In May, two massive tornadoes struck near Oklahoma City, OK. The twisters destroyed numerous businesses, shutting down their operations. The shutdowns caused business owners to sustain income losses. In addition, they incurred extra expenses as they tried to speed up the repairs and minimize the amount of income they lost. Many small to medium-sized businesses affected by the twisters were not protected by business interruption and extra expense coverages because they were not aware of this critical gap in their coverage.
Business Interruption Coverage
Business interruption insurance (also called business income coverage) covers the actual loss of income (earnings) an insured sustains during the period of restoration as a result of a shutdown of the insured’s business. For the loss to be covered, the shutdown must result from damage to covered property by a covered cause of loss. Business interruption coverage is not well understood by some agents and many insurance buyers. Not surprisingly, businesses that have sustained uninsured income losses account for a significant portion of the errors and omissions suits filed against insurance brokers and agents every year. To avoid becoming a statistic, be sure your clients understand this coverage and the importance of purchasing adequate limits.
Extra Expense Coverage
Extra expense coverage is often written in conjunction with business interruption coverage. It covers expenses the insured incurs to avoid or minimize a suspension and to continue operations at the described premises or elsewhere. The coverage is intended to keep the business running or to get it up and running as soon as possible.
Utility Interruption Coverage
The Oklahoma tornadoes caused widespread utility outages. Yet, utility interruption is an excluded peril under most property policies. The utility services interruption endorsement covers loss of income and extra expense (if extra expense is included) that results from a suspension of operations caused by a utility interruption. Typically, the damage must involve utility-owned equipment located away from the insured’s premises (or at least outside a covered building). Also, the damage to the utility’s property must result from a covered peril. Coverage for overhead lines usually requires a separate endorsement.
Contingent Business Interruption
The contingent business interruption endorsement is designed for insureds whose business operations are dependent on those of another. For instance, suppose an oil rig manufacturer in Texas depends on a key supplier in Oklahoma for product components. If the tornado damaged the supplier’s facility, and the supplier was unable to provide components to the manufacturer, the manufacturer would be unable to operate. Contingent business interruption coverage would protect the manufacturer against income losses resulting from a shutdown at the supplier’s facility.
BOP to Property Policy
Under a business owners policy (BOP), business income, extra expense and direct damage coverages are subject to a single combined limit. If you are moving a client from a BOP to a standard property policy, remember to specify business interruption and extra expense limits. Don’t assume these coverages will be included. Also, remember to provide the essential underwriting information, such as net income or sales and continuing expenses.
Will it take a devastating tornado to encourage you to start thinking about business interruption and extra expense coverages? Protect your clients now before it is too late.