What Every Small Business Owner Should Know about Business Interruption Insurance

Commercial insurance coverage that is tailored to the needs, objectives, and risks of a small business can determine a company’s ability to overcome a disaster like a hurricane, fire, or other natural or man-made peril.  Although there are many forms of coverage that are critical for a business, business interruption coverage is all too often overlooked.  While there are different types of business interruption coverage, this form of commercial insurance essentially covers lost profits because of a company’s inability to operate or underperformance in the wake of a peril that causes significant damage.

A new survey reported in the Insurance Journal provides interesting insights regarding the lack of protection possessed by many small businesses.  In the Harris Interactive poll commissioned by Nationwide, 500 small businesses with 300 employees or fewer were interviewed.  Two out of three of the companies did not have business interruption coverage.  The survey results confirmed the ironic fact that smaller business are less likely to have disaster recovery insurance even though they have the greatest need for such insurance when faced with a crippling storm or other cause of significant loss.

The researchers indicated that small businesses may have slacked in making arrangements for financial recovery from a disaster because of the lack of major disasters like hurricanes in recent years.  Because storms and other perils can strike without warning at any point in time, small business owners should carefully analyze their coverage and weigh the benefits of business interruption coverage.  This evaluation also requires a consideration of the appropriate types of business interruption insurance.   

Unlike more familiar coverage for damage to property, buildings, and plants, or liability claims, business interruption coverage provides protection against indirect financial losses incurred due to an interruption in operations caused by damage to the facility.  These indirect losses also include the risk of losing employees because of an inability to pay wages and salaries when the business is not functioning.

This type of coverage is now more commonly called “business income” insurance.  Generally, “business income” refers to net profit, net loss or net income before taxes that would have been generated plus ongoing normal operating costs.  The information used to calculate loss of business income includes:

  • The financial records of the insured company
  • Anticipated net income if the peril had not occurred
  • Net income generated by the business prior to the peril
  • Necessary expenses that would restore the business to normal operation

The insurer will require the policyholder to establish the following for loss of earnings:

  • The business has no prospective earnings
  • Gross earnings of the business in absence of the peril

These situations can be ambiguous, which makes proving estimated earnings complicated based on the facts and circumstance.  If the business facility is under construction, obviously there would be no track record from which income can be proven.  However, our Miami Commercial Insurance Claims Law Firm understands how to cope with complex situations like obtaining business income benefits for an operation that is still in the construction phase.  If projected profits can be established, compensation might still be recoverable from the date the business would have been operational without the peril occurring.

For purposes of receiving funds under the business interruption portion of a commercial policy, the net profits that were forgone because of the property damage must be established.  The individual policy will provide the precise definition of “profits,” but the term typically refers to money that would have been generated above the costs of goods sold, or alternatively, above the cost of overhead, materials, taxes, administrative costs, taxes, and labor costs.

Our Miami commercial insurance claims firm invites you to contact us if you are having difficulties with your insurance company.  Florida insurance claims lawyer J.P. Gonzalez-Sirgo handles claims against insurance companies in Miami and throughout Florida. The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations.  No Recovery, No Lawyer Fees.  Call 305-461-1095 or Toll Free 1-866-71-CLAIM.

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