Coverages Included in Business Income Insurance

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Business income insurance typically includes some additional coverages. These coverages can vary. However, those that are most commonly provided are outlined below.

Expenses to Reduce Loss

Once a physical loss has occurred, a policyholder can often minimize a loss of income by incurring some expenses to keep the business going. For example, a building rented by an auto dealership is damaged by a sinkhole.

The building cannot be used for two months. To keep the business operating the dealership rents a temporary location. The insurer will pay the extra rental expenses to the extent they reduce the overall business income loss.

For instance, suppose the dealership spends $10,000 for two months' rent on the temporary location. The business loses $500,000 in income over the two month period due to the sinkhole damage. If the dealership had not rented the temporary location its income loss would have been $1 million. The insurer will not pay more than $1 million for both the actual loss of income and the cost of renting the temporary location. The $10,000 expense should be covered since the sum of the expense and the $500,000 income loss does not exceed $1 million.

Civil Authority

Your business can lose income if a civil authority blocks access to your premises due to a physical loss at a location near your business.

For example, a fire breaks out in a building near your premises. The building is so badly damaged that it must be dismantled. The police department closes off your street during demolition to protect the public. If the street closure causes you to lose income the loss should be covered by Civil Authority coverage.

The latter is explained in this article.

New Buildings and Alterations

Perhaps you decide to renovate your existing building or to add a new building at your current location. If the new building or your renovations are damaged by a covered peril, causing a suspension of your business, you could incur a loss of income. Such income losses are automatically covered under many business income forms.

New Locations

Business income coverage typically provides limited coverage (perhaps $100,000) for a location you acquire during the policy period. This coverage applies for a short time period, which may be as little as 30 days.

Extended Business Income

Suppose that the auto dealership (in the previous example) has returned to its permanent location. Will it immediately begin generating the same amount of income it earned before the sinkhole occurred? The answer may be no. Some customers may have defected to competitors. Rebuilding the customer base can take time. Happily, most business income forms include a coverage called Extended Business Income. This coverage is intended to cover income a business loses after its operations have resumed following a physical loss.

Extended Business Income coverage normally begins when the property is repaired and your business operations resume.

Coverage typically ends within a specified time period (such as 60 days) or when your income reaches its pre-loss level, whichever comes sooner.

This coverage will also apply to a loss of rental value. For example, an apartment building you own is damaged by a fire and the tenants are forced to leave. Only half of them return after the building is repaired. Your business income insurance will cover the rental value you lose during the specified time period or until your rental value returns to normal, whichever comes first.

Interruption of Computer Operations

Numerous businesses utilize computer data in their day-to-day operations. If the data is damaged or corrupted, the business may be unable to continue operating. A partial or completed shutdown can lead to a business income loss.

Many business income forms provide a small amount of coverage (perhaps $2500) for income losses caused by an interruption in computer operations.

For coverage to apply, computer operations must be suspended due to damage to electronic data by a peril listed in the policy. Covered perils may include computer virus, fire, hail and lightning.

Building Ordinance

Most business income forms do not cover income losses that result from building code enforcement. That is, if a building takes additional time to repair so that you can comply with a building code, your policy will not cover income you lose during that additional time period. 

Building ordinance coverage is included in some business income forms. It is also available via an endorsement. (This coverage is separate from building ordinance coverage that applies to direct damage losses.) It covers income you lose during an increased business suspension caused by a requirement to comply with a building code. This coverage may include a 72-hour waiting period. 

Dependent Property

Some business income forms include coverage for dependent property (also called contingent business income). Dependent property coverage is explained in this article.

Utility Services

Few businesses can operate without basic utility services such as electricity and water. If a utility service is interrupted, a business may have to shut down until the service is restored. The shutdown can lead to a loss of income. Utility interruption coverage will protect your firm against income losses caused by utility service interruptions. This coverage is included in some business income forms. It is also available by an endorsement.