I recently attended a Property Casualty seminar where we learned that many businesses are underinsured on their Business Income (or Interruption) with Extra Expense coverage. (Or it may appear BI w/ EE) That is alarming to me as there are usually penalties involved at the time of a loss, in this particular coverage, if you are under insured. In this article I will briefly define these coverages as well as provide some basics to consider when you are faced with making this particular coverage limit decision. Business Income w/ Extra Expense is actually two separate coverages.
Business income is loss of income protection, replacing your operating income during the period of restoration or interruption of commerce. This is a little like disability insurance only for your company. Extra expense coverage is designed to protect businesses in the event of an unforeseen additional expense, in order to continue operations. An example would be paying employees overtime to come in on a weekend to set up the office so it can functional again on Monday. Those additional wages are an additional expense to your company and are therefore covered.
Many insurance professionals would say that BI is simply Net Income + Operating Expenses. That is a good starting point, but to really analyze your exposure, a more in depth formula of Net Annual Sales + Cost of Goods Sold + Utilities + Ordinary Payroll, might provide more accurate results.
Net Annual Sales is the Gross Annual Sales less discounts, returns, allowances, bad debt, collection expenses, prepaid freight, plus any other earnings from your business operations, such as rents, commissions, cash discounts received and interest or service fees. Cost of Goods Sold is raw stock used in production, materials directly consumed in production, merchandise sold including packaging materials, services purchased from subcontractors, minus the cost of non-continuing outside services. Utilities are any Power, Heat and Refrigeration obligations that must be continued by contract and will need to be added with endorsement CP 15 11. Ordinary Payroll, which also needs to be added through endorsement CP 15 10, will include the payroll for all employees, even if production has been stopped. These four items together give you 100% of your BI exposure.
Once you have your full exposure calculated, you will need to apply your Co-Insurance factor which will let you know how much coverage you must have, to remain within your insurance company's acceptable boundaries. For example if you have an 80% co-insurance factor you can carry 20% less coverage than 100% of your BI exposure. Please note, that if you are insured for less than what is required, you will be penalized at the time of loss, regardless of the size of the loss.
Finally, you will need to come up with what you feel is an appropriate amount of Extra Expense coverage that might be needed. Some things to consider are: increased rent, advertising costs, moving expense, additional hourly wages/ overtime, increase utilities, computer equipment rental and reproduction, etc.
Once you have these limits you can choose to add some cushion for margin for error. Otherwise you have accurately calculated your business interruption needs.
Like any insurance coverage there are complexities that cannot be fully described in a newsletter article, so if you have further questions please do not hesitate to contact us. Additionally we have posed a sample business income worksheet for your use on our website at www.batesinc.com.