It is important for real estate businesses to have adequate insurance coverage, and you cannot just cover the property itself. Natural disasters, as well as utility failures, may render properties temporarily or permanently unusable. Business interruption (BI) insurance can help when you are unable to generate your usual income.
What does BI cover?
BI insurance can augment your income stream for the period that you are unable to fully conduct business or tenants cannot fully use their space. It compensates a company for income lost when normal operations are suspended because of physical damage to its property or a legal order requiring the business to close. In essence, the purpose of BI insurance is to place the property owner in the same financial standing as they were before the business closed.
Remember, property insurance covers only physical damage to your property. But, BI insurance provides capital to pay salaries, benefits and extra expenses incurred (over and above those normally incurred) to mitigate an insured loss.
BI normally is not sold as a standalone policy. Instead, this type of coverage is added on to an existing property or comprehensive business insurance policy. Such coverage is especially important if you count on rental income to service your debts. Be sure to note that, because BI is included as part of your primary business policy, it will pay out only if the cause of the loss is covered by the larger policy. This means you should review the list of covered losses in your business owner’s policy when adding or renewing a BI policy.
What should owners consider?
There are some potential pitfalls to watch out for with BI. For instance, most policies limit the recovery period. This “period of restoration” generally runs from the date of suspension of operations to the date of completion of repairs or the date the property is returned to the same operating condition that existed before the event ending normal operations.
In addition, policy terms may vary greatly. For example, a policy may set a specific period of recovery, a maximum period of coverage or a maximum recovery per month. When buying BI insurance, be sure you understand at the outset how long a covered recovery period is.
You also can obtain extended coverage for the period between the completion of repairs and your return to normal occupancy. Make sure your policy clearly defines “suspension of operations.” Without a clear definition, the insurer might attempt to deny coverage if you do not experience a complete shutdown. Also, the insurer will cover only losses directly attributable to the damage, not those partly due to a slow rental market.
How do you make a claim?
The goal of BI insurance is to make commercial property owners “whole” after an unexpected temporary shutdown. Policies compensate for lost income, which is a function of lost rents, incurred fixed costs and operating cost savings. Some also reimburse for extra expenses incurred due to property damage.
Insurers use historic profit and loss statements, tax returns and rent rolls to compute lost profits. But, they also will factor in macroeconomic trends that may have lowered rental income, even if the disaster had not occurred. Because insurers will base indemnity on your property’s financial records, update your records regularly and keep them in a safe location.
To make a compensable claim, promptly present evidence of lost rental income. You will not be able to recover on properties that were not generating rental income at the time of the damage. Claims examiners will scrutinize your paperwork. Consult your CPA firm to support your lost profits calculations and clarify BI provisions.
If you have commercial real estate properties and do not have BI insurance, it is time to consider it. Remember, some damaged rental properties fail before they are ever restored. Do not let that happen to you.