Can Your Company Survive a Major Property Loss?

MAY 7, 2024

Business interruption insurance is one of the least understood and most contentious property coverages. If the limits are not properly structured, a significant gap may exist between what the insured expects to recover versus what the insurance carrier will pay. In many cases, when a property loss causes a company to shut down, even temporarily, the income interruption can force it to close its doors forever.

Why Is Business Interruption Coverage Important?

Business interruption insurance protects a company’s bottom line when a physical loss — for example, a loss caused by fire, or another covered property loss — disrupts normal operations. USI Insurance Services advises companies on how to identify and analyze their business interruption exposures and select appropriate business income and extra expense limits.

Business interruption insurance typically provides for:

• Lost revenue
• Ongoing operational costs to keep the business running
• Extra expenses incurred to minimize the loss

A business without properly structured coverage may be forced to pay out of pocket the extra expenses required to stay up and running during the recovery period. This is where working with an experienced broker is critical. USI works with clients to set appropriate extra expense limits to match the unique exposures of the company, preventing underinsured losses that can cost business owners hundreds of thousands of dollars.

Mistakes in Business Income Interruption Calculations

Business income worksheets can be confusing and challenging for business owners to complete. These worksheets are usually provided without detailed instructions or explanations of the line items for income and expenses, and therefore many business owners decline to fill them out. This can lead to gaps in coverage, exposing the business to underinsured losses — sometimes exceeding $1 million — and can also lead to disputes over claim settlements.

Examples of Claims

Scenario No. 1

A manufacturer of electrical components believed it had sufficient business income interruption limits. USI performed a thorough review and uncovered that the company’s limits were inadequate and did not match the actual exposures of the business. We worked with the company to complete an updated business income worksheet, and then requested that the underwriter make a midterm endorsement to increase the policy limits.

A few months later, the company suffered a major property loss when a fire damaged its building, equipment and inventory. Although the building remained intact, there was significant smoke damage, as well as water damage caused by firefighting efforts. This forced the company to suspend operations for seven months while repairs were made.

Fortunately, because USI had helped to correct the company’s business income interruption and extra expense limits, it avoided a $270,000 shortfall in coverage.

Scenario No. 2

An owner of multiple commercial rental properties realized she didn’t have the correct business interruption limits after USI detailed specific costs, in addition to lost rental income, that she would face in the event of a loss.

Once she made us her broker, we:

• Evaluated the historical rent rolls and current vacancy levels and compared them to the coverage limits currently in place
• Developed and recommended business interruption limits, taking into consideration lost income due to broken leases, time to repair buildings, and how long it would take to return to pre-loss rent levels
• Worked with the underwriter to update her policies based on our comprehensive analysis

Not long after, the client experienced a covered loss. Because she had worked with USI to revise her business income and extra expense limits, as well as an appropriate period of restoration, she recovered an additional $80,000 more than she would have received under the previous policy.