Proper Coverage Makes the Difference Between Staying Open and Closed
When a building burns down, floods, or explodes from a gas leak, the damages are usually obvious enough. However, in addition to the direct loss of the building, members can suffer indirect damages that are much less obvious and more difficult to quantify.
Indirect damages refer to the loss of fees or income generated out of the facility, the expenses to relocate to a temporary facility, the overtime paid to employees to assist in resuming operations during repair, or the cost needed to pay skilled employees once operations resume. Business Income and Extra Expense coverage protects against these types of indirect damages that are a result of an insured property loss. These coverages are designed to put a district in the same financial position it would have been in had no loss occurred.
Business Income covers the loss of non-continuing revenue and continuing normal operating expenses incurred during the period of restoration. Extra Expense reimburses the necessary expenses incurred in order to minimize the loss amount and those that will enable the district to continue operations. Many rural areas do not have a population base that would support rehiring personnel after a six month or one-year layoff, so ordinary payroll needs to be accounted for within the chosen limit.
Determining a Correct Limit
We believe all districts have some exposure to indirect damages, so members who have scheduled property automatically receive coverage with a combined limit of $250,000. The question remains: is that enough? Where members have payroll excess of $150,000, we suggest that the basic limit is not enough.
To determine the right amount for your district, we recommend completing the Business Income and Extra Expense Worksheet. Your financial statement will help you in entering in the figures needed to calculate the right limit.
Business income is calculated using total gross revenue, continuing expenses, and non-continuing expenses to determine your net revenue. Ordinary payroll, which can be a high figure, is automatically included, so adding that number to the net revenue is crucial.
Extra Expenses can include renting a temporary facility, renting fixtures and equipment, temporary machinery such as a generator, moving and hauling, additional utilities, advertising, telephone and communications, and travel expenses. Your continuity plan or disaster plan could help in estimating these figures, as it should outline the steps you would take to continue operations.
Taking time to complete the worksheet will help your district decide on the right amount of coverage needed to remain in a good financial position and continue its delivery of services to the people you serve.
How to Manage the Risk
Having a continuity plan or disaster plan outlining your goal to prevent or mitigate loss by managing the initial crisis and then to recover from it as quickly as possible is crucial.
A written plan should outline important critical items such as notification to employees and the community, establishing an evacuation plan that uses the safest route, understanding if a recovery site can be easily located, and verification that data restoration works smoothly.
For indirect damages, determining the number of months it will take to repair the damages can assist in the planning process. Factors to consider include the time to adjust the loss (90–120 days), the time to draft architectural plans and obtain engineering studies, the time for the bidding and permitting phase, seasonal problems (e.g., snow, rain), and additional time due to a catastrophe (e.g., hail storms in Colorado delaying a contractor’s response and material availability).
Developing, maintaining, and testing your disaster recovery plan will protect your physical and informational assets, expedite the full resumption of your operations, and minimize the loss of income in order to maintain public confidence.
Understanding what indirect damages may affect an organization can make the difference when it comes to keeping the doors open and staff on payroll. By taking advantage of our business interruption and extra expense coverage, members can remain financially stable in difficult times or during unexpected losses.
