A Healthy BI Limit's a Fat BI Limit
Based on that headline, fat might be an over exaggeration. You want an appropriate “BI” limit based on your company, but when it comes down to it, you’re better falling on the side of a higher than lower limit. “BI,” or business interruption, is a coverage that’s purchased as part of a property insurance policy. It’s not the coverage you need to rebuild your building – this is real property coverage. It’s the coverage that pays for lost profits and reimburses you for the continuing expense that you might have in the event of the loss. Essentially, it gives you the money you need while your manufacturing or waste facility is being repaired or rebuilt in order to stay in business. Approximately 25% to 33% of businesses never reopen not because of their lack of property insurance but due to non-appropriate business interruption insurance. This is a highly important coverage and one where people tend to skimp for no reason - the coverage is relatively inexpensive!
Most importantly, ensure that your business interruption limit is appropriate for your operation. In addition, there’s another coverage that goes along with your BI limit called extra expense, or an EE limit, that’s also important. An EE limit gives you coverage for expenses you incur to get your business back up and running as quickly as possible. For example, you may need to rent temporary space to help you begin to do some business in hopes of reducing your overall lost profits. The expense of this temporary space is an extra expense and would be covered under the extra expense limit. Generally, the limit on an insurance policy is a combined limit for business interruption and extra expense.
As an insurance professional, one of the worst conversations you can have with a client is when they don’t have enough BI and EE coverage for a loss. The conversation goes something like this:
Broker: “I am sorry Mr. Client, but your current costs are approximately 1.8 million dollars to rebuild your business and keep your operations going. The issue is that you only have 1 million in coverage. It appears you will need to eat approximately 800,000 in the claim costs.”
Client: “I hate you.”
Below are three tips to assuring that you’ll have an adequate BI & EE limit for your policy:
- Complete a BI and EE worksheet annually. BI worksheets help you calculate your lost earnings and continuing expenses. Generally, if you’re familiar with the finances of your organization and have decent internal financial statements, a BI worksheet is easy to complete. To calculate the EE amount you need, there’s usually an addendum to the BI worksheet. Estimations are needed for things like cost of temporary rental space, additional insurance needs, etc. Once the worksheet is completed, it must be reviewed and updated annually.
- Be realistic on the time element of the coverage. When you calculate a BI and EE limit, you’re calculating based on a 12-month need. But, there’s a factor that goes along with the BI and EE limit called coinsurance. This factor allows you to reduce or increase the amount of months that you’ll need BI and EE insurance. For example, if you want 12 months of BI and EE limit, then the coinsurance is 100% (100% of the calculated limit in item #1 above). If you want six months of coverage, then the coinsurance amount is 50%. If you want 15 months of coverage, then the coinsurance amount is 125%. Coinsurance does help to reduce the cost, but it can get you into trouble if you underestimate the time it takes to get things up and running. This is definitely an area where if pays to be conservative.
- Understand what the BI limit benchmarks are for your industry. It’s always best to calculate your limit using a worksheet; you don’t want to rely on benchmarks. Knowing the benchmark for your industry can be helpful so you get an idea of whether your limit’s within some averages. If not, then you can spend time understanding why your limit’s different. For example, Travelers Insurance places a BI and EE benchmark limit for manufacturers between 45% - 55% of annual revenue. For car dealers, the benchmark is at 20% of annual revenue.
Hopefully, these three tips will help you assure that you keep a fat, adequate limit for business interruption and extra expense. We wouldn’t want anyone to have that “hateful” conversation with their broker. There’s no need.
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