When a business suffers a covered loss to its building and/or its business personal property (contents), the property insurance in force will provide funds to repair the damage or replace the property. Sometimes the severity of the property damage makes it necessary for the business to close or for operations to be reduced for a period of time while repairs or replacement is accomplished. In such cases the business additionally suffers a loss of income. Depending on the length of time for the repairs the amount of lost income can be severe. It may even force the business into bankruptcy. Business income & extra expense coverage are designed to provide protection against such a loss.
Also known as business interruption coverage, business income coverage replaces net income and provides for continuing business expenses during the period of time the business is closed or operations are impaired. In short, it provides income so that when repairs are complete the business is in the same net financial condition as it would have been had the loss not occurred.
Determining a limit for business income coverage can be tricky. It is suggested that an evaluation of the business' financial statement be done to determine the amount of net income and identify those business expenses that would continue during the period of repair. Note that ordinary payroll (generally defined as hourly wages / non supervisory wages) may be limited or excluded from coverage. Ordinary payroll expenses may be added for a specified period of time. It is also important to understand how long it will take the business to reopen in order to know how much business income coverage is needed. Here are some things to be considered. Can the business relocate easily? Is there a disaster plan in place? Does the business have other locations that can help mitigate the loss of income? How much of its income is earned away from the damaged premises? Contractors, for example, earn the vast majority of their income away from their premises while retailers and restaurants earn theirs at their store’s location.
Business income & extra expense coverage are provided during the period of repair or replacement known as the period of restoration. The period of restoration begins when the damage to the property occurs and ends when the damage should have been repaired or replaced. The period of restoration under standard policies may be limited to 30 days but most policies can be endorsed to extend this period to one year and some even longer. Many small business package policies include 12 months.
Often written in tandem with business income coverage but also written separately, extra expense coverage provides the extra amount needed above normal expenditures for things like temporary relocation expenses or overnight shipping costs to get quick delivery of contents or equipment. This allows the business to continue to operate, even at a reduced capacity, and the amount of lost income is mitigated. This is important as loss of market share is not covered.
Finally, it is important to understand that in order for business income and extra expense coverage to provide coverage the damage must have occurred to covered property from a covered peril and have taken place on the premises designated in the policy.
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