What Happens When Your Business Operations are Unexpectedly Disrupted?

Business Income Coverage - Your Financial Lifeline

Imagine a fire devastating your production floor or warehouse.  The impact extends far beyond the physical damage.  Your revenue source is immediately halted but financial obligations continue and often rise significantly.  Business income coverage, also referred to as business interruption or BI, is a business planning tool that acts as a crucial financial safety net in these circumstances.  Business income coverage increases a business's ability to survive a substantial loss and should be an essential component of your risk management strategy.  This vital protection can mean the difference between successfully navigating a disruption and being forced to permanently shut your doors. 

Business Income Explained
BI coverage is designed to bridge the gap between catastrophe and recovery.  BI generally includes financial protection for various expenses that can arise if an organization is forced to pause operations or temporarily close due to direct physical damage by a covered cause of loss.  BI coverage typically pays for operating costs such as: 

• Income an organization would be earning if it were running normally
• Commercial mortgage, rent, lease, loan, utility and tax payments during a disruption
• Payroll expenses to maintain employees' wages during a closure

How to Determine Your BI Limit
The amount of BI coverage needed is based on your business's financial records, so it's crucial to maintain accurate and up-to-date documentation of your income and expenses.  The coverage limit should be a projection of the largest possible loss your organization may incur from a covered peril under a specific policy.  Basic key components to consider when determining your BI limit include:

• Business Income Worksheet - a critical planning tool used to estimate annual business income exposure in the event of a major covered loss
• Noncontinuing Expenses - may include raw materials, certain utilities, specific components of payroll (e.g. wages for hourly employees)
• Period of Restoration - the total anticipated length of an operational disruption, consider the following:
  • Cause investigation/debris removal can span 1-2 months or more
  • Securing permits can take 2-3 months or more
  • Reconstruction can take 7-12 months (or years for complex operations)
  • Replacement of machinery and equipment can take 2-18 months; troubleshooting and testing another 2-3 months
  • The EPA and other regulatory agencies can create further delays
• Peak Periods - fluctuations in revenue and profits throughout a given year based on consumer trends and seasonal patterns
• Extra Expenses - expenses beyond typical operating costs amid disruptions to get the business back up and running (e.g. relocation to a temporary location, expedited shipping fees for essential materials and supplies, overtime wages resulting from working additional hours to minimize operational downtime)
• Coinsurance Requirements - some policies require a policyholder to maintain a minimum amount of coverage.  Typically, the policy limit requested should match the BI worksheet value 

Determining the right amount of business income coverage is complex.  As your business grows and changes, the guidance of a trusted insurance advisor allows for regular reviews and coverage adjustments as needed.  Understanding the factors involved in BI calculations and coordinating with your CPA and advisor to ensure accurate projections is crucial for safeguarding your bottom line.  Disasters happen. The goal is to not only survive a business disruption, but to emerge from it with your company's financial health intact.  Because the majority of businesses that shut their doors following a severe property loss never reopen them, accurate BI calculations and adequate coverage are your tools for achieving resilience.  
 

Business income - your safety net for unexpected disruptions
Explore the essentials of business income coverage with #TeamKoppinger
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