Business Income – A type of coverage that replaces lost revenue following a covered loss
Being a business owner, have you imagined a scenario where a covered loss, such as fire damage, shuts down your operations resulting in no revenue? This is not an uncommon mistake where a business assumes their property insurance is all they need.
TL;DR
- Business income is your total sales minus any returns or adjustments
- Its importance lies in the ability to cover operational expenses during a business disruption
- One pitfall is assuming property coverage supersedes the need for business income insurance
- Ensure you have adequate business income and extra expense coverage to protect against catastrophic losses
What Is Business Income in Insurance?
Put simply, business income is the net income (revenues less operating expenses) your business would have earned if a covered loss (like fire, theft, etc.) hadn’t occurred. It includes normal operating expenses incurred, including payroll.
Technically speaking, this is a type of coverage that falls under business income coverage, often part of a business owner’s policy. It falls under the declarations and you would find it frequently mentioned within the income for business sections of the policy.
Key Related Terms to Know
- Qualified Business Income (QBI) – This is the net amount of income, gain, deduction, and loss for any trade or business.
- Gross Receipts – These are all revenues received by the business.
- Period of Restoration – The period during which business income loss is covered.
- Gross Business Income – Gross income means all income you receive in the form of money, goods, property, and services that is not exempt from tax.
Common Questions About Business Income
What is included in business income for insurance purposes?
Business income for insurance includes net profit or loss before taxes that would have been earned if the business were operational, and the normal continuing operating expenses, including payroll.
Why is business income coverage important?
Business income coverage protects your business by replacing the lost income during a period of restoration, ensuring your business continues to meet its financial obligations such as rent and salaries.
How is business income coverage limit determined?
The limit is usually based on the projections of your business income, expenses and net profit. Thus, it’s crucial for business owners to evaluate and update this projection annually to avoid being underinsured.
What can affect my business income loss claim?
Anything from the length of time your business is closed to your business continuity planning can affect your claim. For instance, if you could have mitigated your loss by relocating but chose not to, it could reduce your payable claim.
Business Income vs. Net Business Income
Net Business Income and Business Income are two different concepts. While net business income refers to the profit or loss made by a business after all its expenses have been deducted, business income in a holistic view refers to the total earnings generated from routine business activities before any expense.
Comparison Area | Business Income | Net Business Income
|
Primary use case | Evaluating overall business productivity | Tax planning and net profit calculations |
Coverage / concept type | Gross receipts including returns, allowances and cost of goods sold | Income after deduction of operational expenses |
Typical exclusions | Investment income, rental income if not part of normal operations, capital gains, royalty income | Non-business expenses, non-deductible expenses, tax preparation legal fees |
Who is most affected by errors | All businesses, specifically those heavily reliant on daily operations to generate revenue | Businesses with high operating expenses |
Common mistakes | Poor financial management or language barriers leading to incorrect reports or failure to adjust for returns and allowances | Excessive or personal expenditure leading to a net business loss |
Real Claim Examples Involving Business Income
Scenario 1: A popular restaurant experiences a devastating fire that requires it to shut down for several months for repairs. The loss of business income costs hundreds of thousands of dollars, far surpassing the cost of physical damages. Proper business income coverage would have covered the lost income during the period of restoration.
Scenario 2: A manufacturing plant suffers extensive damage due to a hurricane—a covered peril. While their property damage coverage covers the building and equipment losses, the company also loses major contracted business. With a well-designed business income loss policy, these losses would have been mitigated.
Scenario 3: After a massive flood in the area, a retail store has to shut down for weeks. Despite having an insurance cover for the building and stock items, their policy did not include business income protection. As a result, the revenue they lost while shut down was not covered.
Limitations and Common Mistakes
- Business income insurance typically doesn’t cover losses caused by circumstances that aren’t covered by your commercial property policy.
- Business income loss coverage requires careful valuation and documentations to ensure accurate earnings estimations.
- Without a good understanding of the policy’s “period of restoration,” businesses might not have adequate coverage if shutdowns last longer than expected.
How to Explain Business Income to Clients
Personal Lines client: “Think of business income insurance as the lifesaver that keeps your business afloat when forced to close due to damages. Without it, you might struggle to pay routine expenses if a serious disaster occurs.”
Small Business owner: “Your business income policy is like having a safety net. If a disaster occurs, it helps ensure you can pay your ongoing costs and uphold your business responsibilities until you can open your doors again.”
CFO or Risk Manager: “Business income coverage is part of your financial risk management strategy. This policy allows your business to continue as usual by covering lost income and operating expenses after an unexpected closure.”