Business Income Coverage
Business income coverage protects your company against a loss of income caused by a shutdown in your business operations resulting from a physical loss. This coverage is sometimes called business interruption insurance. It may be written alone or in combination with extra expense coverage.
Many insurers provide business income coverage utilizing a standard ISO business income form. Other insurers have developed their own business income forms.
Most of these closely resemble the ISO form.
What is Business Income?
Within the context of property insurance business income includes both of the following:
- Net Income The net income you would have earned if no loss had occurred. Net income is your net profit or loss before income taxes are subtracted.
- Continuing Expenses The normal operating expenses you must continue to pay after a loss. Examples are rent, electricity and property taxes.
Many businesses earn income by providing a service or selling a product. Others earn some or all of their income by renting premises to tenants. If a building is damaged to the extent it becomes uninhabitable, the landlord will lose the rental income that he or she would otherwise have earned.
When purchasing business income coverage you can choose one of three options:
- Business Income Including Rental Value Designed for a business that earns income from rental operations and other activities
- Business Income Other Than Rental Value Intended for a business that does not earn any rental income
- Rental Value Only Designed for a business whose income is derived solely from renting premises
Rental value means the net income you would have received from tenants if a loss had not occurred. It includes the fair rental value of any portion of the premises you occupy (rent you would have earned had you rented that part of the property to a tenant).
Rental value also includes your continuing normal expenses.
Requirements for Coverage
A business income loss is covered only if all of the following conditions are satisfied:
- Income Loss You suffer an income loss due to a "necessary" suspension of your business operations.
- Physical Loss The suspension results from physical damage by a covered peril to property at premises described in the declarations. Covered perils are often described in a section of your policy called Causes of Loss.
- Scheduled Limit A business income limit must be scheduled for the premises where the physical loss takes place.
- Period of Restoration The suspension must occur during a time period called the period of restoration (explained below).
A suspension occurs if your business operations slow down or cease entirely. If your coverage includes rental value, then a suspension occurs if all or a portion of the described premises are uninhabitable due to damage by a covered peril.
Damaged Property Need Not Be Yours
Business income coverage applies to an income loss you suffer due to physical damage to property caused by a covered cause of loss. The damaged property need not belong to you. Moreover, it need not be "covered property" under your policy.
For example, suppose that you operate a dry cleaning business in a building you lease from Rent-a-Building. Your landlord has insured the building under its own property policy. You have insured your personal property under a commercial property policy that includes business income coverage. Your policy lists a business income limit for your rented premises.
Late one night the building is badly damaged by a fire. You are forced to shut down your business for three months until the building is repaired. The building does not belong to you, nor does it qualify as "covered property" under your property policy. Nevertheless, the income you lose due to the shutdown of your business should be covered by your business income coverage. Your income loss has resulted from a shutdown of your business due to physical damage by a covered peril (fire) to property at premises described in your policy.
Period of Restoration
How much income you lose as a result of a business suspension depends largely on the time required to repair damaged property. Business income insurance covers income you lose during the period of restoration.
Under many business income forms the period of restoration begins a few days after the physical loss has occurred. This gap in coverage is a type of deductible called a waiting period. A typical waiting period is 72 hours. For instance, if a fire breaks on June 1, the period of restoration will begin on June 4. Income you lose during the first three days of the suspension will not be covered. Some insurers offer business income coverage without a waiting period.
The period of restoration typically ends when the damaged property at the described premises is, or should be, repaired. If you move to a new location, the period of restoration ends when you resume business at the new location.
The restoration period does not include any increased time required to comply with a building code. For example, suppose that the reopening of your dry cleaning business is delayed by two weeks because the repairs must comply with a new building code. Income you lose during that additional two week period will not be covered.
Business income forms often include some additional coverages. These are explained in a separate article.