Imagine getting that phone call, or arriving at your business tomorrow morning and discovering a fire, burst pipe, or other major loss has made the building unusable.
Your commercial property insurance may help repair the building and replace damaged equipment or inventory. But what happens to your income while those repairs are being completed?
Would your business have enough money to survive six to 12 months without operating normally?
The Bills Don’t Stop When the Business Closes
Even when revenue suddenly stops, many business expenses continue. Depending on the business, those expenses may include:
- Employee payroll
- Rent or mortgage payments
- Loan payments
- Taxes
- Utilities
- Insurance premiums
- Equipment leases
- Accounting and professional fees
- Other ongoing operating expenses
A temporary closure can quickly become a permanent one if the business does not have enough cash, or the right insurance coverage to carry it through the recovery period.
Property Insurance Alone May Not Be Enough
Commercial property insurance pays pay for direct physical damage to covered property. It helps pay the costs to repair the building or replace damaged equipment, furniture, supplies, and inventory.
However, replacing damaged property does not include replacing replace the income your business would have earned had there not been a loss of any kind.
That is where business income coverage, sometimes called business interruption coverage, becomes important.
Following a covered loss, business income coverage helps to replace lost income and pay certain continuing expenses while the business is being repaired and restored.
How Long Would It Really Take to Reopen?
Many business owners underestimate how long recovery could take following a serious loss.
Reopening may require more than repairing walls and ordering new furniture. The process could also involve:
- Debris removal
- Building inspections
- Architectural or engineering work
- Construction permits
- Contractor scheduling
- Replacement equipment
- Specialized materials
- New inventory
- Utility restoration
- Required code upgrades
Northern Michigan businesses can face additional challenges due to contractor availability, seasonal construction and weather schedules, supply delays, and limited options for temporary commercial space.
Even a relatively straightforward repair can take much longer than expected. A major fire or structural loss could keep a business displaced for up to a year or more.
Could You Continue Operating Somewhere Else?
Closing completely is not always the only option.
Extra expense coverage may help pay certain additional costs needed to keep a business operating after a covered loss. Depending on the policy and circumstances, that might include:
- Renting temporary office or retail space
- Moving equipment or inventory
- Leasing temporary equipment
- Setting up phones and technology at another location
- Paying additional transportation or shipping expenses
- Advertising a temporary location
For many businesses, operating at reduced capacity from a temporary location may be far better than disappearing from the market for several months. Doing that can permanently affect your business.
Customers will still need the services or products they purchased from you. If you cannot provide them, they may be forced to go elsewhere, and some may not return after your business reopens.
Not Every Closure Is Covered
Business income coverage does not protect a business from every situation that causes revenue to decline.
Coverage is generally triggered when a covered cause of loss results in direct physical damage to covered property and interrupts normal business operations. The policy may also include a waiting period before business income coverage begins. Common waiting periods are 30, 60 or 90 days, but can vary based on how the coverage was written.
Coverage terms, limits, exclusions, and the length of the restoration period vary by policy. That makes it important to understand exactly what your insurance would and would not provide, and to do so before a loss occurs.
How Much Business Income Coverage Do You Need?
Choosing an appropriate amount requires more than estimating one or two months of revenue.
Business owners should consider:
- Normal income and seasonal fluctuations
- Ongoing expenses that would continue during a closure
- Employee payroll (for staff you don’t want to lose to competitors)
- How long repairs or rebuilding could realistically take
- Whether specialized equipment would be difficult to replace
- The cost of operating from a temporary location
- How quickly the business could return to its previous income level
- Whether the policy’s coverage period is long enough
Seasonality is especially important for Northern Michigan businesses. Losing the busiest three or four months of the year could have a much greater financial effect than being closed during a slower period.
The goal is not simply to reopen the doors. It is to give the business enough financial support to survive the interruption and successfully resume operations.
Don’t Wait Until the Business Is Closed to Find Out
Ask yourself one uncomfortable but important question:
If my business could not operate from its current location for six months, how would I continue paying my employees, my bills, and myself?
If the answer is unclear, it may be time to review your business income and extra expense coverage.
At Cardinal Insurance Group, we help Northern Michigan business owners understand how their commercial insurance would respond when an unexpected loss interrupts normal operations.
Contact our team to review your coverage and make sure your business has more than insurance for its property—it has a plan for surviving the time it takes to recover.
Linda M. Fisher, AAI, CIC, CPRIA, CPRM, LIC, LUTCF, TQA Trusted Guidance. Personalized Service.