Jul 10
13
Business Income Insurance – Almost as Painful as Life Insurance
Loss of Business Income is one of the areas of commercial insurance that is not well understood by insureds and sometimes, their brokers. Often left until the last minute after all the other property applications are completed, business owners, nagged by their agents, finally get around to addressing the Business Income insurance application. No wonder really, it is almost as painful as applying for life insurance. Thinking about worst case scenarios and just how much a major disaster actually would cost the business is hard enough; then the forms must be completed. So there it is: the business income and extra expense insurance application process sort of stinks.
Business Income Worksheets are Daunting
That being said, not having these forms completed accurately can end up costing the business a great deal of money in the form of uninsured or under-insured losses. So it is really a good idea to get the Business Income application worksheet to the accountant as soon as possible so that limits and coinsurance can be selected well in advance of renewal. For medium and large scale businesses, this insurance part can be quite expensive. Often insureds must find compromises between how much coverage they need and how much insurance they can afford. The final limit chosen is usually something between the worst case possible loss and the most likely average loss. That is something to address with a qualified and experienced property insurance broker or legal counsel.
A Covered Property Loss is Always the Trigger for Covered Business Income Losses
One thing insureds often get confused about with respect to business income insurance is that there must be a covered loss under the property insurance policy in order for there to be any recovery under the Business Income. If there is no payment under Property Insurance, there will be no payment under Business Income. Business interruptions due to power failures or computer failures simply are not covered unless the cause of the failures are covered by the property insurance.
Co-insurance in Business Income is Sort of Different than in Property Insurance
Another mystery about Business Income is the application of co-insurance. For savvy, or at least interested, business owners who have taken some time to wrap their brains around co-insurance penalty provisions in Property Insurance should know that in the definitions of Business Income insurance, co-insurance actually means something else entirely.
In Business Income, the co-insurance represents some percentage of annual net income that might be lost due to a covered suspension of business operations. For example, say the business income worksheet showed that the annual net income and expenses required for the business for a year was $100,000. However, the insured feels confident that operations could resume within 6 months. In this case, the business might choose a 50% coinsurance thereby only paying for half of that amount, or $50,000.
What Co-insurance Percentage Should be Selected?
Co-insurance percentages available run from 50% to 125%. Also, the base rate for the insurance goes down as the co-insurance percentage goes up, just as it does in property insurance. Insureds should be careful not to choose the lowest amount just to save some money on the insurance. This coverage is crucial to the survival of the business. Most of the expenses of any loss are incurred in the first few months after an accident.
The number of insurance cases litigated due to Business Income claims is quite high. Partly because the insureds did not take the time to understand the insurance or complete the forms accurately. Insurance brokers can only quote off of the information that they receive. Taking the time to consider this insurance and understand it could alleviate a great deal of pain later on. After all, the last thing anyone wants to do after a loss is quibble with the insurance company about coverage.
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