The business income portion of a property claim can be one of the most difficult and expensive components. Business income losses total over 12% of all ICC property claims. Understanding what the policy covers and proper communication play a key role in the successful resolution of a business income claim.
Business income is defined as the net income (profit or loss) the business would have earned had the loss not occurred, plus the continuing normal operating expenses incurred. Policyholders sometimes confuse net income with lost sales. Net sales minus the cost of goods sold and the cost of normal operating expenses results in net income.
For example, a business suffers a covered cause of loss that results in being closed one day and losing average sales of $2,000. While the business did not receive the $2,000 in revenue, they also did not have to use the products that were sold and did not pay their staff to prepare and serve the product to the customer. Therefore, their actual business income loss was less than $2,000 and will need to be determined.
Business income coverage is intended to place the insured back into the position they would have been in had the loss not occurred, no better and no worse.
If the insured was operating at a net loss prior to the claim, it is reasonable to assume they would have continued operating at a net loss.
Communication is key. One of the first steps when calculating a business income loss is to understand the insured’s business. During the initial phone conversation with the insured or insured representative, there are specific questions that are asked. The questions are tailored to each individual insured, depending on the type of business income loss suffered and period of restoration. These questions open a dialog for us to understand the insured’s normal business operations.
- Is the insured the Building Owner or Tenant?
- Are there any lease or franchise agreements in place?
- What are the normal hours of operation?
- Is the business fully closed or partially operational?
- How often is payroll paid?
During that initial conversation, ordinary payroll is discussed. In the standard policy, ordinary payroll is limited to 60 days or the period of restoration, whichever is less.
Business environment may also affect a business’s operations including, but not limited to:
- Seasonality – The business may experience an increase in business during the summer months
- Competition – A competitor may have recently moved into the neighborhood, decreasing the business’s sales
- Sports venues nearby – Increase in business during a sporting event
The period of restoration is the reasonable time it is expected to take for the business to rebuild, replace, or relocate. The claims adjuster provides the insured with the estimated period of restoration which will then be the timeframe for calculating the business income loss.
Please note, if the insured decides to remodel, expand, or otherwise enhance their property (e.g.: larger kitchen), this will affect the reopen date for the business, but it does not affect the period of restoration for the business income loss calculation. The time the insured remains closed for their enhancements to the business is an out-of-pocket expense for the insured.
Proper documentation is required to calculate a business income loss. Without proper documentation, a business income loss calculation cannot be performed. We start with historical business documents, such as Profit and Loss Statements, Federal Income Tax Returns, Sales Tax Reports, and Detailed Payroll Reports to project into the loss period. Sometimes a business is new or under new ownership and does not have historical data to project from. In those cases, we may use industry data or post-loss documentation to project a business income loss.
With proper communication and documentation settling a business income loss becomes much easier and quicker. We recognize that a claim creates a stressful time for the business owner and strive to make the process go as smoothly as possible.
Learn more about insuring your business with ICC by contacting an ICC agent today. The Find an Agent search on our homepage will help you locate an ICC agent in your area.
