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 fully operate in the wake of a peril that causes significant damage.

A 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, 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 loss
  • 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 a drop in prospective earnings
  • Gross earnings of the business in the absence of the loss

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.  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.

You can reach Miami Insurance Claims Lawyer J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at (305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email Attorney Gonzalez-Sirgo directly at [email protected].

J.P. Gonzalez-Sirgo
J.P. Gonzalez-Sirgo, P.A.
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