The Basics of Business Income Insurance

By: Gayle Bennett

From tornado to fire to civic emergency, an unexpected calamity can interrupt business and hit your bottom line. This primer brings you up to speed on how business income coverage can help.

Worst-case scenario: Your association's building suffers a four-alarm fire. You lose all hardcopy records, merchandise, annual conference signage, and much more. On top of that, you have to move to another building for at least six months while the space is rebuilt, and you still have to pay the lease on the burned-out office. What's your business income insurance going to cover? What about your extra-expense coverage?

Business income insurance, also called business interruption insurance, is like most other insurance policies: You hope you never have to use it, but you have it just in case you do. But is your policy sufficient for your worst-case-scenario needs? And do you know the basics on what events trigger the policy and how long your coverage lasts?

What Is It, Anyway?

Business income coverage is a type of property insurance that is designed to pay for loss of income that occurs when a business suffers major physical damage and is completely or partially shut down.

Insurance By the Numbers

Business income insurance is common in the association world, but less so in the commercial sphere. According to a March 2007 survey from the National Association of Insurance Commissioners, one-third of companies with revenues under $1 million had such coverage. One-third of businesses with fewer than 20 employees had business income insurance versus almost 60 percent of firms with 20 to 99 employees.

$20 Billion
According to a November 2012 Insurance Journal article, Hurricane Sandy caused as much as $20 billion in insured losses, not counting flood damage that could add billions more to the total.

$58 Billion
Global insurance group Munich Re estimates insured natural catastrophe losses in the United States totaled $58 billion in 2012, more than twice the 2000 to 2011 average loss of $27 billion (in 2012 dollars).

Small or medium-sized associations often have a business owner's policy (BOP), and business income insurance is almost always included in a BOP.

"It's a bundled type of policy," says Michelle Evans, assistant vice president with Aon Association Services, a division of Affinity Insurance Services and an ASAE-Endorsed Business Solutions partner. That means coverages in a BOP are grouped and offered together at a lower premium than if they were sold separately. "There may be some [business income] coverage that's automatically included based on your disaster-recovery plan."

A BOP also can include business income coverage called "12 months actual loss sustained" (yes, a real name), which means there is no limit to what the insurance policy will pay out within a 12-month period, as long as the business can prove monetary losses based on past performance or costs. Larger associations might have what's called a package plan, where the association can design its business income coverages by filling out a business interruption form provided by the insurance agent. This form will outline all the organization's potential exposures, including estimated relocation costs, payroll for a defined period, and records reclamation.

Fire, Not Flood

Not all catastrophes will trigger a business income policy. Fire will, but flood and earthquake will not.

When Hurricane Sandy hit New York and New Jersey in October 2012, many businesses were flooded and temporarily unable to operate. The Ocean County Board of Realtors in New Jersey didn't have power for more than a week. After working from home for a few days, CEO Mary Ann Wissell brought the organization's server to another location and was able to send out communications to her members. Although her office's interruption was relatively short, she asked her insurance agent about the association's business income coverage.

"He advised us that the reason we were without power was because the substation flooded. We would not be able to collect," she says. In this case, it was a moot point, Wissell says, because the organization didn't lose any income from the interruption.

In addition, every plan has a waiting period before coverage kicks in, which can be anywhere from 24 to 72 hours.

The cost of business income coverage will vary based on the size of the association and its risks. Associations as a business type have relatively low business income risks, particularly as offices move their IT systems to the cloud and have telework policies in place.

"The price of the policy is related to the risk of a fire or other disaster damaging your premises," says Loretta Worters, vice president at the Insurance Information Institute. "All other things being equal, the price would probably be higher for a restaurant, for example, because of the greater risk of fire." Also, an association can often easily operate out of another location.

Extra-Expense Coverage

Since most associations don't manufacture or sell perishable items, extra-expense coverage can be more important than business income coverage.

Extra-expense coverage will pay for things that are necessary to keep the business operating during the interruption, such as the cost of moving to a different location, additional rent, an IT specialist to set up your new network, and security services at the damaged location. Extra expense is usually part of a business income policy, but it's imperative to check your policy to see if the coverage is sufficient if the worst happens.

Civil authority coverage is also generally part of a business owner's policy or package plan. If an association's employees can't access the building because the civil authority won't allow it, the policy pays out for loss of business. In that case, the building may not have suffered physical damage, but it is nonetheless inaccessible for a period of time.

Sound unlikely? Not really. Civil authority coverage was triggered in the aftermath of the 9/11 terrorist attacks and during Hurricane Katrina.

Ask Your Agent

If the worst happens, and your association needs its business income and extra-expense coverage, are your limits sufficient?

"The first obstacle I run into is, 'We're just an office, what business income could we lose?'" says Leslie White, founder and president of Croydon Consulting, a risk management firm. "To a degree, that's a valid point, but if they have a fire in their office, how long would it take them to get back into business? With a regional disaster, such as a tornado, it could be months, if not years, until they get back to where they started. With the tornado in Joplin, Missouri, every contractor had a waiting list or they too were wiped out."

Evans encourages every association to update its disaster-recovery plan and then share that information with its insurance agent.

"The biggest thing that a person should be thinking about is unforeseen circumstances. That's why the disaster-recovery plan is key for business interruption," she says.

When you're renewing your insurance policy, Evans advises that you ask your insurance agent a series of questions related to business income and extra-expense coverage:

  • What types of events and properties are covered?
  • How does the policy define business income coverage?
  • What type of event must occur for the policy to be triggered?
  • How much time must pass before the coverage starts?
  • How long does the coverage last?
  • What is the extra-expense coverage? How much coverage would you need to pay the current lease and rent at another location?
  • Do you need other types of coverage that are associated with business income insurance, such as civil authority coverage or extended business income coverage, which would provide coverage for longer than the defined period?

In a perfect world, you will never need this insurance, but associations should commit to due diligence to ensure that business as usual can resume as quickly as possible should disaster strike.

"Stuff can happen," says White. "Even if something happens to the tenant next door, it could impact you."

Gayle Bennett has written for the magazines of the Council for Advancement and Support of Education, the IDEA Health and Fitness Association, and the Council for Residential Specialists.

Scanning the Fiscal Horizon

Rob Leslie, CPA, has spent more than 25 years working with nonprofits. Currently, he provides public accounting and financial services to nonprofits as a partner at Eide Bailly in Phoenix. He also is a faculty associate at the Nonprofit Management Institute at Arizona State University's Lodestar Center for Philanthropy & Nonprofit Innovation, where he teaches courses on nonprofit financial management. Associations Now captured Leslie's thoughts on how associations have managed in the slow economy and what the financial future may look like.

Associations Now: What's an example of a major emerging issue in the financial management of associations?

Leslie: The change of the revenue mix. Different associations have a different mix of revenues, whether it's membership dues or education or other activities they do. If you're an association that provides education and training, the competition in that space is increasing, whether it's through internet-based training or in-house training.

What are the biggest issues for associations and nonprofits in the congressional tax reform debate?

The constant battle associations face with Congress is whether they should be tax exempt, either in total or in part. [Congress has] been trying to make investment income taxable. Congress is looking for revenue sources from nonprofits, especially from those that aren't in that [realm] of a charity providing health and human services. They might also do something with deductibility of certain donations … although when you look at the demographics of giving, most people aren't giving for the tax deduction.

Is fundraising still a challenge in the sluggish economy?

I think it's a geographic issue. There's been a huge hit in Phoenix, for example, compared to Washington, DC. There's the synergy of the housing meltdown and the underemployment and unemployment rates [in Phoenix]. And we have a large retired population who become restrictive on giving when their returns on investment are low. There have been changes in where that money is going. Is it going to arts and culture, or is it going to emergency needs—food, shelter, and that type of thing?

What is your advice on reserves?

The first philosophical hurdle is do we even need reserves? This is a bigger issue in the public charity world, where the [thinking] is that we have these donor dollars, and it's incumbent on us to put them into programs. But a lot of those organizations … are now in the camp of wanting some reserves. This downturn has caused a lot of people to rethink their philosophy. The next question is how much? Three months, six months, a year? It depends on the revenue mix and how quickly an organization can expand or contract. Another variable is debt. Do I not only need reserves for operating expenses but also for a debt service?

What should association executives pay more attention to on the financial front?

People often are put into leadership roles, into the C-suite, because they have tenure with the organization or they are really good at a program or the clinical side of things. But they really don't know how to run a business. In the class I teach, I tell my students that you never fall back on your tax-exempt status as a nonprofit as a reason for a bad business practice. It goes back to the talent pool and needing good solid education and training in [nonprofit management].

Gayle Bennett

Gayle Bennett is a freelance writer and editor based in Washington, DC.