Tuesday Morning Insurance Tidbit - BI/EE

[InsuranceMan]

Happy Tuesday fellow ADI-ers,

     Well, I am back!  I have to tell you, in all honesty, I wish I weren’t.  I have spent the last week or so in Thailand with a 10 hour tour stopover in South Korea, and it was absolutely amazing and I wish I could have spent more time.  I have never felt more like James Bond and Indiana Jones all wrapped into one before!!!!!!!!!!  I am appreciative of the time that I had away, but it just never seems long enough.  With that said though, I am rejuvenated and ready to continue my insurance superhero work, so let’s get to it!

     In today’s installment of the “Tidbit”, we are going to discuss Business Income & Extra Expense (also seen as BI&EE or BI/EE).  It is important to understand this coverage and what it does and does not cover.  First, what the heck is it?!?!?!  Well, it is actually two different coverage’s, but they oftentimes go hand-in-hand with one another, and that is why they are often referred to at the same time. 

     First, Business Income is a type of property insurance that covers the loss of net income of a business when there is damage to the premises due to a covered cause of loss, that results in a slowdown or temporary cessation of business.  Extra Expense, however, is the necessary expenses that you incur during the period of restoration that you normally would not have incurred if you had not had a loss.  So, again, what the heck does all of that mean??!??!?!?!

     It is probably easiest to use examples to illustrate these coverages.  Let’s say that you have had a fire in your building and you are shut down for 60 days while the clean-up and restoration is taking place.  Business Income coverage would provide the net income amount and continuing normal operating expenses that you would continue to incur (including payroll, if you have employees) during the period of restoration.  Basically, this coverage provides for the amount of net income that you would have normally earned during the period of restoration, as well as pay for your normal operating expenses such as rent, utilities, property taxes, etc.  Nice, right?!?!?!  You would still have money coming in during this downtime if you have this coverage.  That makes a difficult situation much easier knowing that you can still pay your bills and keep staff paid even if you are not able to produce product and make money.  Whew!!!!  Thank goodness for insurance, right?!?!?!?

     In tandem with Business Income insurance paying for ongoing costs, Extra Expense coverage provides for the necessary costs/expenses that you may incur to get your business up and going as quickly as possible after a covered loss.  Extra Expense coverage can be used to temporarily relocate your business to another location, outsource functions that you normally would be able to conduct if you had not had a loss, an in some cases even expedite shipping of necessary items/equipment or renovation costs.  Things like getting a water mitigation company to come in as quickly as possible to keep damages to a minimum and the increased electricity costs to run all the drying fans are examples that I have seen covered by this insurance.  Again, pretty nice to have in order to make a difficult situation more bearable. 

     Although I always suggest having these coverages on your policy, there are some things that they do not contemplate.  Business Income/Extra Expense coverage is also often referred to as Time Element coverage, but be careful!!!!!!!!!  People often misconstrue Time Element coverage to mean that however long the restoration period takes, it will all be covered.  Worse yet is that some insurance agents may even tell you that “time element” coverage will provide compensation on things such as the time value of maturation on your product. They believe that the value of the maturation would be covered under this policy provision.  W R O N G ! ! ! ! ! ! !  See, that is why you need me, InsuranceMan 2.0 !!!! to assist you. 

     Time element coverage typically will only cover you for a restoration period of 12 months and is based on a complex formula that considers your past Profit and Loss Statements (P&L’s), earnings data, etc.  Usually the numbers are compiled from your normal course of business and earnings from the last three to five years.  If you are a start up operation, this can be a bit more difficult to justify and predict, but it is possible and really should not be something to stress out over.  With that said, one thing that it will not take into account is the maturation value of your stock.  Please, please, please keep this in mind as this can be a HUGE point of contention in the case of a loss.  There are ways to make sure that the maturation value is provided for, but I am one of the only people in the country that understands this aspect and created a valuation form to deal with this specific need.  If you have questions about this, please reach out to me and allow me to assist you!

     As with all insurance, the question always arises as to, “How much is too much?”, or “How much is enough?”  A very basic rule of thumb is that if you take your P&L statement for the course of a year and divide it by 12, it will give you a very rudimentary figure to start with.  Let’s say that your net earnings in a year are $120,000.  Why that figure, well, because it is easy to use as it breaks out to $10,000 a month in earnings and I don’t want to do too much math what with being jet-lagged and all.

     So, if you know that your net earnings are roughly $10,000 a month, you can then decide what level of coverage you want to have for your BI/EE.  Often times the coverage is provided on a monthly level of indemnification.  What the heck does that mean?!?!?!?  It means that insurance carriers will provide coverage based on the total coverage amount on a 1/3rd, 1/4th, 1/6th basis, or on a 12 month actual loss sustained basis.  Ugh, this is getting confusing, right???!?!??!  Right!  Again, more reason you need me to assist you. 

     The tricky part is deciding as to how much coverage you need and for how long.  Typically, most businesses go with a 1/6th basis and cover themselves for half a years’ worth of net income and expenses.  Now, that may or may not fulfill your needs, but I am speaking in generalizations here.  So, in this case it essentially means that the total limit of indemnification would be $60,000 for the year on a 1/6th basis.  That then breaks out to $10,000 a month for up to 6 months.  If the restoration period takes longer than that amount of time, and costs more than the $60,000 you are going to have to out-of-pocket the rest of the funding.  As you can see, it is important to make an educated decision when choosing the limit as well as the period of restoration.

     Without wanting to confuse this issue further, I will briefly mention a few items.  Just because you chose a 1/6th limit (in the case above), it does not mean you are only limited to 6 months of coverage.  It does mean that the maximum amount of coverage that you can get in any one month is limited to the total amount divided by the period of indemnity, however.  An example would be that you picked $60,000 on a 1/6th basis but you really come to find out you only are needing to use $6,000 a month.  Well then, your overall limit of $60,000 would carry you for 10 months and that would be permissible even on a 1/6th coverage option.  Converse to that, let’s say that you find that you need $12,000 a month to keep up with everything.  Well, being that you chose the 1/6th basis, you could only recoup up to $10,000 in any given month leaving you $2,000 short each month and you would use up your total amount of indemnity within the 6 months timeframe. 

     One last item to mention is that just like other insurance, the more you want the higher the cost.  If you go with a lower period of indemnification with a lower monthly limit, the less expensive it will be.  If you are really concerned over a loss and being shut down and you want to make certain that you have adequate coverage, you can choose a 12-month, actual loss sustained option but keep in mind this is usually the most expensive option.  This option keeps you from having to go through the process of determining and setting a separate limit due to the fact that it provides coverage for your actual loss of business income for up to 12 months.  I highly recommend this type of coverage, not because it costs more and I can make more, but because of the fact that it really is the best coverage available and leaves very little grey area in determining amounts, etc.

     With that, dear forum-goer, I will bid you ado for today.  Thank you for taking time to read this and educate yourself on the wonderful world of BI/EE.  As always, if you have any questions, needs, or concerns, please feel free to reach out to me, InsuranceMan 2.0!!!  Until next time …

 

Stay Vigilant,

Aaron Linden

a.k.a. InsuranceMan 2.0!!!

307-752-5961

insuranceman2.0@yahoo.com