In Part III of our multi-part series on Business Interruption coverage, we offered some real-life examples of BI coverage at work. To continue this examination, Part IV of this BI series looks at an additional aspect of BI – “Saved Expenses” – that business owners might encounter in their BI coverage.
As a business owner, you are of course familiar with the day-to-day expenses of running your company – the electric bill, your accountant fees, your payroll. After a loss, you may be closed or have reduced operations – and some of those expenses may cease while others may be reduced. In order to accurately calculate your business interruption claim, you will need to capture all those expenses that stop because you are closed.
Why? Because these expenses reduce the income that you would have earned. If you were operating, you would have had to pay these expenses. So, the insurance company, in calculating your payout under the BI provision, will reduce your total income during your normal operations, too.
Let’s try to explain that another way. If you’re closed, you don’t have to turn on the lights or crank the AC in the office, thereby reducing your electric bill. If the insurance company pays you for your lost sales and doesn’t reduce the payout by what you saved on your electric bill, you would be in a better position than you would have been in but for the loss. Remember your insurance policy is in place to put you in the same position had there been no loss – no better and no worse.
Here are a few key examples of such “Saved Expenses”:
- Bank fees – Maybe you get charged 2% for fees every time a customer uses a credit card. If customers aren’t making purchases, they aren’t using their credit cards at your business. If you’re not paying 2% in fees, that’s 2% the insurance company deducts from your BI claim.
- Commissions – Your sales might run on commission – maybe they get $100 for every unit they sell. If your sales team isn’t making any sales, you’re not paying them $100 per unit, which the insurance company will account for in your BI claim.
- Utilities – With your factory closed, you don’t have to have the lights on, and machines aren’t running. That represents a significant savings in electricity costs, which reduces your BI claim.
- Repairs and maintenance – Like cost of goods sold, your business facility requires maintenance (paint the walls, polish the floors, etc.). The insurance company is paying to put everything back to brand new. You won’t have those expenses over the next 12 months at similar levels. NOTE: it’s important to scrutinize what’s captured in the repairs and maintenance expenses, because if the insurance company is capturing non-recurring expenses (e.g., a once-per-decade purchase, such as a new furnace), it would fall outside normal, everyday repairs and maintenance.
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We hope this background explanation of Business Interruption was helpful. For any additional insight or questions, please contact us to discuss – we will be happy to help!