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Business Income and Extra Expense Explained

By February 18, 2020Property

A Guide To Helping You Better Understand Business Income And Extra Expense Coverage

It’s important for you to understand the details of these important coverages as they are often overlooked.  The more you understand these coverages, the better the opportunity you’ll have to fully recover from a loss.

Business Income coverage (sometimes referred to as Business Interruption coverage), is protection against loss of income, in which an organization has suffered a property loss or damage from a covered peril, such as a fire, natural disaster, theft or vandalism. This covers the time when the organization is shut down or relocated until the property is repaired or replaced.

Extra Expense Coverage, often combined with the business income coverage, reimburses you for the necessary extra or additional expenses you incur to continue your operations after a covered caused of loss.  Typical examples might include lease payments for temporary relocation to another facility, leased generators, etc. The organization must make every effort to continue operations and the expenses must be above your normal operating expenses.

Real World Example
If a fire destroys a church and they are not able to meet for an extended period of time, the loss of or reduced offerings can present a significant financial impact to a church budget. Additionally, if the church needs to rent a banquet room at the local hotel or perhaps lease space from a local school in order to meet every Sunday while the repairs to the building are being completed, this presents a large extra expense that is a direct result of the fire claim.

Some important points to consider:

  • Be sure to review the insurance carrier’s form regarding the limit of coverage provided. Because it’s an often overlooked coverage, it’s somewhat unusual to find limits other than what the insurance carrier provides as standard.  Some carriers may not provide any coverage and with others it’s fairly standard to see $50,000 or $100,000.  Depending on your specific operations, this could be sufficient or woefully inadequate.
  • For each occurrence of business income loss, a 72-hour waiting period applies. This waiting period is not a deductible per se; however, it is that portion of the business income loss that is to be borne by the insured.  The 72-hour waiting period begins at the time of direct physical loss or damage to the property.
  • If you have a school, midweek daycare, PreK or similar program, the potential loss of tuition can be significant if you’re displaced for an extended period of time so those need to be carefully considered in the determination of adequate business income coverage. Of course, most policies require you to resume operations as soon as possible, assuming of course they can be easily moved to another location to resume operation.

We hope you never need to utilize this coverage but should you do, like having the proper amount of insurance to replace your building, adequate amounts of business income/extra expense coverage is equally of importance.