Business income insurance: Stay prepared for anything

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Business income insurance - hurricane

Bill Johnson, Vice President, Underwriting – Pennsylvania Lumbermens Mutual Insurance Company

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Lumber and building material businesses face a number of risks to operations on a regular basis, perhaps none more frightening than natural disasters. The threat of wildfires and hurricanes, particularly in these summer and early fall months, looms large. However, what comes after can also cause major stress, as the potential for prolonged business interruptions are likely after disasters and large losses.

Between seasonal, catastrophic storms and the daily risk of fire, short- and long-term business closures are a real threat. Lumber and building material dealers can prepare to financially support recovery with business income insurance.

Business income insurance, also known as business interruption insurance, provides policyholders with coverage that reimburses their business for lost income caused by a covered loss. For example, if a wildfire were to strike the area surrounding a lumber company, the business may experience lost income during the ensuing recovery days as the business could be out of operation. With a good business income insurance policy, that lost income could be recouped. Additionally, if a thief were to rob a company of their inventory and the business had to suspend normal operations, a business income policy would allow the business to recover the income they lost while replacing that inventory and returning operations to normal.

The purpose behind a business income policy is to allow a company to post net profit numbers as if there had been no interruption at all. This allows companies that have been saddled by disasters or crises to continue to operate in the aftermath and have the chance to return operations to their prior state. A business income policy typically covers the duration of the recovery efforts after the event that caused the interruption.

A business income insurance policy is important for any business to have, as work stoppage threats are always present. However, there are several important steps management must take in order to accurately represent their company’s needs in the policy to ensure they have adequate coverage.

It’s crucial that the policy carefully documents the company’s current standing so that the interruption coverage represents an accurate estimate of net profits lost. During the application process, businesses should provide insurers with detailed information on the following:

  1. Income: Management should be ready to provide gross sales, discounts, returns, debts, prepaid freight, net sales, costs of goods sold and annual gross earnings information to insurers.
  2. Expenses: Management should identify any and all continuing and non-continuing expenses and list their value. Potential continuing expenses include administration expenses, payroll and benefits, rent and utility bills, maintenance and supply contracts, office expenses and insurance premiums.
  3. Limits of Insurance: Management should be prepared to provide an estimated length of shutdown, maximum income loss, extra expenses and start-up costs to restart business.
  4. Seasonal sales and sales growth: When representing a business’s sales values, management should ensure that the values are based on peak seasonal sales values and that sales growth is considered.
  5. Long term damages: If equipment and machinery stand to be damaged by a potential disaster, take note of that and how long it would likely take to repair or replace the equipment. If the business relies heavily on this equipment and it’s anticipated to be out of commission for a while, this would result in longer business insurance coverage.

It’s crucial that businesses have the needed amount of funds to deal with continuing expenses and lost revenue. Accurately representing these figures is therefore absolutely essential, so that you are covered for the accurate value of your business after a loss.

The most frequent issues businesses have with this type of claim is missing one of the important elements or not properly evaluating the cost of recovery for a specific element. One useful tool for avoiding this sort of issue is to track figures on a business income insurance worksheet. For example, PLM offers a standard business income worksheet that can be used to easily keep track of the various requirements of business income claims. Additionally, companies can contact their insurer for business-specific insurance needs.

Further, business owners should be prepared with a plan of action should a disaster occur. Making decisions at this time can be difficult and having defined steps laid out (in addition to securing a good business income policy) can be extremely helpful. This plan should define a systematic process to review the scene and determine what parts of the business are operational or usable after a loss. Further, the plan should include a list of resources, contacts and procedures to help the business know where to turn during those first days after a disaster.

Pennsylvania Lumbermens Mutual Insurance Company has been insuring companies in the wood niche for over 100 years and can provide risk management solutions based on specific company needs. For more information regarding PLM’s business income insurance and other coverages, please visit the website at or contact your loss control representative here.

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