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Business Interruption Insurance

 

Most businesses carry "fire insurance," as it is commonly called (though fire is just one of many perils covered by business insurance policies. Such insurance is usually required in order to get a mortgage on a building or to secure a loan using property as collateral. However, it is estimated that between one-third and one-half of all businesses have no business interruption insurance.

A major reason that many businesses don't survive a serious loss is the lack of business interruption insurance. What is business interruption insurance and why is it needed? As an analogy, most individuals need at least three types of personal insurance. First, they need life insurance in case they meet an untimely demise. Second, they need medical insurance in case they have an extended illness or injury. Third, they need disability income insurance to offset their lost income while ill or recuperating from injury.

A business also needs these same three types of insurance coverages. The first two are provided by commercial property insurance which, like life insurance, pays for direct damage to property if it is totally destroyed by a covered peril. Like medical insurance, commercial property insurance also pays for the cost to repair the property if it is only damaged and not completely destroyed.

The insurance coverage that is often overlooked is business interruption insurance which is comparable to disability insurance in that it pays for the business's loss of profit and expenses that continue while the business is not fully operational during repair or relocation following a loss. Almost half of all businesses that experience a serious loss never reopen their doors and over one-fourth of those that do, close within 3 years. Again, a major factor in such business failures is the lack of adequate business interruption insurance.

Business income insurance covers three types of losses or expenses that occur while the business's operations are interrupted or curtailed: (1) loss of profits, (2) continuing expenses, and (3) extra expenses. In addition to its loss of profits, a business must continue to pay some bills whether its doors are open or not. Some businesses will incur extra expenses in order to remain open at a temporary location. Business interruption insurance pays for these losses and costs.

Business interruption insurance is offered within two major types of business insurance packages. First, half or more of all businesses are eligible for "Businessowners" policies. These are package policies that incorporate many of the most commonly needed insurance coverages. Most "BOP" policies, as they are often called, include business interruption insurance without any specific dollar limit, but rather a time limit which is typically 12 months. Following major disasters, a year's worth of virtually unlimited coverage can mean the difference between survival and business failure. Unfortunately, not all businesses are eligible for a BOP policy, not is it appropriate for all businesses.

BOP policies are typically limited to smaller, low-hazard retail or service businesses. Other businesses are usually insured under a Commercial Package Policy, or "CPP." These packages are much more flexible than BOPs because they include many optional coverages not available under a BOP policy. A downside, though, is that the coverages built into a BOP policy must be added separately in a CPP.

Business interruption insurance is a good example of such a coverage. Unlike a BOP policy where there is a time limit rather than a dollar limit, under a CPP, there is a dollar limit but no time limit for business interruption insurance. The biggest problem with this approach is that many business owners grossly underestimate the amount of coverage they need during the coming year.

To determine the proper limit, the business owner must determine, in the event of a total loss, how long it would take to rebuild or relocate and restore operations to their pre-loss level. Next, he or she must determine what would be the worst time of year for such a loss to occur, how much profit would be lost, and what expenses would continue or increase during that specific time period.

If the business is new or rapidly growing, the business owner can easily underestimate the amount of insurance needed and, as a result, incur penalties for underinsurance built into the policy. For situations like this, business interruption insurance often includes options that eliminate to some extent, and for a price, the underinsurance penalties in the policy, though the limit itself may still be inadequate .

Also, keep in mind that, after the business reopens its doors after several months, the level of business will almost certainly not be the same. However, business income insurance normally stops as soon as the business is fully operational again, regardless of the income stream at that time. Therefore, the business owner may need to purchase what is called an "extended period of indemnity" coverage. This pays the difference between what the business would have earned if it had never had a loss and its actual depressed income stream while it rebuilds its customer base.

One of the reasons some business owners don't purchase this coverage is because, as you can see, it can get rather complicated. That's why it is important to seek the counsel of a good independent insurance agent who is experienced in placing commercial insurance.

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What You Don't Know About Renters Insurance

While "expert" sites are proliferating on the net, it pays to get advice from real subject experts. Below is a question and answer provided at a well-known consumer insurance web site. Compare their response to the question to that of some of our faculty.

Here's the question posed on the web site:

"I was a renter in the same residence for nine years, and had an accidental fire which severely damaged one room. Not only did our landlords ask us to leave, but now their insurance company is coming after us for the claim. (We received none of this money, by the way.) We did not have renters insurance, which I am being led to believe would not have covered the dwelling, only the contents or my personal belongings. I have never heard of this, and I haven't recovered from my own losses. What are my rights and what can I do to stop this?"

Now, here's the "answer" posted on the web site:

"You're right in believing that renters insurance only would have covered your personal belongings. Insurance for the structural space you are living in should be covered under your landlord's policy. Even if your landlord has not purchased landlords insurance, this does not mean that liability lies with you. According to [Here the site names an insurance company that shall remain anonymous (despite their indirect connection to Peter Sellers) because we can't believe that someone there actually said this. - Ed.], the fact that you do not own the property means that you are not legally liable for damage done to it. You should ask your landlord's company to give you the rule in writing that allows them to come after you for payment.

Disclaimer: We are consumer journalists, not financial planners or insurance brokers. So, while we try our best to answer your questions, nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice."

IIAAVU Faculty Responses

To quote Perry White of the Daily Planet, "Great Caesar's ghost!!!" Imagine the potential liability of an insurance agent if he/she gave this kind of advice! They have a disclaimer (see above) that they are only consumer journalists...if so, why not stick to consumer issues as opposed to technical advice? Makes you wonder if some states would prohibit this as an unlicensed activity...either insurance or law. In any case, several of our faculty members couldn't resist writing to the "journalist." Below are their emails (edited so as to violate any community decency standards)...note that the last one reveals a critical renter's policy coverage that's often overlooked.

It's clearly possible that if she had purchased a homeowners (renters) policy on her belongings, the policy would have also responded for the structural damage caused in the fire. If she had been negligent in causing the fire, perhaps by way of allowing an unattended pan of grease to cause the fire, then she would in most cases be deemed to have been negligent and the "renters" policy would respond for the subrogation papers the insurance company has sent her. Clearly, the insurance company covering the building feels there is some negligence on the part of the tenant by way of "coming after her," as the article states. Even if she is not negligent in the fire a renter's policy would DEFEND her in the claim.

Your statement of "You're right in believing that renters insurance only would have covered your personal belongings" is not correct and would lead one to believe that a "renter's policy" ONLY covers personal belongings, which is certainly not the case. Liability and defense coverages are some of the most valuable coverage provided in the typical "renter's insurance" policy, known commonly as an HO-4 Tenants policy.

Your reply indicated that damage to the landlord's building was not covered by a renter's policy. Actually, the industry-standard renter's policy ("HO-4") does have coverage under the Section II Liability provision for property damage to the property of others, if the insured (renter) is legally liable. There is specific coverage for what the insurance industry refers to as "fire legal liability." That is, if the tenant causes fire damage to the landlord's building, the tenant's HO-4 renter's policy will cover the fire damage, up to the Section II limit of liability, usually $100,000.

Even if the landlord had insurance, that does not relieve the tenant of responsibility. After the landlord's insurer pays the claim, the insurer will seek recovery against any party which might have negligently caused the damage (known as "subrogation"). If the tenant's negligence caused the fire, the landlord's insurer will in all likelihood seek recovery from the tenant (whether or not the tenant has insurance). However, if the landlord has waived subrogation against the tenant, his insurer cannot bring an action against the tenant.

It was also stated that a person isn't legally liable for damage to property if they don't own it. That is ridiculous! If someone hits your new car, would you expect that they aren't liable because they don't own it?? On the contrary, you would expect the negligent party to pay for the damage to your car, rather than your own insurance company. That's pretty much how the landlord would feel.

First, a renter's policy (commonly called an "HO-4 Tenant's Form) does, indeed, cover damage to the occupied unit, typically up to $100,000, under the Liability section of the policy. Normally, damage to property in your care, custody or control is not covered, but an exception is made for this and a few other situations.

In fact, when I have trained agents in the past, I often make the point that the best candidate for a personal umbrella policy is a renter or condo owner who can negligently burn down the building in which they reside, along with the contents of others...not to mention the potential liability for loss of life. It's the liability insurance in a renter's policy that is of the greatest value, not the meager coverage typically provided on personal belongings.

Second, with regard to the statement "According to [anonymous company], the fact that you do not own the property means that you are not legally liable for damage done to it. You should ask your landlord's company to give you the rule in writing that allows them to come after you for payment."...

I can't believe that a [anonymous company] representative made this statement...most likely what he/she said was you usually cannot be held liable for damage to property you OWN, not property you do not own. As far as asking for the "rule" in writing that allows them to come after you, you'll find that "rule" in every freshman law book in the country...it's a fundamental legal principle that you have the right to recover for damages negligently caused to you or your property.

So, the landlord's insurance company, under the right (by common law or contract) of subrogation, has every legal recourse against the tortfeasor as does the landlord. Most commercial property policies, though, allow the landlord to waive this subrogation right...so, ultimately, it's up to the landlord as to whether the insurer can pursue this claim. The way this works in most cases is that the landlord's property insurer pays for the damages, then subrogates for recovery from the negligent person's liability insurer.

Copyright 2000 by the Independent Insurance Agents & Brokers of America, Inc. Reprinted with permission.

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Top 10 Reasons to purchase the Rental Car CDW/LDW

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