Business Income Worksheet: A Refresher
By Andrew Royce, October 8, 2018
Over 70% of businesses involved in a major fire either do not reopen, or subsequently fail within 3 years of a fire. The ones that do survive have a disaster response plan in place before a claim happens. Every business is vulnerable to unpredictable events. Whether or not they become catastrophic is up to the executive’s pre-disaster recovery planning, including continuity planning and properly completing the Business Income worksheet.
Business income losses result from the interruption of normal business operations because of direct physical damage of property under a covered cause of loss. The business either shuts down or continues operations in a reduced capacity. In most instances, revenue falls or stops while at least some expenses continue. If you are unable to supply your customers during a loss, will they turn to one of your competitors to supply your product or service? If it takes 3, 6, 9 or 12 months to rebuild and become fully operational, how many of your clients come back to you after they have established a new relationship? These questions should be considered with completing a business continuity plan.
After a business income loss the insured seeks compensation under the lost business income provisions of its policy. It is critical that a CEO/CFO properly complete the Business Income worksheet at the insurance renewal if the claim is to be adequately paid. Below is a refresher on business income coverage to help understand and complete the Business Income worksheet.
Definition — Business Income insureds the net profit (or loss) and continuing expenses you (the insured) would have had if there had not been any covered loss. Any expense that is not necessary to continue will not be paid.
Continuing Expenses are normal operating expenses, including payroll that may continue during the period of restoration and extended period of indemnity.
Non-Continuing Expenses are normal operating expensed that do not continue during the period of restoration and extended period of indemnity.
Period of Restoration is the period of time that payment the covered losses will continue until:
- The property is restored,
- For manufacturers, plus the time it takes for them to restore the manufacturing production facilities; or
- The limit of insurance is exhausted, whichever is first.
Extended Period of Indemnity: The policy may provide for an extended period of indemnity, which insures the difference between what the business is doing following restoration of property and what it would have done had no loss occurred. Most companies grant 30 days coverage for the extended period of indemnity with the option to purchase a greater time frame up to “unlimited”.
Waiting Period: A waiting period is an amount of time, represented by normal business hours, which must elapse before the insurance company will start calculating a BI loss. The BI coverage starts after the waiting period is exhausted. The waiting period does not apply to extra expense. This is so you may use the EE dollars immediately so as to return to business quickly.
100% Business Income: The 100% BI amount is determined by completing a BI Worksheet. The worksheet sets forth what constitutes the 100% BI for the 12 months of the policy year. In theory, if you were out of business for 12 months, and you determined the 100% BI correctly, you would have insurance for 12 months. If you determine that recovery will take a period longer then 12 months, you will need to calculate an increased BI limit. You must be conservative in estimating how long it will take you to return to the business to where it would have been if no loss occurred.
If you estimate it would take the following recovery times:
- 9 months (optimistic) you’d require 75% of the 100% BI,
- 12 months, you’d require 100% of the 100% BI, or
- 18 months, you’d require 150% of the 100% BI.
Ordinary Payroll: Ordinary payroll is automatically covered under Business Income. If you do not want to cover the ordinary payroll, it must be excluded or limited by endorsement. Non-ordinary payroll or executive payroll may not be excluded, as these individuals are essential for the insured’s return to business.
Failure to insure the ordinary payroll may cause you problems in returning to the market place because trained employees may not be available. In such cases training costs are not insured and may represent a considerable amount plus a delay in returning to business.
There are two types of payroll calculations for Business Income:
- Officers, executives, department managers, employees under contract; and any additional person or persons the insured wants to decree as executive payroll either by job classification or by individual’s names.
- Payroll, benefits, governmental pensions paid by the insured, union dues paid by the insured, and Worker’s Compensation premium.
Even though it is usually not advisable to exclude ordinary payroll, you have the option to exclude the ordinary payroll entirely or insure the ordinary payroll for 30, 60, 90 or 180 days.
Extra Expense (EE) insures those necessary expenses, over and above your normal operating expenses, you pay in an attempt to reduce the BI loss and/or return to business more rapidly than if such extra expenses were not paid.
Business Income Including Extra Expense Combined Limits: If the combined BI/EE form is purchased, values for BI and EE should be established and combined. Too many times only the BI value is calculated. At the time of loss, the combined BI/EE limit of insurance may be used entirely for BI; entirely for EE; or any combination of BI/EE.
Steps you can take to help resolve your claim favorably:
- Do your best to read your policy carefully. If you do not understand how the insurer will calculate the income loss, ask for an explanation and insist that the method of calculation be consistent with policy terms and applicable laws and regulations.
- Start gathering data immediately following the incident. Don’t throw anything away, even if it’s damaged, until you determine whether it may be needed to support your claim, including your claim for the physical damage.
- Involve your accountant or other financial expert in any significant financial loss.
- Keep accurate records of sales and operations expenses that continue after a loss. Lost revenue and extra expenses caused by the business interruption should be tracked from day one. You may want to track the extra expenses in a separate ledger or account. Get professional help if necessary.
- Take photographs of the damage before you make any repairs or remove any damaged items.
- Take reasonable steps to avoid or minimize your loss. For example, you may consider re-opening your business at a temporary location, outsourcing of some operations to other organizations, continuing to operate using only part of your business space, etc.
- Keep a log of all your communications with the insurance company during the claim process. Also keep copies of all letters and e-mails you receive from and send to the insurer or its representatives.
- Avoid misunderstandings, ask the insurance company to request documents in writing.
- Consider hiring an independent insurance adjuster or insurance attorney (at your expense) to deal with the insurance company and advise you regarding how best to prove your claim and maximize your recovery consistent with policy terms.
Accurately calculating business interruption values is a critical part of an organization’s pre-loss planning process. Having an accurate valuation greatly improves the recovery process and the organization’s probability of surviving a catastrophic event.
If you would like more information on Business Income, please contact BlueStone Advisors at 630.504.6400.
Andrew Royce, CIC, CRM, CLCS, CRIS is Co-Founder & President of BlueStone Advisors, LLC, an insurance brokerage and consulting firm specializing in Property & Casualty, Employee Benefits and Captives. He specializes in Captives for P&C and Employee Benefits and has over 15 years of industry experience. Andrew can be reached at firstname.lastname@example.org.