January 26, 2021

A Deeper Dive into Business Interruption Coverage Options

As you know from reading our previous posts on the subject, Business Interruption (BI) coverage is an area of commercial insurance that can be hard to understand. If you’re the owner of a business, assuming you have full coverage, your BI coverage should make you whole – restoring you financially to a position as if you had not suffered any loss at all.

So, as a refresher, remember that business interruption compensates you for lost profits. Suppose you have a fire at your place of business that prevents your customers from patronizing your establishment. What happens? You don’t make any money, that’s what. Well, BI accounts for that shortfall and pays you for your lost net income and expenses until you can get back on your feet.

BI is critically important. But it can be difficult to grasp the various endorsements and options available to you when selecting the level of BI coverage that’s right for your business. To help you get a sense of some of these options, we have highlighted a few that should inform your decision making.

Extra Expense endorsement
You can get BI coverage either with or without an ‘Extra Expense’ endorsement if you’re purchasing a Commercial Property Policy. It’s at your discretion – an a la carte process in which you buy the pieces you need for your business. If you buy BI without the Extra Expense endorsement, you still have coverage for BI and expenses to reduce the loss you suffer. Say you have a store in a strip mall and you suffer a fire loss.  You have 12 months of coverage, and it looks like you will be closed for repairs for all 12 months. You look for an alternate space, but rents are really high everywhere – you’re looking at an additional $2K per month compared to what you were paying at the mall. But you have to either pay that inflated rent at the new location or not re-open at all.

Normally, the Extra Expense endorsement would enable you to rent the new space. But if you opted to only purchase Business Interruption coverage WITHOUT the Extra Expense coverage – you must now show that spending the extra $2K per month actually saves money for the insurance company. How do you do that? Maybe spending the extra $2K per month enables you to earn $500K during that year in a temporary location. That’s a net positive to the insurance company. If you do have the Extra Expense endorsement, you don’t have to undertake this exercise. Overall, it’s worth it to get this endorsement. But if you don’t, you still have a category to pay for expenses to reduce. But you must prove it.

Brands and Labels endorsement
If you own a company that makes a product – in the upholstery, furniture or fashion industries, for example – you probably place great importance on your brand and label. If you have a fire, the brand labeled items might be damaged, but not destroyed. Maybe some of your brand labeled clothing was not directly damaged by fire, but reeks of smoke. So, you submit a claim for replacement to your insurance company.

If the insurance company pays to replace the items, they have the right to take the damaged inventory for salvage. They will most likely bring in a salvor who will then sell the product to a company such as Building 19, who in turn offers them at a discount to the public. The problem is, those re-sale outlets are a “bad look” for the high-end brand/label. Fancy clothiers don’t want their merchandise showing up there. In fact, many high-end labels pride themselves on never discounting their items.

What can a business do to protect themselves? If they have the Brands and Labels Endorsement, it forces the insurance company to remove the label or any other identifying tickets or labels before it is sold to the discount store. That protects the business and its name.

Which business should get this protection? Any company that manufactures tangible products – that is, something a consumer holds or uses – that is marked or tagged should consider this endorsement. If you have your name on your product, you should get the ‘Brands and Labels’ endorsement. Sometimes it’s built in to deluxe policies for retail clients, but if not, you might need to purchase it.

Personal Property of Others
One SMW client – a Mack truck dealer and mechanic – had a bad fire at one of its repair shops. The fire destroyed all of the very expensive equipment used by their mechanics to repair the trucks. These sophisticated tools, it turns out, were not the property of the business – they were owned by the mechanics themselves. Luckily, the dealership had additional coverage for ‘Personal Property of Others’ in its commercial policy, and was able to cover the loss up to $5K per mechanic (to a maximum of $25K overall). Great result – but be careful. In this case, the dealership let the insurance company outsource the replacement process. Instead of getting identical high-end tools from specialty manufacturers, as per the list each mechanic drew up in the claim submission process, they received a stream of cheap knockoffs from Amazon, Walmart and the like. It was a nightmare.

Ideally, you would have employees insure their own tools through their own policies, as they will get a better result in a claim through their insurer than through the company’s policy.  It’s also important to ask questions and stay involved when the insurance company offers to provide services (like the replacement tools scenario above). Find out exactly what they plan to do, and always get specifics, as things aren’t always what they seem.


Mindi Labella

Mindi Labella

Mindi is a CPA who specializes in commercial losses, business interruption, extra expense and time element claims. She is an integral member of the SMW team, drawing on her business background to advocate on behalf of our clients.
If you’ve had a fire, flood or other property loss resulting in an insurance claim, and need a public insurance adjuster in Massachusetts, New Hampshire, Rhode Island, New England or anywhere in the U.S. or Caribbean, call Swerling Milton Winnick. We are the oldest and largest public adjusting firm in New England, and our team of experts will give you personalized, 24/7 attention to successfully resolve your residential or business insurance claim.