Understanding Business Income Coverage

Property coverage can protect a business from physical damage to its property from fire, windstorm, vandalism and other similar events. Sometimes, the covered damage prevents a business from operating. In those situations, the business’s revenue may decline or even come to a halt. Business Income coverage may provide protection against certain financial losses that are sustained while the business is unable to operate.

What is Business Income or Extra Expense coverage?

The types of financial losses for which coverage typically is afforded include loss of Business Income and Extra Expense loss.

Business Income is generally defined as the net income (net profit or loss) plus normal continuing operating expenses. Extra Expense is generally defined as expenses reasonably and necessarily incurred to avoid or minimize the period in which the business is unable to operate.

The time frame during which these coverages apply is referred to as the period of restoration. The period of restoration begins when covered damage forces a business to suspend its operations, and it ends when the covered damage is, or reasonably could have been, repaired.

Some policies also include Extended Business Income coverage. This coverage may provide protection against a loss of business income that continues after operations have been resumed and the period of restoration has ended. The time frame during which this coverage applies is typically specified in the policy.

Here is an example of how these coverages may provide a business with important protection:

Kate’s Bagel Shop is a Travelers customer. The shop’s insurance policy provides Property coverage and Business Income coverage (including Extra Expense and up to 30 days of Extended Business Income coverage). A fire causes extensive damage to the shop’s interior and cooking equipment. Repair of the fire damage will take approximately three months.

The shop is able to shorten its downtime and resume operations in two months, rather than the expected three months, by arranging to make bagels off-site. However, when it resumes operations, the shop’s revenue does not immediately return to the level projected prior to the fire.

In this example:

• The policy’s Property coverage would protect against the cost of repairing the fire damage.
• Business Income coverage would provide protection against certain financial losses (i.e., the profits that would have been earned during the two-month period the shop is unable to operate and normal continuing operating expenses, such as electrical costs, incurred during that time).
• Extra Expense coverage would protect against the increased costs the shop incurred to make the bagels off-site to minimize its downtime.
• Extended Business Income coverage would protect against a loss of Business Income that continues during the 30-day time frame after the shop has resumed operations and the period of restoration has ended.