Transfer of Risk - Do you know What your Buying? Business Interruption Insurance
Don Noel
Everyone thinks about hurricanes (and rightfully should) when thinking about insurance, but there are a myriad of other perils and events that your property policy covers. This month, I’d like to focus on Business Interruption Insurance, which is sometimes also called “Time Element” insurance.
Business interruption insurance can be defined as: insurance covering loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension of its operations during the time required to repair or replace the damaged property.
Many of you know how much coverage you have if you’re sued, or if your building blows down. How many of you know what would happen if a fire destroyed your administrative offices, or a tornado wiped out your entire operation and you were unable to operate for a period of days, weeks or even months? Where would your income come from? Could you move and resume operations so quickly that your financial health would not be affected? Could you pay for the normal operating expenses that don’t stop just because of a loss (think: electric, payroll, benefits, taxes, etc.)? Probably not, and that’s why you need Business Interruption coverage.
Let’s use a hypothetical example: Disney Behavioral Services, Inc. of Orlando has one major building and 11 satellite buildings throughout Orange County, Florida. DBS has an annual income of $50 million, and almost 100% of its income is derived from billings to Medicare and Medicaid.
On January 14, at 3 am, an electrical fire caused by a faulty extension cord starts in the administrative offices, and by the time the fire is extinguished the offices, along with a major portion of the main building, suffer fire, smoke and water damage. Effectively speaking, DBS is without computer servers, billing records and a substantial number of patient treatment facilities.
Financially, 50% of DBS’s income is derived from this premises annually, and it takes two months for the facilities to be repaired and operations to resume normally (wow am I optimistic!). Essentially, using a very simplistic approach, DBS has lost $2.1 million of revenue per month due to this event.
Is it covered? With your F.I.T. policy, you bet! Now, as an administrator, you’d probably be out less than that because you moved many of your functions to owned or rented facilities elsewhere, so the loss is something less than above, but your F.I.T. policy pays for the Actual Loss Sustained, whatever the number.
Let’s look at another example: What if a hurricane hits, and power is out to your building(s) but you’ve suffered no physical damage? Or what if your neighbor’s property is damaged (by a covered cause of loss) and the authorities say you can’t enter your property? Under your F.I.T. policy these scenarios would be covered under Contingent Time Element coverage, which reads: “If direct physical loss or damage to the real or personal property of a direct supplier or direct customer of the Insured is damaged by a Covered Cause of Loss under this Policy, and such damage: a. wholly or partially prevents any direct supplier to the Insured from supplying their goods and/or services to the Insured, or b. wholly or partially prevents any direct customer of the Insured from accepting the Insured's goods and/or services; then this Policy is extended to cover the actual loss sustained by the Insured during the Period of Interruption with respect to such real or personal property.”
In layman’s terms, then, the policy would cover both instances, as long as the property that was damaged at the power company and/or neighbor were the type of property that would have been insured under your policy, and the peril that damaged them was a covered peril.
An important note: please make sure your financial losses are provable, and that you have data to support your claim. Offsite backups of data and financial records are easy, inexpensive and should be done nightly!
All in all, your F.I.T. policy provides a level of security that many policies do not. And for many of our smaller members, the buying power provided by F.I.T. gives you coverage that only large members typically enjoy. Please let your friends and colleagues know about F.I.T., as the bigger we get, the better we can serve you!
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