Hurricanes and other disasters – floods, earthquakes, tornadoes, and even cyber attacks or power outages – can cause devastation to businesses and disrupt their operations. Business owners who have had to close shop due to an unexpected disaster should review their commercial insurance policies to determine if they have a business interruption rider.
While reviewing an insurance policy may sound easy, interpreting the policy’s language and understanding the process can be difficult and daunting for business owners. Below are a few key terms found in common business interruption insurance policies and their common speak “translations.”
1. Actual Loss
One key point in nearly every business interruption policy is that only actual losses are covered.
Translation: The policy will only cover the losses that occurred specifically due to the disaster and the cost to restore the property to its previous state. Likewise, if a business has a partial loss, the insurance policy will only cover that portion of related expenses.
Example: If a three-star hotel is damaged, its business interruption claim would cover the actual losses which would include the cost to restore the hotel to its previous three-star level. If the hotel decided to upgrade its restoration efforts to make it a four-star facility, the insurer is not going to cover those additional associated costs.
2. Period of Restoration
Policies often state that the insurer will determine the reasonable period of restoration to calculate what it owes to a policyholder experiencing a business interruption.
Translation: The period of restoration is simply the reasonable time it takes, or should take, for a business to resume operations after rebuilding, repairing, or replacing damages following the disaster. In determining the period of restoration, an insurer considers several factors, such as the extent of damages, the estimated rebuilding and repair time, size and value of the property, and the location and accessibility of the property.
3. Business Income
Typically an insurance carrier assumes liability for the insured’s lost net income.
Translation: Lost net income is total lost revenues combined with total disaster-related expenses (due to a physical loss at the insured’s premises) incurred during the period of restoration.
4. Extra Expense
During the period of restoration, a business may experience non-ordinary costs often referred to as extra expense due to the covered peril.
Translation: An extra expense is one that a policyholder incurs in addition to the normal operating expenses to mitigate the damages during the period of restoration. The caveat to claiming these types of expense is that most insurers will only cover expenses that limit the lost income claim. In other words, the insurer will almost never pay any part of an extra expense that is more than the business interruption claim itself.
Example: A business may need temporary office space, equipment rentals, generators, and overtime employee wages.
5. Leader Property
If a business that was not damaged relies heavily on a nearby property that was impacted by a disaster, then that business should review its business interruption policy to determine if it has a leader property rider. Leader property coverage, as the name implies, covers a business that is impacted not physically, but rather, financially by a nearby disaster.
Example: A restaurant that relies on a sports arena to attract patrons to an otherwise undesirable location could use the leader property endorsement to cover losses if a storm damages the arena but not the restaurant itself.
CRI Can Help You Identify Your Coverage Areas and Translate Your Claim
With a better understanding of some key terms used in typical business interruption policies, business owners can get a head-start on recouping their lost income. Understanding your insurance policy may seem like common sense, but interpreting the policy’s language can often become daunting. When it comes to calculating potential losses, contact us to help make the process easier.