Insuring Income: The Lifeblood of Your Business
If someone asks you if your firm has a catastrophe plan, how would you respond? Would your answer sound something like this: “There’s nothing in writing, however, if something happened that compromised our ability to earn we have a good idea what we would do.”
Maybe your plan is to contact a competitor to help you set up shop for a while. Maybe it’s to rent space and negotiate new service contracts with vendors. Maybe it’s nothing at all.
Without a defined plan, the continuity of your firm after a serious loss damages your property—such as a fire or windstorm—is questionable. So, a damaging loss brings your operations to a screeching halt, consider business income insurance. If this insurance policy is designed to supplement the resulting lost income as well as provide much needed dollars to pay continuing expenses.
While commercial property insurance protects your real estate and contents, business income insurance protects your firm against loss to your firm’s profit-and-loss statement by covering continuing expenses, helping your firm preserve contractual obligations and retaining personnel.
There are several reasons often cited by business owners for not purchasing business income insurance—and the most common one is cost. Because this insurance is not typically required to secure and retain a loan for a piece of property, many business owners forgo this important coverage to keep costs down.
Another common reason is the nature of the insurance itself. Quite simply, business income coverage is different from standard property insurance in that it is designed to cover indirect losses. Many owners incorrectly assume all costs resulting from the loss are covered by the commercial property policy, when in fact that policy is only designed to cover direct losses to property such as a damaged roof or broken windows.
Another reason is that many business owners show reluctance when asked to furnish complex and sensitive financial data during the underwriting process.
Owners that forgo business income coverage are left with few options to protect the firm’s income after a loss. Examples include:
Cash. Even if the firm is in a position to continue funding necessary costs with cash, wouldn’t you prefer to use the firm’s cash for expansion or growth rather then using up this valuable resource funding a catastrophe plan?
Borrow. Your firm could collateralize the loan with the firm and/or its resources. However, keep in mind that a severe loss has just occurred and therefore lending institutions may be skeptical in handing out funds when it appears the firm’s ability to generate revenue has been compromised.
Determining Adequate Coverage
This can be tricky. The good news is that your Trusted Choice® independnet insurance agent can help guide you through the process. Examples of questions that must be addressed include:
- How long will it take to rebuild? Could you relocate to an alternate location?
- Do you have any reciprocal agreements with competitors that could help your firm stay afloat by sharing resources?
- Does your firm have contracts with vendors or suppliers that could be jeopardized by your indefinite absence from the marketplace?
- What is your firm’s anticipated loss of Business income? Business income includes net income (net profit or loss before income taxes) and continuing normal operating expenses, including payroll. This should include total profits and all expenses that will continue during the interruption.
- How much extra expense coverage is needed? Extra expense insurance typically is sold along with business income insurance. This insurance provides dollars to pay expenses that exceed the normal operating expenses you would have incurred had the loss never happened, such as the cost of leasing a temporary space. It also is designed to cover necessary expenses that reduce the business income loss such as overtime payments to laborers that expedite repairs.
- What is your firm’s projected net income and operating expenses for the next 12 months?
- Would sales continue to suffer for an extended period of time after your firm reopened for business?
The truth is that many businesses go under after a catastrophic loss not because the building can’t be repaired, but because of the firm’s inability to earn. Business income insurance is designed to remedy this situation; this is why it is often referred to as disability insurance for your business. For more information on securing valuable Business income insurance for your firm call your Trusted Choice® independent insurance agent today.