In part 1 of our series on Business Income Coverage for charter schools, we explained what Business Income Coverage is and gave the first step in determining the correct limit for your school.
Here are steps 2 and 3, and next week we will finish with premium estimates and exclusions to be aware of.
Step 2: Establish the loss’s extent or duration (how long will it take to get back up and running). The following questions need to be answered to determine an appropriate time limit for your business to be back up and running:
- How long will the building take to rebuild?
- How long will it take to replenish personal property?
- What if you must find a new location?
- Do you have a contingency plan to get you up and going much faster?
Step 3: Match the limit and time frame to the best coverage option. There are six different coverage options available when selecting how the insurance company will pay for lost income. Due to space, I will only cover three of the options available:
Coverage Option 1: Monthly Limit of Indemnity. This is a standard payment for risks that will be out less than six months. Coverage is limited to a maximum payout amount for any 30 days. The maximum amount is determined by taking the total Business Income Limit and dividing it by the number of months of selected coverage. For example, if you had a $120,000 limit and six months of coverage, your monthly limit would be $20,000.
Coverage Option 2: Actual Loss Sustained. This is the best option available if operations can be resumed in less than 12 months. Actual loss sustained means the company will pay net income and continuing expenses, no matter how much they are, for 12 consecutive months or how long it takes you to get back up and running. This form takes away the hassle of calculating a loss amount, as it does not matter. One drawback is that ordinary payroll is typically only included up to 60 days. Make sure to check your policy or talk to your agent about payroll inclusion on the coverage and for how long.
Coverage Option 3: Actual Loss Sustained Up to a Limit. This coverage is more common in large schools where a loss may keep operations shut down for more than a year. With this option, the carrier does not have a time frame or specified monthly limit of indemnity, and they will pay the loss until a maximum limit is reached.
How are claims calculated? Claim payment amounts are calculated a few different ways, but the most common is taking the prior week’s, month’s, or year’s revenue amount for the same specified time frame and the current year’s sales trend amount to calculate the loss. It is essential to have solid, up-to-date financial statements to assist in the calculation. Then depending upon the estimated time of loss, the insurance company may cut a check weekly, monthly, or once you are back up and running (only in the case of tiny claims).