Business Income Insurance. What is it and what is it for? Basically, it’s insurance that covers the income you lose if your operations are slowed or stopped due to physical damage to your place of business. But what specifically does it cover? How is the income amount calculated? How long are you covered? If you own or operate a business, this article is a must-read.
Business Income Insurance – An Introduction
We all know the importance of having home insurance. Although the chances of disaster are slim, very few people would leave their home unprotected. The devastation would be overwhelming. Canadian financial institutions won’t issue a mortgage without a home insurance policy. Even if it weren’t a requirement, we know the importance of having insurance policies that protect our homes in case the unthinkable happens. The majority of homeowners couldn’t afford the costs of repairing the damaged property and the cost of replacing their belongings.
The same is true with a business. If you own a business, the last thing you need is a fire or flood destroying everything you’ve worked for. Which is why a Commercial Property Insurance policy is just as important as a homeowner’s policy – maybe even more important. Your business is often your only source of income. More on commercial property coverage later.
Business Income Insurance takes protecting you from bankruptcy a step further. Sure, having insurance that covers the damage done to your business is crucial, but so is covering the business income you rely on every month to pay your expenses. If the worst-case comes to pass and your business is shut down because of a catastrophic event (called a peril), those expenses start piling up and can drown you in debt without money coming in.
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A Closer Look at Business Income Insurance
In order to get a comprehensive picture of Business Income Insurance, it’s helpful to know the basic coverages that go hand-in-hand with it. We’ve detailed three main coverages that are standard for most businesses, including Business Income Insurance.
Commercial Property Insurance
As mentioned above, this is coverage that protects a business in the event of:
- Sewage backup
- Water damage
- Ice storms
This list is not exhaustive and it’s beneficial to go over your policy in detail with an insurance broker. If your business suffers an insured peril, a commercial property policy starts making you whole again. According to the Insurance Board of Canada, items that can be covered include:
- Inventory and supplies
- Office furniture and fixtures
- Computers and electronics
- The personal property of employees while on-site
- Customer property at your business site
- Lighting systems
- Outdoor signs
- Fencing and landscaping
- Tools and equipment in transit or used off-site for business purposes
While having commercial property insurance is fundamental to your risk management profile, it’s really only the first step.
Business Income Insurance
Just as it makes sense to have commercial property coverage, it also makes sense to have business income coverage. As a business owner, as long as you have operating expenses, you need to protect the income that pays those expenses. Otherwise, you risk having those accumulating costs collapse your business.
These are typical expenses that a business income insurance policy can help a business owner pay:
- Rent / lease payments
- Loans and lines of credit
- Utilities – gas, electrical, etc.
- Phone bills, internet
- Equipment rental fees
You might be wondering how the amount of business income that’s covered is calculated. That amount is typically calculated based on your recent financial records. So it’s always a good idea to back up your financial records regularly and keep them off-site, preferably in a secure area or with a third party like a bank or an accountant.
There are generally two time periods that the coverage lasts: until the repairs can reasonably be completed or until your company reaches the same level of income it was at before the peril. As might be expected, there is usually a period of time after re-opening that a business needs before it can fully recuperate. One reason is that it takes time for clients to return or for your business to earn new ones to replace the ones who left while you were closed.
When discussing business income insurance with your broker, he/she should go over the time period that best suits your business needs.
Extra Expense Coverage
There are businesses that have to remain operational, peril or not. Contact centres, service providers, security services, banks, hospitals, pharmacies, manufacturers and mining companies – if you run a company that has to find a way to stay open, expense coverage should be added to your business income insurance.
Extra expense coverage supports those businesses in times of peril by covering the added expenses they will have to incur to:
- Move to a different location
- Pay rent at the new location
- Outsource work or pay overtime as needed
- Pay for equipment
- Pay for phone, internet, hydro, etc., at the alternate location
These expenses have to be considered reasonable and necessary for the business to prevent a shutdown or to reduce the time that it is shut down.
Putting It All Together
Business Income Insurance is as much a necessity as commercial property insurance for businesses that depend on their income to continue operating. And for a lot of businesses, extra expense coverage is the only way they can continue operating as they can’t afford to close down.
ALIGNED – Getting You the Best Value for Business Income Insurance
Having an insurance expert who is also a business expert is crucial in a broker-client relationship. You need a broker who knows your business needs and will make sure you understand the policies that might very well save you from financial ruin one day. Our ALIGNED brokers specialize in business insurance products, know exactly which products are best for each business and know how to get you optimal coverage for your money.
Contact us and start protecting your business today.