If your New York business is insured on anything other than a BOP type policy, chances are good that your business income insurance (a/k/a/ Business Interruption Coverage) is on a separately stated policy form with a specified limit of coverage. Most Business Owner Policies (BOP) have a convenient “actual loss sustained” limit for up to 12 months of coverage, but in larger companies the package policy, usually has Business Income stated as a limit with a co-insurance percentage attached to it. In order to arrive at the limit of coverage a Business Income worksheet should be completed to calculate both the potential exposure in dollars, as well as duration of potential loss expressed in months. Unfortunately the worksheet can be intimidating and complex, and many businesses just forego the calculation each renewal and stick with a round number they think is sufficient.
That could be a disaster if you have a large loss that either shuts your doors for a period of time, or limits your business capabilities. Having the correct business income insurance is very critical for New York manufacturers as they typically have a long recovery period due to the time it takes to obtain, rebuild, test and get specialized machinery operational.
Let’s take a step back and explain what the business income policy form is supposed to do. In the event you suffer an insured loss at your described premises that forces you to suspend or curtail business operations, your income stream will take a hit. If you’re out of operations a couple of days, that’s not a big deal – but in the event of a catastrophic loss that puts you out of business for months, that’s a big deal! The business income form’s intent is to help you pay for your ongoing business expenses and your lost profit during the duration of your downtime, as well as the extra expenses associated with expediting the process of getting you back in business.
Often, we will see prospective accounts that have one or more of the following problems:
1. They have not completed a Business Income worksheet so their limit is not reflective of what the potential need for coverage is. Instead, the insured or their broker has guessed or taken a percentage of annual sales as the limit of coverage, and usually there is insufficient coverage which can threaten the business’s ability to recover following a loss.
2. The worksheet has been calculated and a monthly limit has been somewhat accurately estimated, but the duration of time that coverage will extend (as expressed as a co-insurance in the policy) is insufficient. Many businesses believe that they can recover quickly (three months as an example) following a loss; unfortunately the truth is that large losses usually take significantly longer than that. Underestimating the duration of recovery also will threaten a company’s survival.
3. The policy is not endorsed properly to include the broadening forms necessary for recovery, or limit payroll reimbursement (in blue-collar industries).
4. The worst problem of all there is no business income/business interruption insurance at all!
Here’s the deal – insurance company worksheets are complicated but a necessity for coverage. They, with the policy forms are the basis of how the carrier will pay your claim. Our suggestion – do the “back of the envelope” calculation to see if your existing limit is sufficient or not. Take total income either annual or monthly and subtract out those expenses that do not continue should you be shut down – cost of raw materials, possibly some payroll, possibly some utilities and whatever else you believe will not continue. Calculate that for a monthly limit. Now imagine your plant, property, office or warehouse has been destroyed. How long will it take to rebuild, or find another location, and outfit it for business to start back up. Keep in mind that in some communities the permitting process could take 3 months alone, add to that architect’s time, cleaning up and demolition of the existing damaged structure, finding a general contractor, etc. If your business involves the use of specialized machinery, build time in for that too. Then of course the time to reconstruct your building – don’t skimp here as it usually takes a lot longer to complete a project than originally anticipated. Multiple the number of months times the monthly dollar need you sketched out; then add a fudge factor – 20%. How does that number stack up against your current policy?
If it’s close than it may take some minor adjustments; if it’s far off, maybe it’s time to do a deep dive on the topic. One last point, as mentioned earlier, the limit is only one part of the process. Making sure the co-insurance percentage is properly characterized and having the right endorsements to the policy are also critical.
For help on calculating or understanding your business income / business interruption need in New York, please feel free to reach out to us in New City.