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Business interruption insurance is offered within
two major types of business insurance packages.
1.
BOP – Business Owners Policies
First,
half or more of all businesses are eligible for
“Businessowners” policies. These are package policies that
incorporate many of the most commonly needed insurance
coverage. Most “BOP” policies, as they are often called,
include business interruption insurance
without any specific
dollar limit,
but rather a
time limit
which is
typically 12 months.
Following
major disasters,
a year’s worth of
virtually unlimited coverage
can mean the difference between survival and business
failure. Unfortunately, not all businesses are eligible for
a BOP policy, not is it appropriate for all businesses.
BOP policies are typically limited to smaller, low-hazard
retail or service businesses.
2. CPP – Commercial Package Policy
Other businesses are
usually insured under a
Commercial Package Policy,
or “CPP.”
These packages are much
more flexible
than BOPs because they include many optional coverages not
available under a BOP policy. A downside, though, is that
the coverages built into a BOP policy must be added
separately in a CPP.
Business
Interruption
Insurance
is a good example of such a coverage. Unlike a BOP policy
where there is a time limit rather than a dollar limit,
under a CPP,
there is a
dollar limit
but no time
limit for
business interruption insurance.
The biggest problem with this approach is that many business
owners grossly underestimate the amount of coverage they
need during the coming year.
To determine the proper limit, the business owner must
determine, in the event of a total loss, how long it would
take to rebuild or relocate and restore operations to their
pre-loss level. Next, he or she must determine what would be
the worst time of year for such a loss to occur, how much
profit would be lost, and what expenses would continue or
increase during that specific time period.
If the business is
new or rapidly growing,
the business owner can
easily underestimate the amount of insurance needed
and, as a
result, incur penalties for underinsurance built into the
policy. For situations like this, business interruption
insurance often includes options that eliminate to some
extent, and for a price, the underinsurance penalties in the
policy, though the limit itself may still be inadequate.
Also, keep in mind
that, after the business reopens its doors after several
months, the level of business will almost certainly not be
the same. However,
business income insurance
normally stops as soon as the business is fully operational
again, regardless of the income stream at that time.
Therefore, the business owner may need to purchase what is
called an
“extended period of indemnity”
coverage. This pays the difference between what the business
would have earned if it had never had a loss and its actual
depressed income stream while it rebuilds its customer base.
One of the reasons some business owners don’t purchase this
coverage is because, as you can see, it can get rather
complicated.
That’s why it is important to seek the counsel of a good
independent insurance agent who is experienced in placing
commercial insurance.
NOTE: Policy coverages
and circumstances can change at any time, so the information
above may not be accurate at the time of reprinting or
subsequently to that time. IIABA does not assume and has no
responsibility for liability or damage which may result from
the use of any of this information. The most current, up to
date version of this article can be found at IIABA’s Virtual
University at http://www.iiaba.net/VU. |
