After the Fire: Business Interruption Insurance Explained

16 May 2016

Ryan Hanley

Ryan Hanley is the vice president of marketing at TrustedChoice.com and the managing editor of Agency Nation. He is also a speaker, podcaster and author of the Amazon best-seller, "Content Warfare." Ryan has over 12 years of insurance expertise and blogs frequently to help consumers understand complicated insurance topics.

Property insurance for your business might seem straightforward and all encompassing, but what if a disaster interrupts your business? Things get more complicated. Business interruption insurance (also known as business income insurance) is crucial for your business to be able to survive fire, wind or other disasters, and there are several items to consider to get a grasp on what you need, where you need it and for how long.

Let’s say your business has a fire. Forty to 60 percent of your business, be it storefront, warehouse, inventory, etc., has been destroyed. Business interruption keeps the business alive, much like disability insurance keeps us financially alive in the case of a health disaster. Unlike property insurance where only the damaged property is covered, business interruption takes care of continuing expenses, payroll, bank debts, anything in the periphery needed to keep the business on its feet.

The cost of business income coverage needed depends on several factors. The fire rate—the location of the business, the rating of the community, the construction type, the occupancy of the building—is crucial. Another massive factor is construction. The type of structure and materials will definitely play into coverage costs, and there is very little difference between brand new versus existing structures.

Regarding leased buildings, the obligation of property insurance goes to either the owner or the lessee, and this should be explained in the rental agreement.

One important endorsement you may wish to consider with your purchase of business income insurance is dependent property coverage. This applies to mall stores or any business dependent upon another business (such as a retail store) which relies on the traffic to and from another bigger store, such as an “anchor” store in a mall. If one of the large anchor stores is damaged in a disaster, the loss of income and traffic they receive in the wake of said disaster will most likely create collateral loss for your business. Ask your agent about this coverage if you think you need it.

When disaster strikes

If a disaster hits your business, it’s important to document loss properly and work with your adjuster to make absolutely certain your policy is working correctly and covering everything you need. Insurers have the right to audit your books and records. The information provided to the insurer from the policyholder should be detailed and honest.

You will want to provide a number of data analyses when submitting a claim, including but not limited to monthly profit and loss statements, inventory reports, cost accounting reports, monthly and daily production reports, and a complete list of purchase orders and invoices. The insurer will guide you through the complete list and add anything they may need to make a proper adjustment. On some occasions, the insurance provider may bring in a forensic accountant to help speed up the process.

There is also the extra expense claim to consider when filing business interruption insurance claims. This refers to the money spent that would not have been spent if it weren’t for the disaster at hand; a temporary storage, for example, or any extra costs that would never have existed otherwise.

Regardless of your business interruption insurance policy, submitting a claim can be a long, arduous process if you don’t have all your ducks in a row. Thankfully, there are people available to help you at every turn, from accountants to adjusters to your independent insurance agent.

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