Introduction
The value of most businesses is related directly to their ability to generate revenue and net income. This ability becomes much more important after a business suffers a catastrophe, like a fire, a windstorm, or a water damage.
Imagine a fire destroying your business, and as a result, you stop all operations for three months. During this three-month period, your business continues to pay salaries, utilities, rent, and other fixed costs necessary for operations to restart. So what can you do to make your business whole again after this fire? Business-income insurance might be the answer.
Business-income insurance (also known as business interruption) is usually either part of a businessowners policy or added by an endorsement to a commercial property package policy. Although policy terms can vary widely, there are some basic common principles applicable to all policies.
Generally, for a business to recover its business-income loss, the loss must result from the following:
1. A covered cause of loss;
2. That results in direct physical damage;
3. To insured property;
4. At the premises described in the insurance policy’s Declaration page.
1. Suspension of Operations
For an insured to recover its business income, the covered loss must usually cause “necessary suspension” of the insured’s business operations. Unfortunately, “necessary suspension” is frequently an undefined term in most policies. Some courts construing this language hold that a total business cessation is required, while others hold that a mere slowdown or decrease in business volume is enough.
2. Direct Physical Loss
Business-income insurance typically requires a “direct physical loss” to covered property, which usually involves some type of physical damage to the covered property. This requirement can be problematic when there is only loss to intangible property. For example, if a virus causes loss of intangible computer data, which causes business-income loss, there is a question whether any direct physical loss has occurred.
Even without a direct physical loss, however, there may be limited coverage for a forced closure such as when a civil authority prohibits access to the insured premises due to direct physical loss or damage to property other than the actual premises itself.
3. Described Premises
The damage need not be to property covered under the policy, if it causes interruption at the premises described in the policy’s Declaration page. In addition, if the insured occupies only a part of a building, damage to other areas that provide access to the described premises will trigger coverage. For example, if an apartment complex suffers damage to its first floor only, it may be sufficient to establish a claim if an upper-level resident can’t access his or her apartment.
4. Period of Restoration
Policies typically limit recovery to the actual loss for the period of time it would take to repair or replace the building in which the business is conducted. There is usually a waiting period of 48 to 72 hours before an insured may recover its business-income loss, which is intended to preclude insureds from recovering for short-term losses. Further, most policies have a maximum period of coverage—frequently 4, 6, or 12 months.
5. Damages Recoverable
Damages recoverable may include lost profits or gross earnings less non-continuing expense. While an insured may usually prove lost income through sales and production records, other data like market trends may also be considered. Similarly, normal maintenance or downtime, or seasonal price fluctuations may affect the amount of loss.
6. Insured’s Duties
After a claim, insureds may have duties that may be prerequisites to coverage. These duties include the following:
1. Giving prompt notice of how and where the damage occurred;
2. Taking reasonable steps to protect the property from further damage; and
3. Allowing examination of physically damaged property.
Businesses typically must permit the insurer access to financial books and records, including profit and loss statements, production reports, inventory, invoices, and purchase orders.
7. Lost Income
Business-income insurance is designed to protect the income the insured business would have earned had there been no interruption of the business. There is typically coverage for loss of earnings as well as continuing expenses, such as payroll, rent and utility bills, which continue despite the cessation of business. The extra expenses of continuing business, to avoid shutdown, such as temporary lease space, is also covered.
8. Extra Expense
Some policies may provide additional coverage for extra expenses, which pays the insured for additional expenses incurred (above the normal monthly expenses) due to a covered loss. The extra expenses must be necessary in order to resume operations of the business. For example, if an insured rents equipment to continue operations at the businesses-affected location, then the policy will pay the rental expenses.
9. Presentation and Documentation of a Business-Income Claim
Preparing a business-income claim can be detailed and complex, and it requires tremendous effort. An insured should not go through this daunting process alone, and might want to consider hiring a professional, like a property insurance attorney to properly protect its interests.
The documents required to properly submit a business-income claim generally depend on the insurance company and the amount of claim. Usually, an insurer may ask for the following documents:
1. Description of the operations and the products or services offered;
2. Tax returns ( 3 – 5 years), including payroll records; and
3. Monthly profit and loss statements (3 – 5 years).
Summary
For a business to recover its business-income losses, the claim must arise from a covered cause of loss that results in direct physical damage, to insured property, at the premises described in the insurance policy’s Declaration page.
A business should discuss it business-income needs with its insurance agent. Finally, it is recommended that a business hire a professional, like a property insurance attorney to assist during this process.
About the Author
Rabih Hamawi is a principal at Law Office of Rabih Hamawi, P.C. and focuses his practice on representing policyholders in fire, property damage, and insurance-coverage disputes with insurers and in errors-and-omissions cases against insurance agents. He has extensive expertise in insurance coverage and is a licensed property and casualty, life, accident, and health insurance producer and counselor (LIC). He earned the Chartered Property and Casualty Underwriter (CPCU), Certified Insurance Counselor (CIC), and Certified Risk Manager (CRM) designations. His email address is rh@hamawilaw.com. www.hamawilaw.com.