Business interruption (BI) insurance is a very specialized and often misinterpreted type of insurance coverage. One common misconception is that BI insurance covers all employees and/or the loss of use of premises. In fact, there are different types of BI coverage, therefore, it’s important for business owners to understand what they all mean. Consulting with an experienced insurance broker can help.
In addition to explaining the value-added aspect of having BI insurance, a broker can also assist with tailoring BI insurance to the specific exposures a business may have in order to mitigate its loss, should one occur.
BFL CANADA is one of the largest risk management, insurance brokerage and benefits consulting firms in the country. Managing Partner, Calgary branch leader Greg Cortese says, “I would suggest all types of businesses would benefit from some level of BI insurance. Some more than others. A business that is very dependent on a specific site or location to generate their revenue, with little to no ability to generate revenue without that physical location, would be the greatest exposure.”
Having grown up with a family that owned restaurants, Cortese understands the importance of a physical location and how it relates to revenue generated or lost. “I grew up in a family that owned restaurants and always heard my dad say ‘location, location, location.’ Therefore, it is so important for some restaurants to not only have a physical location but also be in the right location. For example, if a fire were to cause damage to a restaurant resulting in a closure for an extended period of time, all of the revenue would come to a complete stop. There is no way for that restaurant owner to generate any form of revenue from that business until such time that the premises are either replaced or repaired.”
For businesses with a smaller BI exposure, a specific form of BI coverage called Extra Expense would be recommended. Extra Expense pays for both reasonable and necessary expenses such as the cost of setting up a temporary office while damaged office space and equipment are being repaired or replaced.
For example, a plumbing contractor would be considered a business with a smaller BI exposure. Cortese says, “These types of contractors typically generate all of their revenue away from their premises. They go to the client, perform a service and get paid. This means, if they have an office location that suffers a loss, it may interrupt business in the short-term, but as long as they have their systems backed up offsite, they can find a temporary or new office space to work from. This doesn’t have a huge impact on business as the plumber can still operate and generate revenue.”
When explaining BI insurance, Cortese often asks his clients, “If you came to work tomorrow and a fire had burned down the premises and everything in it, and all you had was your mobile phone, what impact would this have on your business’s ability to generate income?” He says this question prompts a lot of conversation. “Not only about insurance, but about business continuity planning. What planning can the business do pre-loss to ensure that they can continue to operate post-loss?”
According to Professor of Risk Management and Insurance at the Haskayne School of Business Anne Kleffner, there are three main categories associated with the risk management process: identify (events and sources of risk), analyze (the likelihood and consequences of risk) and evaluate (is the risk acceptable?). During the evaluation phase, businesses and companies can either choose to leave the situation as is, treat it or eliminate it. Equally important in the risk management process is the strategy for treatment and the ability to measure and monitor success. Kleffner says, “The “guts” of risk management are really assessment and treatment.”
The reason businesses and companies implement risk management systems is to identify all possible risks, reduce or allocate those risks and provide a rational foundation for making better decisions related to risks. Kleffner explains that risk management can essentially be divided into four buckets: property, liability, personnel and income. Businesses must address all four buckets and make provisions to protect property and personnel, while decreasing liability and maintaining income. “Business continuity plans are fundamental,” emphasizes Kleffner. “Businesses and companies must protect themselves from large losses.”
Kleffner says that without risk management, businesses may not be able to achieve their strategic objectives. Risk management is relevant to both small and large businesses, “it just looks different,” says Kleffner.
Cortese emphasizes the importance for business owners to understand the different forms of BI insurance. He also explains that BI loss must be triggered by an insured peril. When it comes to BI insurance and COVID-19, he says the topic has been “interesting.”
“There is much debate whether or not BI and loss of revenue because of COVID-19 constitutes an insurance claim. More often than not – no. Traditionally, the intent of BI insurance is that there must be physical damage to the premises resulting in business interruption – like a fire, flood, or earthquake. Many non-essential businesses over the past 12 months have been forced to close down, due to COVID-19, but have no physical loss to premises. There is no tangible damage to their property. Yet they have had a severe impact to revenue and profit.”
There are basically two main forms of BI coverage: Earnings Form and Profits Form. Earnings Form pays only until the damage is repaired or the property is replaced. Profits Form continues to pay until a business resumes to its normal, pre-interruption level of income, subject to the maximum period of indemnity listed in the policy. “Most indemnity periods,” says Cortese, “run between 12 and 24 months. Obviously in the event of a BI claim, there is involvement from accounting to assist the insured in proving their loss. BI insurance not only pays net income (net profit or loss before income taxes), but also normal operating expenses incurred, including payroll, that continue despite the partial or full interruption of operations.”
For small business owner Dr. Beverly Huang, BI insurance helped keep her business Grassroots Naturopathic Medicine Health Clinic afloat when the clinic was flooded in 2016. She says, “Based on guidance from our insurance broker, we followed all the BI coverage criteria each year. This included filling out worksheets, listing assets and liabilities etc. When our clinic got flooded, BI insurance covered rent costs in a temporary space, while repairs were being done to our original location. BI insurance allowed us to continue working without having to shut down. In our line of work, clinicians cannot make up for lost time. Our commodity are our people.”
Based on her personal experience, Huang recommends small business owners consider purchasing BI insurance. “If it wasn’t for BI insurance, we would not have been able to continue business operations during the closure while our clinic was being repaired.”
Cortese believes BI insurance is beneficial to business owners. “They (business owners) often focus on insuring their physical property – buildings, contents, leasehold improvements, equipment and vehicles. And yes, these are very important properties to insure. But I always tell clients one of the most important insurance coverages they can purchase is BI. It protects their income – and, after all, this is why they are in business.