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Insure This By Bill Velin

Why Business Interruption Insurance

he best place to start a conversation about Business Interruption insur- ance (also known as Loss of Business income insurance) is to understand what it is. It insures loss of income in an amount sufficient to cover continuing expenses and lost profits, if any. If your business is operating successfully, it is earning enough to cover expenses and generate a profit.


If you have a fire which forces your operations to cease, some of your expens- es will cease or will be reduced. For exam- ple, you may have a reduction in power or fuel consumption, which will reduce your operating costs. Business Interrup- tion insurance does not cover those non- continuing expenses. However,

it will

cover those expenses that you will be required to pay whether your business is operating or not – such as loans, taxes, mortgages, etc.

Also note that you do not have to be making a profit to benefit from Business Interruption insurance. In fact, non-prof- it organizations frequently purchase Business Interruption insurance just to cover ongoing expenses, including salaries of key personnel. So do not consider this coverage only as insurance against lost profits.

Of course, not every shutdown of your business will trigger coverage. Before you can even think about recovering a loss under a Business Interruption policy, there must first be direct physical damage from an insured peril to your premises – during the term of the policy – that caus- es an interruption of normal operations and a loss of earnings. The policy will pay for the loss of earnings during the time required to restore the business to nor- mal operating conditions or until the limit of insurance is exhausted. The place to start when determining the appropriate amount of business income insurance is with your accounting records. Ideally, the entries in your

16 Automotive Recycling | September-October 2016

accounting journal, the record of accounts in your general ledger, and your income statement will provide the basic information you need to calculate the cor- rect amount of Business Interruption insurance needed. Each insurance com- pany in the marketplace has a business income worksheet you can use to calcu- late the correct amount as well. Most of these worksheets will take you through an exercise that will help you to come up with an estimated length of time it will take you to get back to “pre-claim” busi- ness operations. Once you know this, and the amount of monthly earnings and net profits, it is relatively simple to calculate how much coverage to buy.

The final question you need to answer before buying this coverage is whether or not you should cover “ordinary” payroll. When you suffer a severe claim and your business is going to be shut down for an extended period of time(such as 6 to 9 months), you will most likely not be able to afford to pay your ordinary (as com- pared to key) employees if you have no revenue coming in. If you went to them and advised them that they were out of a job until your business operations resume 6 to 9 months down the road, would most of them simply go home and wait without a paycheck until you called them back to work? Or would many of them be forced to take a job elsewhere in which case you may not ever get them back once you are

ready to resume operations. Many busi- nesses have a lot of “ordinary payroll” employees that are really “key” to the suc- cess of your operation that you would not want to jeopardize losing in the event you could not pay them for an extended peri- od. Therefore, you may want to include “ordinary payroll” in your Business Interruption calculation. That way, you would be able to pay them their wages and benefits during the period of re-con- struction and retain them going forward. The key to Business Interruption insur- ance lies in understanding what the potential for a Business Interruption loss is – future earning, length of the shut- down and additional expenses incurred, including covering ordinary payroll. This is the only insurance available to “insure your income statement.”

If you feel it is critical to have your income statement guaranteed, you may want to seriously consider this coverage, which can be purchased as part of your Property Insurance.

Bill Velin recently acquired his book of busi- ness – including the ARA Program – from Wells Fargo and has partnered with Assured Partners of Minnesota dba Lee F. Murphy In- surance, one of the largest insurance agencies

in the country. This new agency represents all of the same carriers as the old agency did, so the move will be seam- less to the current and future customers of the program. For more information on how participating in the ARA

national Insurance Program can benefit your business, contact Bill Velin at 651-294-0705 (direct) or by e-mail at Ltd.

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