What is Business Income Coverage, and why is it so important?
Business Income Coverage is one of the least understood coverages. However, the coverage it provides to charter schools is by far one of the most important to have on your policy. Because it is one of the least understood, we wanted to do a 3-part explanation of the coverage and explain some of the following:
- What Business Income Covers.
- How to determine an appropriate limit.
- How a claim is calculated and paid.
- What to expect for the cost.
- Any special exclusions to be aware of.
What Business Income Covers: The goal of insurance is to “make whole.” While Property Insurance will return your location and property to its same physical condition before the loss, Business Income is designed to put you in the same fiscal position you had no loss occurred.
In other words, if a disaster such as a fire shuts down your school, the Property Insurance will rebuild your building, and Business Income Insurance will reimburse you for lost profits and continuing expenses while your school was closed.
How to Determine an Appropriate Limit: There are three steps to calculating an appropriate limit for Business Income.
Step 1: Establishing a Yearly Business Income Exposure. Selecting a limit can be tricky because the calculation should take into account net income and continuing expenses. The easiest way to start is to use the following formula:
Gross Sales minus (-) Cost of Goods Sold* = Gross Profit (*For insurance purposes, “Cost of Goods Sold” should NOT include payroll expense. You want to have payroll to maintain your workforce following a significant loss by continuing to pay them.)
Thankfully, there are worksheets to assist you in calculating this amount, so you don’t do it on your own. (If you would like a copy of one, please contact our office, and we’ll be happy to send one over.)
In part 2, next week, we will show you how a claim is calculated and paid for this type of loss.