Business Income & Extra Expense

A comprehensive insurance program should cover your various property and liability exposures, but should also keep your business afloat while you rebuild after a loss. Business Income and Extra Expense are coverages used to pay the insured after a loss, keeping the money-flow moving as if the claim never happened.

Business Income is a coverage that reimburses a business for reduced or completely lost income due to a physical loss to their building/premises due to a covered peril. An easy example is a bakery burning down. While the building is being rebuilt, the bakery cannot operate. The loss of income is substantial, as it may take up to a year to finish the new building. During that time, the bakery would need to have Business Income coverage to receive any sort of income while the bakery is waiting on the new building. This coverage is particularly useful for businesses that still have loans and liens on their property that they would still be required to pay or other contractual expenses that they must pay. The Business Income coverage amount that a business would receive is a ‘net income’, however. If you are receiving payments through Business Income, you won’t receive any reimbursement for fees and expenses that you won’t be incurring while the business is down (such as the cost of the dough, in the bakery example). Business Income coverage is usually subject to a total limit of payments, a time limit, or both. Also, Business Income coverage alone would not cover additional expenses of renting a temporary location or expediting the rebuilding process, etc.

Extra Expense coverage is an optional coverage that can be added to Business Income. In the previous example, if the bakery had Extra Expense coverage along with their Business Income coverage, the Extra Expense coverage would cover the additional costs that were incurred due to renting a temporary location, overnight delivery of new supplies and equipment, expedited rebuilding of the original location, etc. This coverage often positively impacts the business’ ability to return to the same capacity it was at before a loss, as being out-of-operation for too long may result in your customers looking for a different provider of your product/service.

Calculating a proper level of Business Income coverage can be very complicated, especially for new businesses or businesses with seasonal/variable products. Keeping excellent accounting records, and backing up those accounting records outside of the business may be essential to getting properly reimbursed by Business Income. Also, initially establishing the correct amount of Business Income coverage should be reserved for a trained insurance professional, as insurance underwriters calculate Business Income differently than a CPA would. 

Note: With Business Income and Extra Expense coverages, the verbiage used is that these coverages will only be triggered after a Covered Loss. Determining the covered losses depends on the policy form you're using. Each policy has a Cause of Loss designation. The more perils covered, the more likely you'll be able to receive the benefit of Business Income and Extra Expense.

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