Would you believe that there is an insurance product specifically designed to help insure a solid, sustainable profit? In fact, without this coverage, hitting your profit targets may become impossible.
For example, you own a restaurant. Your location in the heart of the office district is the key to your booming lunchtime trade. But a kitchen fire destroys your building. Your building and personal property insurance coverage is superb. Within nine months you will be reopening in one of the finest constructed buildings in your area, with totally new kitchen equipment and dining room furnishings. In fact, a few of your friends keep telling you how lucky you were to have the fire, since the old place was looking a bit dowdy. (Hopefully the fire department and insurance company don’t agree you came out TOO well, or there may be delays while they complete their arson investigation.)
Only one problem. You go broke after six months.
Why? Because although your building and personal property insurance will do a fine job at replacing your physical assets, they don’t pay a nickel towards your lost profits! And at some point, it’s going to become very clear to you that the real reason you wanted to be in the restaurant business was not to own a building. It was to make a profit. And that you did not insure.
Any business which generates revenues (and name one that doesn't) risks facing this same situation. What can you do?
Commonly known as "business interruption" or "business income" coverage, insurance is available to pay your profit lost if due to a cause of loss covered by the policy. One type of loss not covered, for example, is lost revenue resulting from bad business decisions. If your lunchtime restaurant trade collapses because you bet the health food and vegetable juice bar was going to be your ticket to the top, but everyone within fifty miles of your location loves steak and ribs, there will be no coverage.
Covered causes of loss for your business income insurance will usually be the same as those covered in your building policy, such as fire, theft, and windstorm.
How does business income coverage work? Let's use our aforementioned restaurant friend.
After the fire, his insurance carrier will ask for information documenting the lost profit. There are going to be some estimates involved, because the profit you are documenting never took place. And the profit you are making a claim for is that lost during the nine months the business is closed by the fire. Clearly the better your recordkeeping, and the more stable your business revenues, the better the estimate of your lost earnings.
One frequent misunderstanding arising from this type of insurance is what will actually be paid following a loss. The insurance is designed to cover what you lost, not your total revenue. If you normally would have grossed $50,000 month for the nine months, the insurance will not pay you $450,000!
Why? If before the fire the business was grossing $450,000 and after the fire it is grossing $0, isn’t it obvious the business lost the entire $450,000? Not if you remember much of that $450,000 went to pay for bills that may no longer be coming in, or will be greatly reduced during the rebuilding.
For example, a major overhead cost for a restaurant is food. If the place is closed, that food bill will disappear. Along with it will go much, if not all, of the utilities, income taxes, janitorial and similar expenses. Since you no longer have to pay those bills, the insurance will not pay them either. And your revenue loss will be determined accordingly.
A good rule of thumb is to think of it this way: the insurance doesn’t look at what your business put in your pocket, but rather what the covered loss took out.
Taking that perspective, what is coming out of our restaurant owner's pocket during that nine month rebuilding period? Net profits plus any continuing expenses. Not every bill stops arriving. Insurance, advertising, payroll and other types of overhead will still have to be paid, although the expenses will likely be smaller than if the business was in full operation.
Payroll is a special case. Depending on how long the business is going to be shut down, is it reasonable to keep every employee fully compensated during that time? If your restaurant is going to be closed for three weeks, probably. But for nine months or longer? And if the insurance did cover full employee payrolls for an unlimited time, one or more of your employees might decide a good fire now and then is a nice option to create paid vacations!
This article is a broad overview of this valuable yet often overlooked coverage. There are many considerations and options. To customize this valuable coverage to your unique needs requires the advice of a competent, expert insurance professional. Talk to us soon about business income coverage.
Content courtesy of Trusted Choice