Business Income Insurance

Updated: November 07, 2009

Can your business survive a disaster?

Make sure you have insurance to rebuild AND recover.

You buy insurance in case your building is damaged or destroyed, in case your equipment breaks down or is stolen, or in case an employee or customer is injured. But many business owners overlook something else that needs protection - their company's bottom line.

Payroll, operating expenses and profits collectively represent the most expensive losses small-business owners face if their property is destroyed and their business is shut down.

Even so, most small-business owners aren't well-prepared to recover these costs if a disaster strikes. In a recent survey by a national insurance company, more than half of all small-business owners said they don't have business income insurance - the coverage that allows you to recoup these losses. And six out of 10 entrepreneurs said they don't have enough information about business income insurance to figure out the coverage they need.

Here is a quick overview of why you should consider business income insurance as part of your company's comprehensive insurance package.

First, rebuilding may take longer than you think.

It's a little-known fact that when a property is totally destroyed, it often takes six months to a year - and sometimes longer - for a small business to return to previous income and production levels.

During a business shutdown, customers often take their business elsewhere, and they may take their time finding their way back to you again. Meanwhile, you have to find a way to pay both your ongoing expenses and new ones - investments you need to make to get your business up and running faster to reduce your losses.

When you have business income insurance you are reimbursed for the net income your business would have earned if you had not been shut down - or slowed down - due to covered damage to your property. It can also cover certain continuing costs that you face if your property is destroyed, such as payroll costs.

Extra expense coverage is different. It covers necessary costs that you pay in order to get up and running more quickly. For example, if you would be able to reduce your losses by renting a temporary location to resume operations while you rebuild, those rental expenses would be covered.

How much coverage do you need?

To determine the level of business income coverage you need, you'll need to make some decisions about how you'd want to operate after a disaster destroyed your property:

Do want to continue to pay your employees during a shutdown?
How long do you estimate it will take you to rebuild your property and your revenues?
What expenses will continue even if you're shut down? Which new expenses will you face?

The key is to be realistic in your assessment. Consider the time and costs you would face in recruiting, hiring and training an entirely new staff or the impact of losing skilled employees to the competition.

When it comes to rebuilding and reopening, think about the time it will take to clear debris from your site, get permits, rebuild your property or select a new location, replace equipment and machinery, become fully operational and regain customers. Every business is different, so you'll want to discuss these choices with your financial advisors as well as your insurance agent before purchasing coverage.

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