I’ve worked with business owners and CFOs from varying industries and backgrounds over the past 17 years, and in that time, I have become an accomplished student of facial expressions. Insurance is inherently esoteric, with the devil truly being in the details. My biggest enemy in terms of an expression is something I call “the glaze.” If you have kids or are married, you’ve undoubtedly encountered this look, and you know that when you see it, you’ve lost your listener to that happy place within their mind’s eye. Today’s topic is deep in the property insurance weeds, friends, so please try to stick with me and avoid your happy place for the next ten minutes. Doing so can have a major impact on your property claim experience, not to mention the difference between closing your doors permanently and reopening.
Most business owners who I encounter have done a good job of setting proper limits for their stuff (usually with an assist from their lender, who mandates that this coverage be in line). Buildings are normally insured to value, as is their inventory, machinery, etc. However, keep in mind that these coverage limits can only replace what you had. They do nothing to help you during the time it takes to rebuild and replace everything. Now, if your business is one that could pick up and relocate to a temporary location without missing a beat, then this “time element” coverage is not as crucial. But, if your location is crucial or the ability to manufacture your widgets would be impacted by a large property loss, then listen up.
Time element coverage is typically referred to as “business income” insurance. In the most simplistic terms, business income coverage does for the business what the business would have done for itself if no property claim had occurred. There are three main components of this coverage:
1. Normal profit
2. Payroll for key staff
3. Ongoing expenses that don’t cease after a claim (taxes, loan/lease payments, etc.)
There are four policy forms that cover business income, but the one we most often recommend is the business income and extra expense form. The coverage language not only reimburses you for the three key items above, but it also pays for expenses to expedite a re-opening either in your current location or a temporary location. Most business income coverage forms come with a 72-hour “deductible,” so don’t look for this coverage to come to the rescue for a short-term power outage or other types of short-lived crises.
My experience with large property claims has proven that the business income payment can actually exceed that of your property and personal property limits. The trick to establishing an ample business income limit is to share your historical financial data with your agent and be realistic about the time it would take for you to reopen should your business become a smoldering pile of ashes at some point in the future. Armed with that information, a competent commercial agent can work to establish not only the appropriate limit for your business but also the correct coinsurance or monthly limitation factors.
You can also work to establish coverage preferences such as which employees will be deemed “essential” by your insurer at the time of loss (believe it or not, their opinion may differ from your own). While this coverage is not without a cost, business owners who elect to forego proper limits (or any coverage at all) would at least do well to go through the exercise of establishing just how large of a sum they are “self”-insuring.
Business income coverage can actually lead to a faster reaction from your property insurance carrier.
Now, the dirty little secret of business income coverage is that, in addition to making sure that your business survives, it can actually lead to a faster reaction from your property insurance carrier. After all, if they’re on the hook for paying your normal expenses and profit every month, they are incentivized to do everything in their power to get you back up and running as soon as possible.
As I said at the outset, you’ll need to fight “the glaze” when broaching this subject with your agent, but purchasing proper time element coverage can truly make the difference between reopening and being out of business forever.