So-called "time element" coverage's protect your business’s most important possession.
If someone asked you what your business’s most important asset was, what would you say? Your client list? Your inventory? Your patents or trademarks? What about your income? Without it, no business can survive for long. But many businesses fail to adequately insure their income.
Business income insurance (also known as business interruption insurance) can provide the cash you need to survive when your business loses income due to an insured loss at an insured location. While you make repairs or recover, business income insurance can cover your payroll, continued operating expenses (such as rent), and lost net profits from the time your business shuts down until physical restoration of the property. Your business does NOT have to be profitable for coverage to apply.
Note the key phrases "insured loss" and "insured location" above. Business income coverage triggers when you have a loss covered by your business property policy. Keep in mind that your business property policy covers only losses due to "direct damage." If you lose income due to damage at another location, such as a key supplier, coverage would not apply. "Contingent locations" coverage can provide the coverage you need when property loss at a location other than your own, but that is critical to your operations, forces a shutdown.
The "Time Element" in Time Element Coverage
Business income policies usually have a 72-hour waiting period, meaning they will not pay for income lost in the first 72 hours after direct property damage. You can buy additional coverage to reduce or eliminate the waiting period. Your "period of restoration," or time the policy allows for rebuilding, begins after the waiting period. The policy covers your income lost during this time, usually 30 days. However, you can buy additional coverage to extend your period of restoration for up to 360 days.
Extra Expense Coverage
Extra expense coverage can pay other costs you incur to stay in business and reduce business interruption losses. Extra expense coverage triggers immediately and requires no coinsurance. It can pay for restoration of damaged data files, guard services at a vulnerable location, temporary or overtime workers, cleaning, renting temporary space, and other expenses you incur as you revive operations after a catastrophe.
Unlike business income coverage, extra expense coverage has no waiting period. Your coverage begins immediately after the insured damage occurs. If your policy includes extra expense coverage, limits are included in the business income limit shown on your policy declaration page and do not increase that limit.
Most business income policy forms have a coinsurance provision. This requires the insured to buy insurance equaling net income and all operating expenses for a 12-month period, times the coinsurance percentage the insured selects. Coinsurance percentages range from 50 to 125 percent; the higher coinsurance percentage you select, the higher the premium credit your insurer will give.
Coinsurance percentages also affect how much your policy will pay at claim time. If you fail to maintain enough coverage, the insurer will pro-rate any claim payments, using the ratio of the insurance limit to the loss. Let’s say your business property is worth $1 million and has an insured property damage loss and no income at all during the period of recovery, losing a total of $250,000 in income over three months. If you have $750,000 in coverage, your policy would pay a maximum of 75 percent of your loss, or $187,500, since you should have had at least $1 million in coverage ($83,334 in income per month times 12 months).
Insurers will waive the coinsurance penalty if your policy has an "agreed value" provision and you submit a business income worksheet to your insurer each year. In this case, your policy limit will be the agreed value, with no deduction for a coinsurance penalty.
Some business owner policies (BOPs) include business income coverage. However, time element coverage's are one of the most complex types of property insurance and the "one size fits all" approach might not meet your needs. We can help you estimate how much coverage you need and recommend additional coverage's tailored to meet your specific circumstances. For more information, please contact us.