June 09, 2020

This article was originally published as an “Insurance News Item” by the Alabama Department of Insurance on June 4, 2020.

Businesses face risks every day and insurance is one of the most common ways to manage them. An important coverage for companies is business income loss insurance, also known as business interruption coverage. This provides coverage for lost income when a business is forced to close. Often this is due to property damage or physical damage resulting in loss of use to the insured premises.

TOP CONSIDERATIONS

Coverage may be included as part of a business owners policy, commercial property coverage, or commercial multiple-peril package policy. It may also be included in the base policy or offered through endorsement. Businesses should speak with their agents to find the right coverages for them. As always, be sure to read the policy to learn about exclusions and how coverage may apply.

THINGS YOU SHOULD KNOW

When buying business income coverage, it is essential to know some common policy language.

Business Interruption Insurance Coverage - Replaces income lost when business operations are disrupted because of a covered physical loss like a fire. Direct physical damage caused by riot or civil commotion also triggers business interruption coverage. Expenses like rent for a temporary location, payroll, taxes, and loan payments while the business property is unable to be used are typically covered.

Extra Expense Coverage - Provides repayment for additional expenses incurred during the period of repairs. This often serves to offset the lost income while the business gets back up and running. For example, it may pay rent while the original facility is under repairs. This helps to offset lost income because the business is operating at a different location instead of just closing. This coverage may be included or added to the base business policy.

Service Interruption Clauses - Cover insured losses as a result of direct physical loss, damage, or destruction to utilities and other services. This includes transmission lines and equipment of suppliers of such services. There can be limitations when it comes to distances between where the actual loss occurs and the utility's property. Most often, certain perils aren’t covered, such as an earthquake.

Contingent Business Interruption Coverage (CBI) - For business income losses resulting from damage or destruction of a direct supplier's or customer's property. To be covered, the property damage needs to be the same type covered by the insured's policy.

Civil Authority Coverage - Often available when there is a direct physical loss due to a named public safety threat and direct government order. These clauses usually have time limits and waiting periods.

TOP THINGS YOU SHOULD KNOW

• Know your risks. To effectively select the coverages you’ll need, you should have a good understanding of the risks you’re trying to mitigate.

• Know your finances.  To buy business income coverage, you'll need to know what your income is and how it changes seasonally.

• Know your operations. You need to understand what parts of your business are essential and the people and processes that can’t be removed. You should also think about other methods of operating or locations to continue operations.

• Know your suppliers and vendors. Are they prepared for the risks they face or are there other companies you could rely on if your primary suppliers had to stop operating?

Read your policy carefully to make sure that you understand what risks are excluded. Be sure it gives the correct protection for your needs. Agents and brokers are available to assist with this process.