What is the difference between Business Income Insurance – Business Overhead Insurance – Key Person Insurance.
A newsletter of NuSurance Corp
(C) NuSurance Corp
As those who know me know, I love to talk about insurance and will take any opportunity to field questions. Just recently I had a physician ask me what they needed to adequately protect the practice. This is truly an open-ended question of which I could talk for hours but the question more specifically is how to protect the business from interruption.
What could interrupt the practice’s daily operation?
1. Weather, Fire or some other peril or natural disaster could render the physical plant (office) useless.
2. The Disability of the Principal.
3. The Death of the Principal.
Those of you, who live in Florida or any coastal state, realize that Mother Nature can be a bitch (sorry but true.) Those living in Florida in 2004 – 2006 remember the devastation that occurred. Not only were homes impacted but also businesses, big and small. The business owners relied on coverage called, Business Interruption Insurance also known as Business Income Insurance and some insurance academics refer to it as Time Element Coverage. That is you are covering the loss of time, since we all know time is money.
Whatever name you prefer, it refers to a property insurance coverage that will cover the loss of income that a business suffers directly from a natural disaster, arson, or even terrorism, if you have selected that coverage. This policy comes in two parts, one defining how the income will be calculated as well as how it will be paid out. The other part will be a list of things that can happen to the practice that will trigger the payment. The list of Perils are usually Basic, Broad, and Special or what is known as “Open Perils” with the latter being the broadest and what all should consider.
Once one of those perils damage the facility, in whole or in part, and make it inoperable, the coverage will “Trigger”. After a negotiated waiting period, which was selected at the time of application, usually three days, the policy will then pay monies to cover the business expenses and even the profits of the business until which time the damaged facility can be repaired or replaced, or the practice is moved permanently to another location.
This coverage may be purchased by adding it to a BUSINESS OWNERS POLICY (BOP) or to purchase it on stand-alone basis. Generally, for most practices, adding it to your BOP will be the most efficient way to add this valuable coverage.
Three notes here, first, if you are adding this to your Business Owner Policy, make sure the limit are sufficient to cover a time frame that you think will be reasonable to replace your facility or repair it. Second, ask your agent if “Extra Expense” coverage is available. Finally realize that one of the major flaws for flood insurance is there is NO business interruption contained in the policy.
The Disability of anyone is devastating. But for a business owner this can be excruciating, if they have neglected to purchase Business Overhead Expense (BOE) or Business Expense Insurance Coverage. This is sold by a licensed life and health agent and is considered a “Health” related product. A disability insurance policy is needed to replace the income of a person but a business owner must have two. One policy is needed to cover the loss of their income and the second is to cover the business overhead. Upon the disablement of the principal (as defined in the policy), the policy pays a monthly benefit based on actual expenses, not anticipated profits. These policies are designed for businesses that rely on a few people (or one person) to produce revenue.
Please Note – It is extremely important to request an explanation of the definition of “disability” as this is a price point issue and if you are not careful the cheapest option may become a very expensive decision.
Finally the ultimate, death of the principal obviously can cripple a business. Here the big question is what are the desires of the principals and the families? The desires are expressed in what I call a business will, purchase agreement or perpetuity plan. Strangely enough insurance agencies must have a perpetuity plan before a company will contract and let an agency market their insurance product. The plan outlines what will happen after the principal passes. Who will ultimately run the business? Do you have a friendly competitor? If you are a sole practitioner, perhaps you may want to engage in an agreement for them to purchase your practice after your death. Partners or other stockholders absolutely must have a purchase agreement if that is the desire of the principal. Whatever the agreement, make sure the agreement is funded and the best funding mechanism is a “Key Person” life policy.
I know the next question is what about the deductibility of these policies? And this is where I refer you to your accountant.
For more information contact Nusurance and we can have an agent cover any questions you may have.
Christopher Kazor, CIC, Lutcf
Posted on Wednesday, June 26th, 2013 at 9:07 pm | Filed
under Commercial Insurance