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PEYTON SMITH — The basics on business income and extra expense insurance coverage

PEYTON SMITH

PEYTON SMITH

W hat would you do if you had to close your business due to damage caused by a fire, tornado, storm or something else that was covered by insurance? How are you going to be able to pay the bills and payroll? How are you going to make up for the revenue that was lost during this period if your insurance coverage does not include Business Income and Extra Expense coverage? You could be stuck making these payments out of pocket and losing money. The worst case scenario is you may end up closing your doors if you cannot afford these expenses or loss of income.

According to propertyinsurancecoveragelaw.com, Business Income is defined as “Net Income (Net Profit or Loss before income taxes) that would be earned or incurred and continuing normal operating expenses incurred, including payroll.” That same website also defines Extra Expense as “necessary expenses you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.”

The phrase “Covered Cause of Loss” in the paragraph above is very important in regard to Business Income & Extra Expense coverage. If you are unable to operate your business due to loss or damage to the property, you may not qualify for Business Income & Extra Expense coverage if the loss or damage is not covered under your policy. For example, if your plumbing experiences overflowing and it is determined that the loss is not covered because you do not have Water and Sewer Backup Coverage, then you would likely not qualify for Business Income and Extra Expense Coverage.

Traditional Business Income and Extra Expense Coverage will pay for the actual loss that a business incurs during the period of time in which the business is closed due to the repair and restoration of the business, as long as the loss is covered by insurance. Many companies have a three day waiting period or deductible before they’ll make any payments for the coverage. The maximum benefit period varies from company to company with some companies paying up to 120 days and others paying up to a year of a benefits. Depending on the amount of damage that is incurred, a business could have their doors closed for several weeks or possibly months while the damage is being repaired. A retail business or restaurant that relies on people coming into their business could be out a substantial amount of money, especially as the holiday season is rapidly approaching. Not only is a business at risk at losing income and having to pay their expenses out of pocket, but they could be at risk at losing their employees during the period of restoration. For example, if a restaurant suffers a loss and is unable to operate for a month, but the owners cannot afford to pay the employees or managers, what do you think those employees are going to do? More than likely those employees are going elsewhere to seek work. That type of attrition could be crippling to a business because that means that when they are able to open their doors, they are going to have to hire and train a brand new staff as opposed to having staff that knows the system and doesn’t have to learn the business protocol.

When deciding on the coverage limits for your Business Income and Extra Expense coverage, it would be very beneficial to get your CPA involved to help go over numbers from the previous year.

No matter what line of business you are in, if you own a business it is extremely important to make sure that Business Income and Extra Expense coverage is added to your commercial policy. The lack of this coverage could put the livelihood of your business in jeopardy.

» Peyton Smith is a Risk Advisor with SouthGroup Insurance and can be reached at 601-326-5312 or peyton.smith@southgroup.net 

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