Securing sufficient revenue to cover overhead expenses may be difficult to impossible when a natural disaster or other physical loss disrupts normal business operations. Loss of business income coverage helps businesses survive unexpected events. However, not all policies are the same.

Understanding Loss of Business Income Coverage

Loss of business income insurance is typically tied to commercial property insurance. If a business loses revenue due to business disruption caused by a covered peril, the business can file a claim. For example, if a business suffers a fire, the commercial property insurance policy will help with the cost of repairs, whereas the loss of business income insurance provision will help with lost revenue that is a direct result of the fire.

Since loss of business income coverage is tied to commercial property insurance, it covers the same perils as the commercial property insurance policy, such as wind damage, fire, and riots. Likewise, it excludes losses caused by perils the commercial property insurance policy doesn’t cover. Businesses that want coverage for excluded perils may be able to secure additional policies.

Coverage varies widely. Three important provisions to consider are extra expense coverage, civil authority clauses, and extended business income coverage.

Extra Expense Coverage

A business may incur extra expenses to maintain operations during a period of disruption. Whether insurance covers these additional costs depends on whether the policy provides extra expense coverage.

Consider the following scenario. A bakery experiences a fire. Until repairs are complete, the bakery will have to remain closed. However, the bakery has several contracts for special events and would like to honor these contracts to avoid causing problems for customers who are depending on its services. To make this possible, the bakery rents a kitchen.

Does insurance cover the cost of this rental? This depends on the terms of the policy. If the loss of business income policy includes extra expense coverage – to cover costs beyond normal expenses to allow a business to continue operating – it should cover this expense.

Civil Authority Clauses

In some situations, even the threat of a disaster may disrupt business, including if a property never suffers physical damage. Whether insurance covers business revenue losses caused by evacuation orders depends on whether the policy includes a civil authority clause providing this coverage.

Consider the following scenario. A salon is located in the projected path of a hurricane. The local government issues a mandatory evacuation, resulting in the salon owner and workers closing the business. The hurricane makes landfall. The area experiences severe flooding, leading to an extended evacuation. Thankfully, the salon is located on high ground and only suffers minor damage. However, the loss of income during the evacuation makes it hard for the salon to cover its overhead expenses that month.

Does insurance cover this loss? If the policy includes a civil authority provision that provides coverage for disruption caused by civil authority orders such as mandatory evacuations, the salon owner can seek reimbursement. However, not all policies include such a provision. Plus, details regarding waiting periods, maximum claim periods, and other requirements may vary.

Is Your Business Protected?

Although extra expense coverage, civil authority clauses, and extended business income coverage are all critical provisions, there are other important aspects to coverage. Some businesses may need additional coverage, such as contingent business interruption insurance, which covers losses caused by disruption that involves suppliers and vendors. A broker will help you assess your needs.

Founded in 1961, Wilson, Washburn & Forster recently joined Alera Group, the nation’s 14th largest independent insurance agency. As part of this national firm, we can provide our clients with even more resources, technical expertise, and best practices while maintaining the local service, claims handling, and community commitment that Florida businesses expect.

Contact us today at 786-454-8384 for a complimentary analysis of your insurance and risk management program by an insurance specialist in this field.