A Business Income Vocabulary Lesson

Property can be replaced. Your business come? It's complicated.

Understanding insurance jargon was never in your job description of owning a music business, but it’s sure in ours. Here are a few insurance vocab words that will help you understand Business Income Coverage. We suggest reviewing them with another post: “Property Can Be Replaced. Business Income? It’s Complicated”.

Business Income Coverage – (BIC, Business Interruption Coverage) Insurance that covers a reduction in business income caused by a covered property claim

BIC including Rental Value – If you own and occupy your building, but also lease space to tenants, your income includes your own business income as well as rent from your tenants. This type of BIC accounts for all of it.

Period of Restoration – The time your BIC applies. Typically begins within 72 hours of the physical loss taking place, though some policies might offer a reduced window of time. Ends when the property should be restored (within a reasonable time frame and with quality similar to what was present before) or when business continues at a new, permanent location.

Actual Loss Sustained – (ALS) The insurer will only pay if you actually sustain a business interruption that causes a loss in business income, and the insurer will pay the actual amount lost (up to the policy limit, if applicable).

Duties in the Event of Loss – Did you know? You, the policyholder, are required to do more when a loss occurs than just have an insurance policy in the first place. It’s important to promptly notify your insurance company, protect the property from further damage, and work to get back into business (whether wholly or partially) as soon as possible (if you plan to continue business). Note – Duties in the Event of Loss exist for any type of insurance loss/claim, but some of these are specific to BIC.

Loss Determination – No one can truly predict what would have happened if a loss did not take place. Loss Determination is the process of figuring out approximately how much business income was lost. Calculated using: Net income of business before the loss occurred, probable net income if no loss had occurred, operating expenses that continue during the period of restoration, other relevant sources of info

Net Income – Revenues (what customers pay you for your products, services)  – Expenses (rent, insurance, money paid to stock inventory) = Net Income. BIC intends to cover a reduction in net income.

Business Continuity Plan – (BCP) A game plan, if you will. A document that lays out steps to take in the event of a loss, particularly a major disaster. It can include everything from what decisions to make first, how to assess the damage and your capability to recover (if any).

Extra Expenses – Expenses your business pays to mitigate the effects of the business interruption. These are in addition to your regular expenses. Examples: Cost to express ship new inventory in. Leasing a temporary space so you can continue some of your work within a few weeks rather than waiting until your shop is fully restored.

Continuing Expenses – Business expenses that will continue regardless of a business interruption. Think: Payroll for key employees, loan payments, taxes, insurance premiums, etc.

Noncontinuing Expenses – Business expenses that will stop during a business interruption, such as costs to ship products to your customers.

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