Business Interruption Insurance > The Right Amount
In our last article, we discussed the basics of Business Interruption Insurance that every business owner should understand. In the wake of the damage that the recent hurricanes caused, now more than ever is a great time to evaluate your coverage and determine how you’d fare if your business was plagued by a natural disaster or catastrophe. One of the biggest questions business owners have regarding this policy is how much to carry. In this blog, we’ll cover these important details and what you should consider to adequately protect your business.
Calculate business income.
This is where being on top of business finances comes in handy. For this portion of evaluating your coverage, you’ll need to determine how much you made within the past 12 months. Don’t forget to include income you earned if you rent out commercial properties as part of your business model. Next, project the income you expect to make within the coming 12 months. Note an expected increase or decrease in sales, new properties, a new product that will generate more income, and other contributing factors.
If you carry less insurance than the required amount (based on your past income and projections), then you might be subjected to coinsurance penalties.
According to The Balance, if coinsurance applies to your policy, a coinsurance percentage will be listed in the declarations. This percentage may be anywhere between 50% and 125%. Here’s how the clause applies: Suppose that you have purchased business income coverage based on projected income of $1 million. Your policy includes a coinsurance requirement of 80%. To avoid a coinsurance penalty, you must purchase a limit of at least $800,000 (.80 X $1 million). You decide to purchase only $700,000 as a cost-saving measure.
You suffer a $175,000 income loss due to the shutdown. You have under-insured your business income exposure by $100,000. Here’s how your insurer calculates your loss payment.
Maximum loss payment = loss amount X (limit purchased/ the limit required)
Amount paid by your insurer pays = $175,000 X (700,000 / 800,000) or $153,125. If this were to happen, you’d be responsible for paying the difference, or approximately $22,000.
The opposite scenario is also possible if you purchase too much insurance for what is necessary. However, the Premium Adjustment Endorsement allows business owners to get a refund for overpayment on their business interruption insurance.
Since 1983, Financial Guaranty Insurance Brokers has distinguished itself as a provider of Professional Liability, Cyber Liability, and Crime insurance products for financial entities, in addition to providing crime insurance and general business insurance products to a number of firms across the United States. To receive timely, personalized service from a knowledgeable and experienced staff, call us today at (626) 793-3330 to speak with one of our professionals.