November 6th, 2019
If a natural disaster happened tomorrow, do you have a plan to get the doors of your business back open?
Do you have capital set aside to pay for a temporary location while your primary location is restored?
Do you know how you are going to keep your best employees while your business is shuttered?
All of these risks should be addressed in your risk mitigation strategy and business continuity plan. You should know how you will reopen and how you will pay expenses while you are incapable of, or severely limited on, generating revenue.
Most business continuity insurance coverage (also called business income insurance) involves extra expense coverage. This coverage can be found within the commercial property insurance policy and is triggered by a direct physical loss to either your business' contents or building. In this article, we’ll explain what extra expense coverage is and how it protects your business in specific ways.
Although related to each other and often purchased together, these coverages actually apply to different parts of your claim.
Business income insurance pays your net income, plus continuing operating expenses during the period of restoration.
But what is the period of restoration?
The period of restoration is the span of time between when your property was damaged to when your business becomes operational again.
Extra expense coverage pays for actual, reasonable, and necessary operating expenses incurred during the period of restoration.
Extra expense coverage specifies that payment is made only for expenses that would not have been necessary if there had been no damage. This coverage benefits both the customer and the insurance carrier by attempting to avoid or minimize the suspension or delay of operations, and thereby shorten the period of restoration.
In other words, extra expense coverage helps you get your business back on track quicker and ensures the insurance carrier has a less severe business income loss. It is a win-win, which is why we highly suggest getting this coverage.
Relocating or hauling to a new location
Alterations (such as building modifications) to a temporary location
Additional equipment for a new location not covered by insurance
Overtime for additional help from employees or temporary workers
Contractors (electrical, mechanical, plumbing, etc.)
Equipment and fixture rentals
Additional temporary staff
Staff transportation and allowances
Additional advertising costs (such as to keep customers updated on your status)
There are many different types of business income and extra expense coverage limits. Here are the two common options you will see:
If you are a small or low-risk business, this is the most common coverage that insurance carriers are offering right now. For most small businesses, it is also the best coverage you can buy.
It is superior for a couple reasons:
Unlimited Expenses - ALS coverage is similar to its name. It pays for the amount of business income and extra expense loss your business faces, no matter the cost. Usually the limit of the policy is in the form of a time frame instead of a dollar amount (most commonly 12 months). Although, some insurance carriers do put a dollar AND a time limitation.
Less Administrative Work - Due to the nature of business income and extra expense coverage, the amount of cash needed to pay your bills and expenses will change annually. ALS coverage also helps with unforeseen costs, such as rent fluctuation during a natural disaster. With ALS coverage, there are no business income and extra expense worksheets to fill out and no financial statements to submit.
A business income and extra expense policy with a monthly limit of indemnity will have two different components: a dollar limit and a fraction of various amounts (1/6 with a $650,000 limit).
Dollar Limitation - Similar to other insurances, each monthly limit of indemnity comes with some sort of maximum limit that the coverage will pay. This can have a wide range of dollar amounts, which are influenced by your business's cash flow, the reliance on your location to generate revenue, and the time it would take to restore operations. Generally, if you have a monthly dollar limitation, there will be no coinsurance penalties if you miscalculate this number.
Fractional Monthly Limitation - This fraction represents the monthly limit that the policy would pay in the event of a covered claim. The fraction limits the total amount of expenses the policy will pay on a monthly basis.
For example, 1/6 states that the maximum amount the policy will pay at any given time is 1/6th the amount of the total limit, and the period of restoration has to last a minimum of 6 months before the maximum dollar limit can be reached.
With a $600,000 total limit and a 1/6 monthly limit, the policy would only pay $100,000 each month for a total of 6 months or until the total limit is reached.
We suggest getting ALS coverage with a realistic period of restoration. If ALS coverage is unavailable, contact one of our risk advisors for an analysis of your business income limits.
Ordinary Payroll - Ordinary payroll is not covered by extra expense insurance. This form of payroll would be covered under the business income section of your business continuation insurance.
Additional Payroll - Payroll for new or temporary employees at an alternate location or overtime for current employees that's needed to minimize your time out of business is included in extra expense coverage.
If your business is facing some unusual hiring situations in the wake of a disaster, speak with a risk advisor to determine whether business income and extra expense coverage would cover payroll.
It is critical to have a business continuity plan in place in the event of an unforeseen disaster. With the help of your risk advisor, you can plan for communication, safety, property protection, recovery, and costs that your business will face during this tragic time. This plan will also give you a better idea of how to accurately calculate your business income and extra expense limits.
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