If you haven’t already estimated the Business Interruption (BI) coverage your company requires, now is the time to do so. The business interruption insurance claims formula can help keep the lights on while your company recovers (or rebuilds) from a covered loss.
What is Business Interruption Coverage?
When you have a covered loss, such as a fire or natural disaster, BI insurance does not cover property damage or equipment replacement. It can, however, cover your expenses during the period following the loss when your business is unable to generate income.
Business interruption insurance is a type of insurance coverage that replaces lost income and assists in the payment of additional expenses when your business operations are disrupted by a covered loss. This insurance allows a business to continue operations while repairing or replacing damaged property. BI is important protection, but it is only useful if you have enough coverage.
The Amount of Protection
Calculating BI in business interruption insurance claims allows you to ensure that your company has enough protection to cover a period of downtime for your business – from a brief interruption to your worst-case scenario. Your coverage requirements will be determined by your projected loss of income and any additional expenses incurred as a result of the loss.
Calculating lost profits may entail determining whether there is any room for growth that could affect your revenue projections during the time period in which your insurance benefits are payable under your policy. Extra expenses may include the cost of relocating your business.
Business Interruption Indemnity Period
You must also decide how long your BI indemnity period should be. The length of time your benefits are payable under your policy is referred to as the indemnity period. This time frame must include the time required to return your business to normal operations. It should account for the loss of a customer base or resources such as inventory, equipment, building, or employees (particularly if they are highly specialized or skilled).
Some businesses can restart the next day after a brief stop at an office supply store and renting a temporary location. A short indemnity period may be appropriate for this type of risk. Other companies may be closed for more than a year if they need to rebuild their facilities or replace specialized equipment. A larger, more complex risk may necessitate an indemnity period of 12, 18, 24 months, or longer.
How Do You Determine Your BI Limit
Theoretically, business interruption coverage is a simple concept: the business owner expects to be reimbursed for lost revenue when their company is unable to operate. Isn’t it simple? Not all of the time. That is why it is critical to collaborate closely with your broker, accountant, and even your insurance provider to ensure you are correctly calculating your BI limit.
Unfortunately, no simple formula exists because each business has unique exposures that influence the amount of business interruption coverage required. A public adjuster may be able to provide a BI worksheet to brokers and clients to assist them in their calculations. Any savvy business owner must be prepared for the worst-case scenario because an accident that disrupts operations can occur at any time. Businesses that have the right insurance coverage with suitable limits should be able to weather any unexpected event or accident with no long-term financial impact.