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Business Interruption Insurance

Your commercial policy will generally have a form of business interruption in the form of extra expense coverage which is the extra expense you incur to continue operating perhaps in a different location that you would not have suffered if you did not have the loss.  This is often a small limit and should be reviewed and considered on renewal.  Your broker can help you determine if you have the correct amount for this.

Types of Business Interruption

There are three types of business interruption insurance and specific items businesses should consider for each

Business Income

This is designed to replace income your business would have incurred had no loss occurred. Business income is generally defined as the net profit or loss before taxes, plus continuing normal operating expenses, including ordinary payroll (payroll for employees other than officers, executives, department managers or employees under contract). Coverage is generally limited to the loss of income sustained until the property is restored, or a specific timeframe following the loss.

Considerations

This is the heading

It’s important to review ordinary payroll annually. In the past, manufacturers chose not to insure their direct labour costs—unskilled labour was easily replaced. Consider if that’s still true in your marketplace today.

Time frame to resume business

Review your projected timeframe for resuming business. After a major loss, getting up and running takes much longer than you may anticipate and can cost much more, too.

Extended time frame to return to normal profit

You may be back in business but your customers are still going to your competitor. An extended period of indemnity extension may be necessary to give you more time to restore your business to pre-loss level.

Extra Expense

Extra Expense is designed to pay for necessary expenses incurred during the period of restoration of the property. Extra expenses include those necessary to continue operating the business at its original location or at a temporary replacement location until the original location is repaired.

Considerations

Costs for transitions to temporary space

Not all businesses would lose customers after a major loss. For example, a law firm would retain its clients, and there would still be a flow of revenue; however, the costs involved in renting new office space, moving and hooking up new phones and computers is considerable. Transitions are more expensive than you think. Increased rent, employee overtime and moving costs are examples of extra expenses that service organizations should consider insuring.

Contingent Business

Contingent Business Interruption is an extension of coverage designed to cover loss of income your business incurs due to a property loss at a key supplier or customer location. For example, if a key supplier experiences a fire at its plant and is unable to deliver parts or goods necessary for the continuation of your business, you may have a claim for a contingent business continuity loss.

Considerations

Dependency on Suppliers

Contingent business continuity is the most overlooked area of exposure to loss. Your interdependency on your supplier (under contract or not) or one large customer could put your business in jeopardy when that party suffers a major loss. Contingent business continuity coverage can fill this gap.

Business Interruption Coverage Explained

Hopefully we were able to provide some helpful information.  This coverage can be tricky and it is important to discuss it with your broker.  A profits worksheet can be completed to help you determine the level of coverage you require.  A broker can also help you understand the common exclusions, limitations and warranties that can arise for business interruption insurance. 

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