DISCLAIMER: This is only a brief overview of general coverage issues. Actual coverage is determined by the coverage terms, definitions, and exclusions in each individual insurance policy.
What is Loss of Business Income?
There are so many misconceptions about what happens after a loss with regard to Loss of Business Income that I thought I would explain the process.
The policy describes Loss of Business Income with the following words:
- Net income (net profit or loss before income taxes) that would have been earned or incurred; and
- Continuing normal operating expenses incurred, including payroll Income that would have been earned may include rental value if you own the building and the rental units are uninhabitable due to a covered loss and if rental value is shown in the declarations and you have paid a premium for this coverage.
Policyholders and Loss of Business Income:
This sounds fairly simple and it should be, but some policyholders tend to make Loss of Business Income very complicated.
- First of all, this coverage is likely to be the final part of the loss that is paid because your carrier has no idea what the amount should be until you are back in business. Policyholders often want to be paid for Loss of Business Income right away.
- Next, you should know that you must prove your loss, just like any other part of the loss. Therefore, it is imperative that you keep good records, profit and loss statements, tax forms, payroll records, etc. to verify the amount that has been lost. Your insurance company will compare your records to the previous year and previous monthly records to see what the loss actually is. If you do not have an accountant and/or keep good records, it is very difficult to prove your loss.
- Payroll is included but only to the extent that employees are still working for you and you are reporting their payroll on your tax forms. If you do not need the services of your employees while you are down due to a loss, they should not be paid and, therefore, they are not covered under Loss of Business Income.
- Loss of Business Income is only paid on covered losses. Therefore, if you have a loss that would be excluded under your policy, such as flood, Loss of Business Income is not covered. And, unfortunately, even if you have a flood policy with the National Flood Insurance Program, that policy does not cover Loss of Business Income.
- Some policies are written on an Actual Loss Sustained (ALS) basis for Loss of Business Income. There is no limit shown in the declarations for ALS. However, this does not mean an unlimited source of payment for your loss. The loss must still be proven and the proof is the amount that will be paid.
- Some policies are written on a monthly limit basis for up to 6 months. This is a limit you choose when buying or renewing your policy. For instance, if you chose a 6 month limit of $72,000, your monthly limit for those 6 months will be $12,000. This limited coverage may be paid more quickly than the ALS coverage mentioned above because your insurance carrier can see what you are losing on a monthly basis and has a limit to pay for each month. Once the total policy limit has been reached, the payments cease.
- Loss of Business Income coverage usually contains a deductible, either 24 or 72 hours. This applies to ALS and limited business income. Most insurance companies now use the 72 hour deductible. However, a few policies still have no deductible. With a 72 hour deductible, your loss will not be paid for the first 3 days you are down. Any time down after the first 3 days will be covered according to the guidelines mentioned above.
- If you decide not to go back into business after a loss, the company will pay based on the length of time it would have taken to resume operations as quickly as possible. Remember that it is your responsibility to report claims quickly, provide all documentation requested and to mitigate your loss by resuming operations as quickly as possible.