Business Interruption insurance is like Disability insurance for a business. Disability insurance covers some of a person’s lost income when they’e sick and unable to work. Business Interruption insurance covers a business’s lost income when a fire, explosion, or some other peril causes it to shut down temporarily. A shutdown after a disaster might have more severe consequences for a business than the damage to the property itself. Therefore, it is vital that business owners know whether they need to update their coverage.
There are two reasons why reviewing Business Interruption coverage regularly is important:
- Economic conditions can change. When the economy is down, it is likely that a business’s sales will either drop or flatten. Continuing expenses, such as utilities, mortgage payments, and payments on other loans, may not necessarily decrease; in fact, some may increase, particularly if there is a spike in energy prices. Conversely, a rapidly growing economy or one with high inflation may quickly drive anticipated sales much higher than what the owners expected when they bought the insurance.
- Regardless of the overall economy, businesses change. They introduce new products or services, expand into new markets, acquire new properties or other businesses, and invest in technologies that increase their productivity. All of these changes affect expected income and may change a business’s coverage needs.
When reviewing Business Interruption coverage, there are several factors to consider:
- Is the market for the business’s services expanding or shrinking? Cell phones, at one time seen as a luxury, over time came to be seen as a virtual necessity; millions of buyers entered the market. This increased sales for retailers and service providers.
- Has the business launched new products or services? In the year 2000, Apple, Inc. was solely a computer manufacturer. The next year, it introduced the iPod; later in the decade, it introduced the iPhone. These two products now account for a large share of the company’s sales.
- If the business has coverage for income from dependent properties, how have those properties changed? For example, the business might depend on one major supplier for parts. If that supplier used to have two warehouses but has closed one of them, a fire that shuts down the remaining warehouse will have a significant impact on the business’s income.
- Are competitors entering or leaving the market? A business that has increased competition will be under pressure to resume operations as quickly as possible to discourage customers from permanently going elsewhere. The business will want to pay whatever is necessary to minimize the shut down.
- Has the business’s peak season changed? Suppose a company that provides payroll and benefits administration services decides to start offering tax preparation services to its clients. Much of the tax work and its associated revenue occur during the first quarter of the year. A loss that shuts down the business in March will have a much larger impact than it would have before the firm got into the tax business.
- Have building codes changed in the business’s location? State and local governments are increasingly adopting “green” building codes that require environmentally-friendly construction materials and practices. Meeting these standards might lengthen the rebuilding period and lead to a longer suspension of business.
- What is happening to the business’s costs? If labor or material costs are rising and the business must raise prices to cover the increases, sales volume could decrease and affect the amount of Business Interruption coverage needed.
Taking the time to review coverage and the firm’s financial statements with our professional insurance agents will pay dividends after a loss. Proper Business Interruption coverage could make the difference between a business re-opening, or closing forever after disaster strikes.