Sunday, December 28, 2014

Business Income Insurance: Why is it required?

Businesses suffer losses or interruption due to losses whether man-made or natural. Previously, business owners got themselves insured against the loss or destruction of tangible assets like machinery, equipment, buildings, vehicles, raw material and finished products. A change has since occurred. In the past couple of decades, Insurance companies have begun offering a more important coverage for loss - loss of income affecting revenue or profit during short or long periods of interruption to the business. This new category of insurance is called Business Income Insurance or Business Interruption Insurance (BII).

So what does BII cover? How does it help small, medium and large businesses recover the loss of income due to business interruption?

Factors to consider
  • The duration of Interruption: Depending on the nature of the business, you could consider either the time taken for the business to resume production or operations (as in small scale manufacturing), or the actual time taken for the business to reach the same state that it was in before the interruption happened. This includes loss of reputation and brand value.
  • Sales Projections: Here again, depending on the nature of the business, Sales Revenue can be calculated by projecting the sales revenues achieved in the previous years over the time of interruption. However, if you have introduced new measures and innovations in the recent past, and if it has had a positive impact on sales revenue, then these too must be considered.
  • Deducting the value of Goods: Loss of profit calculations is generally very simple to arrive at. Normally, the value of goods is deducted from the sales revenue to establish net profit. However, if the business owners have changed the profit percentage in the recent past due to changing business conditions, then the correct figure must be factored in the insurance cover.
  • Discontinuing Expenses: Ordinarily, when a business is interrupted, some expenses get discontinued for the duration of interruption. Such expenses will be deducted from the cover. However, if any other additional expenses that may have occurred due to other reasons, then these must be considered and added to the cover.
  • Depreciation: The usual process that is followed is to use the business’ income tax returns or IRS filed to calculate depreciation on fixed or mobile assets,and include it in the cover. However, you should also be cognizant of whether the real depreciation of the asset would take longer to recover any lost asset or assets, than what is shown in the IRS, and therefore, arrive at a more realistic figure.
  • Overtime done by Executives: The claim should also factor the time spent by executives in restoring the business to its original condition. This includes both time spent in strategizing for operating the business in a disruptive situation, as well as execution. This can be costly in the case of senior management executives and must be added to the claim amount.
Other options and endorsements

In addition to the minimum or base cover, there are a few other options to cover losses in other conditions that may be relevant to the business. Some of them are:
  • Expediting and Extra Expenses
  • Dependent property
  • Utility services
  • Civil authority
  • Contingent Business Income insurance
  • Service interruption
  • Leader property
  • Interruption by civil or military authority coverage

Allied Brokers is a full-service insurance brokerage firm and has been providing insurance cover throughout California in various categories, since 1954. We work closely with business owners to understand the real extent and nature of losses during a business interruption and adequately cover the same. We will guide you through various covenants, state laws, options and endorsements, while creating a comprehensive cover for you. This will help you tide over the interruption and cover all damages, thereby helping you restore normal business conditions at the earliest. 

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