Business Interruption Insurance – A quick guide to Coverage

Many business owners large and small are advised at some point to purchase a form of business interruption insurance and while mostly a good idea, it is important to realize what the different forms are covering your business for and to ensure that you are paying for the proper coverage suited to your business.

1. Extra Expense – This is coverage over and above the cost of doing business used to quickly located and get a business up and running again. We can consider this a sort of unplug here and plug in there policy. An example of this would be a company with extreme portability in their operations. They usually back up their computers daily or weekly and simply have to set up new phones, computers and desks and can resume operations within a week or two (if not sooner). A company with employees may consider ordinary payroll coverage to pay salaries for the absolutely necessary staff during the downtime (or they can self-insure)

2. Gross Earnings – commonly used by manufacturers, this coverage is straight forward – it insures for the earnings lost as a result of an insurable claim. Earnings are calculated as revenue minus expenses that cease while the business isn’t operating (like light, gas – items that do not have contractual obligations. This form of business interruption insurance usually ceases when the company opens its doors for business again. Manufacturers would use this coverage in conjunction with extra expense to sub-contract out assembly line product etc to a competitor while they rebuild their shop

3. Profits Form – Provides indemnification for the loss of profits and ongoing fixed expenses. This form of business interruption continues for up to a year after the doors re-open in order to assist the business in re-acquiring their clientele and profit levels. This type of coverage is commonly used by sales and highly competitive businesses where an extended downtime could cost market share and client loyalty. There is a forth called Actual Loss Sustained but it ties in with the profits form. As the name suggests, the coverage indemnifies the actual financial loss sustained as defining in the policy wording that would come with the policy.

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