This One Insurance Hack Saves Your Business from Disaster

99.9% of businesses in the United States are small businesses, and 46% of Americans are employed by small businesses. Given these statistics, the importance of a small business having protection in the event of a loss is quite evident.

Businesses fail for a number of reasons, such as poor leadership, poor marketing plans, and poor planning. When entrepreneurs and business owners are planning their business strategies, very few think how they will continue operating after they sustain a loss.

• 82% of small businesses fail due to a lack of cash flow, according to Jessie Hagen of U.S. Bank.
•  70% of small businesses’ expense is payroll.
• 40% of small businesses will, eventually, become profitable.
• 30% of businesses have business income coverage.
• 25% of businesses fail to reopen after an insurance claim.

Business Income Coverage can prevent you from bankruptcy in the face of disaster.

Why Businesses Need BI Coverage 

Business Interruption (BI) insurance, commonly known as business income coverage, is a lifeline for small enterprises. Allianz Risk Barometer states that loss of income is one of the top three global business risk concerns in 2024, followed by cyber and natural catastrophe claims.

The reality is stark: the Federal Emergency Management Agency (FEMA) reports nearly 1 in 4 businesses don’t bounce back after a significant loss. By contrast, BI insurance covers the heart of a business—its ability to generate income when an unexpected loss occurs.

BI acts as a financial safeguard during unforeseen closures caused by such events — as a fire, tornado, or hurricane that damage the physical workspace. With BI insurance in place, the business can cover ongoing expenses. Plus, it compensates for the revenue the owner would have generated had their doors stayed open.

BI coverage is designed to bridge the gap during recovery, ensuring essential financial obligations are met. This includes:

• Actual lost net income, as illustrated by financial records
• Regular payments such as mortgages, rents, and lease obligations
• Debt repayments
• Outstanding tax liabilities
• Employee salaries and benefits

During the repair and restoration phase, businesses often face ‘Extra Expenses,’ those that are above and beyond typical operational costs. Extra Expense Insurance is designed to cover these costs, allowing the owner to maintain business activities while recovering from property loss. Whether it’s the additional outlay for renting a temporary workspace, getting new communication systems up and running, motivating employees to stay on track or put in additional hours, or marketing to assure customers that you are still operational, this coverage supports efforts to minimize income loss and sustain your presence in the market.

How BI Payments are Determined 

BI insurance exists to ensure financial stability despite a loss that may interrupt or slow down production or operations. In insurance terms, BI coverage includes the entirety of the profit or loss, plus all the ongoing expenses necessary for daily operations. This is the routine income and expenditures during regular business activity.

Most BI policies include coverage for both:

• The actual net income that would have been earned during this period
• The continual normal operating expenses incurred

BI policies often incorporate a waiting period or ‘time deductible’. This is not a monetary deductible, but rather a period that must elapse before the policy kicks in following a loss. For instance, under a certain policy, a business may need to wait 72 hours after the covered cause of loss before the insurance policy begins reimbursing the loss. This ensures that coverage aligns with more significant, impactful disruptions and not minor or brief interruptions.

Filing a BI Claim 

Filing a BI claim can sometimes feel like navigating through a maze of paperwork. However, knowing what is needed can help make the process more manageable. Generally, the type of documentation requested can differ from one insurer to another, but typically includes:

• Profit and Loss Statements: These documents provide a clear picture of the business’ financial performance, detailing revenues and expenses over a certain period.
• Sales Records: This shows the flow of business transactions, giving an insight into the income that the business generates regularly.
• Income Tax Returns: Tax returns are a reliable source for verifying the financial history and health of the operation.
• Rent Rolls: If the business earns income from property rentals, rent rolls are essential to show consistent rental income.
• Payroll Records: Payroll details are crucial for proving the expenses related to employees.

By having these records up to date and easily accessible, business owners can streamline the claims process and help ensure that they are accurately compensated for lost income.

What is Not Covered 

While BI insurance acts as a safety net for business’ revenue, it doesn’t cover:

• Damaged Goods: Items broken as a result of an incident that the policy covers, like shattered glass
• Natural Disasters: Destruction caused by floods or earthquakes falls outside of this policy and typically requires separate coverage
• Unreported Income: Any income not officially recorded on the business’ financial books
• Utilities: Expenses for utilities are generally not included
• Public Health Events: Outbreaks and illnesses, such as COVID-19, which impact operations on a wide scale

By being aware of these exclusions, business owners can better understand the scope of coverage and take necessary steps to protect their business through additional insurance policies, where needed.

In the End 

Understanding the specifics of Business Income (Interruption) Insurance is crucial for every business owner. With this coverage, a business can continue to operate, have cash flow, and pay its employees.

BI coverage will typically respond to incidents that are identified within the commercial property policy. Consideration of the business’ gross earnings and forecasted profits to gauge potential future profits will help obtain the correct coverage amount. Finally, owners are encouraged to discuss this insurance with a trusted insurance expert to comprehend all time-related limitations and exclusions that apply to the policy.

Written by Chantal M. Roberts.

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This report/news/ranking/statistics has been prepared only for general guidance on matters of interest and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, CEOWORLD magazine does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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