Business Insurance Basics

Whenever you think of business insurance and all the language which those in the insurance industry use, you will want to know these basics. When you begin your journey to acquire insurance and it all seems overwhelming, remember the basics we will discuss here.

Business insurance will essentially cover one of the following:

Property
In insurance-speak, property used in your business will include the building in which your business is located, whether it is leased or owned.

Property also includes equipment including business equipment such as computers and tools, furniture, and anything else which is used to conduct business, including vehicles. Property policies are created in order to protect these assets.

People
People in this case include you and anyone who works for you. As a business owner, your employees are one of your greatest assets. Hence, you might consider offering benefits such as health insurance and life insurance as well as short- and long-term disability insurance.

As of this writing, worker’s compensation is required in every state except for Texas. Though Texas law does not require worker’s compensation, many customers may require you to carry it.

Liability
Business liability insurance is created in order to protect your business from being held liable for error or injury. This includes damage to property, people, and implied damages. Liability insurance covers the cost of litigation for these claims.

Income
Your business cannot survive very long if your income stops. If disaster hits, business interruption insurance can provide a revenue stream while you  rebuild  or relocate to another location, either temporarily or permanently.

Use this basic information to work with your licensed insurance professional. Together, you can determine the coverages your business needs and how to maximize your coverage.

Who Needs Business Interruption Insurance?

The short answer: ALL business owners need business interruption insurance!

In the event of a catastrophe, you have insurance to cover physical damages and insurance to cover injuries; you have insurance to cover inventory, and you insurance to cover injured employees. But do you have insurance to cover the money you will not be making because you are unable to open your business after a fire, hurricane, or when a car barrels through your picture window?

From our own experience, we know that many — if not most —  people think that these things are covered byproperty insurance or general liability, that that is not the case at all!

Business insurance does that.

It will compensate you for profits which you would have earned during the time you cannot operate your business.

It can cover fixed costs, meaning the expenses you still have to pay while the business is closed, such as leases, insurance premiums, licenses, and staff costs.

It may make you whole for expenses that are necessary in order to operate our business while your regular place is being repaired or rebuilt.

Many business interruption policies will reimburse you for operate your business temporarily from another locations. These expenses can include moving your operation and things that you need to rent or even buy while you’re there.

You don’t buy a business interruption policy. Instead, it is sold as an additional coverage to your business owner’s policy or your property insurance policy.

Talk to your licensed insurance professional to see if you have business interruption in your arsenal of coverages and, if not, when he can arrange it.

Business Interruption Insurance: Yes or No?

Should you add business interruption insurance?

Being a business owner means you understand that to pay the bills and make a profit, your business needs to be functioning.  If your business shuts down, so does the cash flow and ability to pay bills and generate a profit.

What could possibly cause your business to close? Fire is the first culprit that should be top of mind.  Even a contained fire could cause closure due to smoke damage and repairs.

Mother Nature can cause wind damage, hail, lightning strikes which could cause damage requiring a shut down for repairs.  Vandalism and theft could cause your business to close until repairs or equipment is sourced and replaced.

Do you have the financial resources to weather a shut down? For how long? Don’t forget payroll and vendor invoices. What are you willing to risk?

Once you have business interruption coverage in place, should your business close due to a covered loss, you’ll be reimbursed for the revenue that you would earn during the closure. The insurance carrier uses your financial records so make sure they’re accurate and up to date to receive full compensation. This is especially important for growing businesses whose revenue increases each year.

Another bonus that comes with business interruption insurance is coverage of fixed expenses like rent or electricity. More than 20 percent of all revenue goes toward operating costs and even though your business is closed, you’ll still owe monthly bills.

This coverage offers that peace of mind and will protect your business from financial duress during an unexpected situation.  Talk to your commercial agent about business interruption insurance.

Business Interruption Insurance

Business interruption insurance should be the foundation of your disaster plan.

Every month of every year, business owners face numerous natural disasters in every part of the country.  Blizzards and ice storms, tornadoes and hurricanes, fires and flooding put hundreds of thousands of small businesses at risk. Look at hurricane Katrina, tens of thousands of businesses destroyed and over 125,000 reported jobs lost.

Yet, nearly 70 percent of all business owners admit to having no disaster plan in place for their business.

Going through a disaster is bad enough, having your business survive and recover is greatly improved with a plan in place.  The time to create a disaster plan for your business is before, not after an incident. Taking the time to plan now can pay you back ten fold or more should disaster strike.

You must do a risk assessment for your business.  What potential types of emergencies could your business face?  Your insurance carrier, the American Red Cross, and your state department of insurance can all provide you with information.

Develop a contingency plan which includes operations, employee safety and notification, and what steps to take.  Identify the key areas for your business to survive and how you can perform those functions as quickly as possible.  Identify a remote location if necessary and supplier alternatives.  Set up a call plan or call tree for your employees.

Ensure you have remote access to your computer network and back up and store data daily.

Last, make sure you have business interruption insurance in place.  Typical coverage includes loss of revenue, profits, and fixed operating costs.  It should cover temporary operating location including expenses to set up the location.  It may offer additional temporary expense coverage that is reasonable and necessary while your business is being repaired or rebuilt.

Ask your agent for help in determining the proper policy and coverage for your business.

Sometimes Overlooked Insurances

Don’t Fall Through the Cracks

Let’s take a look at some of the types of insurances which fall under the category of property insurance but are sometimes not considered by the small business owner. Of course, the urgency of having these coverages varies depending on where your business is located and what the realistic risks are in your region.

Builder’s Risk
Builder’s risk insurance is the insurance which covers your property while it is still under construction. For instance, let’s say you are having a multi-story mixed use building which is going to have shops on the bottom few floors and apartments above them. Now let’s say a sudden and violent wind storm hits and your building suffers damage from it. Your builder’s risk insurance will cover the losses incurred in your building before it is occupied.

Tenants Insurance
Tenants insurance, sometimes called “renters’ insurance,” is often required if your business is leasing space to other businesses or residents. Normally, a commercial lease will require coverage up to a certain limit to cover damages which you make in renovations as well as for  negligence by your employees which results in damage to the building.

Business Interruption Insurance

Business interruption insurance protects from loss of income and expenses in the event of property damage or loss. This kind of insurance will pay wages as well as operating expenses for the duration of any shutdown and rebuilding of the business.

Debris Removal
While your property insurance will cover replacement of the loss, it does not always cover the cleanup which is associated with rebuilding your property. Debris removal insurance will cover the costs associated with removing debris after a fire, storm, or flood.
In order to avoid missing out on a coverage you may later need, it is a wise businessperson who consults with his or her licensed insurance professional.

How Does Business Interruption Insurance Work?

Business interruption insurance covers your actual business from the loss or damage to your income due to a loss at your business.  Let’s look at an example of a real business situation to define the key elements of how business interruption insurance works.

Bill and Sally opened a coffee shop and bakery in a leased space downtown.  The income is generated through take out goodies as well as some sit down business at their location.  They have several freezers for storage and service, a storage area for paper goods, restrooms, and small retail and sitting area for their customers.  The shop averages $700 a day and monthly does about $21,000 in revenue.  The shop nets about $1,500 a month not including salaries paid to both Bill and Sally.  Their lease is in year 3 of a 10 year contract with an option.

A fire in the building destroys the shop. While this fire started in another area, the lease specifies each tenant have property insurance. A claim is submitted to the property insurance.  However, to maintain the space, utilities need to be paid, equipment loans paid, minimum orders are required by several vendors to maintain the business.

A contractor is hired, and new freezers and equipment ordered.  Still, it will take 6 weeks or more to get up and running.  No revenue is being generated, which also means Bill and Sally have no income.  This is a tough scenario for any married business owners working together.  There is the stress of the loss of the physical business and equipment, loss of income, and financial pressure..

However, their commercial insurance broker added Business Interruption insurance to their business insurance coverage.  This insurance will cover the loss due to time, quantity and other values. Bill and Sally submit a claim based on actual business records of losing $31,500 in revenue and profits of $2,250.  Now, the shop has this covered as well as the property insurance claim, allowing them to get through to re-opening the business.

Many businesses are forced to close for good by not preparing for the down time and revenue loss.  Have you spoken with your commercial insurance broker about business interruption insurance?

How Much Business Interruption Coverage Do I Need?

In order to determine how much coverage you need, your insurance professional will base it on your educated guess about your future business profits.

There are substantial coinsurance penalties for under-insuring on your business for business interruption.

A coinsurance penalty is a deduction applied by the insurer to the claim amount which is paid.

This penalty can be anywhere from 20% to 50% of a claimed loss.

This requirement exists in order to keep businesses from under-reporting their income in order to pay lower premiums.

The amount of coverage required is figured in gross earnings, which is usually nothing even close to the method your business accountant would use. That being the case, you will have to make sure that your accountant figures the gross earnings in the way that is described in your policy’s definitions.

Each policy will be different and so your policy’s definition must be reviewed and understood carefully.
To illustrate what we mean, let’s say your business has gross earnings of $100,000 and that your policy has a 75% coinsurance requirement. This would indicate that your business needs to buy at least $75,000, or 75% of the $100,000, in coverage.

If your business does not have at least 75% in coverage, a penalty would be applied. That penalty is found by dividing the amount of coverage your business actually carries by the amount that should be carried, multiplied by the loss.

So let’s say that your business, as laid out above, has a business interruption of $50,000, but carries only $50,000 in coverage.

The amount of coverage you carry ($50,000) divided by the amount that should be carried ($75,000). That amounts to .67.

Then we multiply that .67 by the amount of coverage your business actually carries ($50,000), which comes to $33,500, which is the amount of the insurer payout. Simple subtraction of the insurer payout from the amount of the loss leaves, in this case, $16,500.

Because of the dangers inherent in the estimation of this type of insurance policy, many insurers have started including in their policies the “premium adjustment endorsement,” which allows the business to over-insure, thus eliminating the consequences resulting from the consequences of estimating too low.

Your company can safely avoid losing money by over-estimating, because at the end of the policy period, excess premiums paid are returned to the insured.

How To Determine Business Risk

We are asked from time to time how to determine business insurance needs, and we tell those who ask that in the end, that determination rests with the owner.

All too often, we hear from people after a disaster, “I thought it was covered under my business insurance.” This is exactly the kind of surprise we do not want people to experience. And it is an easy thing to get with your licensed insurance professional to make sure coverage is adequate.

All businesses need some kind of business insurance in order to be fully protected, and there are many kinds of coverage available.

Some kinds of insurance are mandatory in many states. Vehicle and workers compensation insurance are examples of mandatory insurance. But do not be fooled into thinking that those are the only kinds of coverage which are mandatory, or that those are the only kinds of coverage your business will need.

Below is a list of kinds of insurance available to businesses. For purposes of this list, we assume that property, general liability, and workers compensation are already part of your present package.

Business interruption insurance: This covers losses and expenses due to fire or other incidents.  The policy covers salaries, rent, utilities, and even lost profits.

Directors and Officers Liability: This protects the officers and board members from suits brought against the company and its officers.

Employment practices liability: This covers against lawsuits of sexual harassment and wrongful termination.

Errors and Omissions: Also known as professional liability insurance.  This insurance protects against legal claims of malpractice or failure to perform to professional standard.

Health insurance: Major medical insurance offered to employees.

Product liability insurance: This protects both sellers and manufacturers against defects and injury as a result of product use or components.

Web site insurance: This covers a variety of claims relating to the company website.  It includes copyright infringement, and data breach.

Take this list and compare it to the kinds of coverage you now have. It might be a good idea to talk to your licensed insurance professional about whether those on the list but not currently used by you are important to your business.

Common Mistakes

Anyone involved in the insurance profession is familiar with the common mistakes people make regarding business insurance.

Setting limits too low: Oftentimes, business owners do not understand that the largest amount of money in a policy is the initial policy, and that extra coverage is usually a very small amount. It is, in fact, often possible to double one’s limits for less than 10% more money.

Not reading the policy: Although insurance policies are usually long and involved, they are contracts, and it is important that the policy be read before you sign it. If you simply cannot do it, you should get an attorney to do it for you.

Not understanding duties: Business owners’ policies carry with them duties to defend or indemnify, and it is essential that the business owner understand those duties. It needs to be clear in your mind whether or not your insurer will defend you if you get sued as well as what they will pay if there is a judgement against your business.

Neglecting business interruption insurance: While you are probably covered for such things as fire or flood, you will quite likely want to be insured for the loss of income during the time your business might be closed due to those incidents and their aftermath.

Finding the right insurance company: The importance of finding the insurance company and policies which will suit your needs cannot be stressed enough. Given that an uncovered lawsuit could mean the end of your business, it is essential that you find just the right company.

Discussion with your licensed insurance professional is the first step to avoiding all of these common errors.

Business Interruption Insurance

What is business interruption insurance?

Business interruption insurance covers the loss of revenue that a business experiences as a result of a disaster while it is closed and being rebuilt or relocated. Property insurance covers the loss of the physical damage subject to deductibles and coverage limits. Business interruption insurance is designed to put the business into a similar financial position as being open and operating.

The amount of coverage for revenue is determined by a historical recap of your business’s financial records. The fixed costs are covered even though your business is not operable and are easily determined by the historical records. Costs incurred with moving or setting a temporary operating location can be covered. Extra expense coverage may be included in the coverage. For instance, if renting equipment would allow your business to operate during renovations or rebuilding, that rental can be covered.

Let’s look at a simple example to review how business interruption insurance would work. Say a fire destroys a small retail shop in a leased space in a downtown location.

A claim is submitted to the property insurance carrier. However, to maintain the space, utilities need to be paid, equipment loans paid, and minimum orders are required by several vendors to maintain the business. A contractor is hired, and equipment ordered. Still, it will take 6 weeks or more to get up and running. No revenue is being generated, which also means the owners have no income.

This is a tough scenario for any small business. However, Business Interruption insurance is in force. This insurance will cover the loss due to time, quantity and other values. The owner submits a claim based on actual business records of losing in revenue and profits. Now, the shop has this covered as well as the property insurance claim, allowing the business to get through to re-opening the business.

Business interruption insurance is often the most valuable coverage in a business insurance package. Unfortunately, it is also the coverage most often overlooked when purchasing business insurance. Ask your insurance professional about business interruption and how it would work in your specific situation.