.

Let’s use an example to illustrate. 

Kiddie Korner Daycare suffered a 3-month shut down of their business after a fire.  They had a business income limit of $60,000.  There total business income loss for those three months was $65,000.

If we use the 80% coinsurance model:

You would take the $65,000 loss x 80% that is $52,000 so there is no penalty to apply since they had a $60,000 limit, but they would only receive $60,000 since that is the limit of coverage.

If we use the monthly limit of ¼ month 

Then they would receive up to $15,000 ($60,000 x ¼)   a month x 3 months they were closed.  They would be paid $45,000

If we use actual loss sustained

Since they were closed les than 12 months, they would receive $65,000.

This quick illustration shows how important it is to have the correct coverage amount and the correct coverage method on your policy.

Depending on the industry, business, or carrier not all the methods for business income are available.

How do you determine the amount of business income you need?

The only way to accurately do this is to complete a business income worksheet.  Below is the worksheet so that you and your CPA can complete.

When thinking about the time that you can be back open, remember it will usually be 50% longer than your initial thought

Please complete this worksheet and forward it back to us so we can discuss.

What will you need to be paid a business income claim?

The insurance company will look at a profit and loss statement for the current period as well as the same period the year prior.   In addition, they may also compare the quarter before last year to see if you are on incline or decline.

They would need proof of contracts that you lost or could not meet during the loss period.

They will need proof of the continue operating expenses.

It is important for business income claims that you have very good business income reports.  Not having taxes or business financial records easily available will cause a delay in your claim or you not getting paid at all.

Contact Huff Insurance Today

If you want to talk to an experienced insurance agent to go over your business income insurance needs, then call us today at 410-647-1111.

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