Ask The Experts: Do I Need Business Interruption Coverage?

Business Interruption Coverage replaces lost income due to an event that interrupts normal business operations. This could be due to a natural disaster, damage from a fire, wind, or any covered loss. While every member with property coverage has $250,000 in coverage, that may not be enough to keep things running.

Your district needs this coverage if it:

  • Relies on fees or other income that depends on your building being open to the public
  • Operates in areas prone to severe weather, such as hail, tornados, or floods
  • Provides services to the community that need to continue during repair

The best way to prepare is to consider the answer to these questions about your district:

  • What is the financial impact of a closure?
  • What is your business continuity plan?
  • What are the deliverables the district provides that cannot be interrupted?
  • Is your current limit enough?
  • What are the potential areas of loss, and how will they affect you post-loss?

Having a plan for interruptions can make a difference when accounting for lost income and expenses. It can be the difference between snapping back after an incident, or facing a long-term crunch that could cripple your district for years to come. In situations like those, many private companies would have simply collapsed.

Why You May Need More Coverage

Business Interruption Coverage has been around for over a hundred years. It covers a businesses’ income and the expenses in the period following a covered disaster. Business income is net income before taxes, and continued normal operating expenses incurred including ordinary payroll.

In addition, this will also include extra expenses during restoration taken to minimize the loss.

A 2015 study sponsored by Nationwide discovered that 75 percent of small businesses did not have a disaster recovery plan in place and 66 percent of respondents said they did not have business interruption insurance. While this is no surprise, since small businesses are least likely to have this type of coverage, they nonetheless, are the ones most affected by a disaster and loss of revenue.

For example, in the aftermath of Superstorm Sandy, 74 percent of small business owners in New York had to close their doors for an extended period. Regardless of the damage done, any amount of time spent not in operation is time without revenue.

The threat of a permanent closure is less present for public entities. But the threat of their communities going without critical public services is an even more dangerous possibility.

What We Offer

As we said above, all Pool members with scheduled property automatically have $250,000 for Business Income including Extra Expense/Rental Income for a covered loss. Business Income will pay for net profit or net income that would usually be earned by normal operations had there not been a loss, including payroll. To the extent that they reduce loss, Extra Expense coverage pays for many additional costs that your district may not normally pay but will become necessary because of the loss. This could include renting temporary space to continue operations.

Depending on the size and services that your district provides, this $250,000 limit may not be enough. For example, if your facility earns essential income from fees or events, there is tremendous risk to your revenue. Consider increasing your limits to ensure ongoing operations as well as your employee payroll.

Buildings and property are repairable, but lost revenue, time, and labor cannot be replaced. That is where Business Interruption coverage comes in. If you are dependent on your staff to carry out operations, this coverage is especially important.

For those in areas at risk for floods and wildfire, this coverage could take care of lodging and transportation expenses for employees who cannot return home because of a disaster. You can also obtain coverage for lost income if your building is not accessible because of the damage.

Coverage includes payroll expenses for all employees except for officers, executives, department managers, or employees under contract. If you have a payroll over $250,000, we recommend completing our Business Income Worksheet, which is available upon request, to evaluate the exposures and costs.

Be proactive and assess extra expenses that may come up. If you would like to talk about where your district stands in relation to Business Interruption Coverage, contact your broker.

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