Do You Need Contingent Business Income Coverage?

When businesses experience a major property loss, they also often incur substantial loss of income due to a total or partial shutdown. In addition, there may be extra expenses—such as relocation to temporary sites, transfer of operations to other owned facilities, restoration of lost records, and replacement of lost phones and communication systems—associated with getting the business operational as soon as possible. Many businesses purchase Business Income coverage, as a part of their Property coverage, to cover this exposure. However, in today’s business world, where companies are dependent upon each other for continuing operations, Business Income insurance may not be enough to adequately protect your assets.

What would happen if a company that you relied on suffered a large loss that affected your operations? Perhaps your primary supplier could no longer provide the necessary materials for your ongoing operation, slowing or stopping your own production. Or a major buyer would have to cancel standing orders, leaving you with overstock and lost income. Perhaps an anchor store or neighboring business that attracts customers to your business is closed for a long time after a major fire, and your sales drop dramatically as a result. In each of these instances, the event is beyond your control but nevertheless causes a substantial loss of income for your business. Contingent Business Income coverage is designed to address this risk exposure.

Contingent Business Income insurance pays for your economic loss resulting from physical damage to the property of another business that you rely upon. It reimburses for lost profits and the extra expenses associated with continuing your operations. The coverage is typically carried by businesses that depend upon a few suppliers, sell the bulk of their product to a limited number of companies, or rely upon a neighboring business to attract a steady customer base to their own location. Coverage can be written on a specific basis, applying only to contingent businesses named on your policy, or on a blanket basis to cover any contingent businesses whose loss affects your business income. Contingent Business Income follows your own property coverage; the cause of loss at the contingent business must be a covered peril for your property on your policy. For example, your policy covers fire damage to your property and the contingent business’s main location is destroyed by fire—coverage would apply. However, if the building was toppled by an earthquake and your property coverage excluded earthquake, the Contingent Business income coverage would not respond.

Claims adjustment for a Contingent Business Income loss can be complex and challenging for both you and your insurer. Losses can come from unpredictable events—consider the long term impact on local businesses from 9/11, Hurricane Katrina, and the BP oil spill—and include unforeseen ramifications. Additionally, events typically result in a slowdown rather than full shutdown and the Contingent Business Income loss is partial rather than total. And so, proper recordkeeping and documentation are vital for a fair and prompt settlement. You will want to provide full information that supports your projected income figures and financial loss, as well as detailed records of the extra expenses that you have incurred in order to effect your contingency plan to continue operations. Historical records of your income trends over time, sales forecasts, and annual budgets will prove valuable in the claims process. Your insurer may request specific documents, including monthly profit and loss statements, production reports, inventories, cost accounting reports, invoices, and purchase orders.

A comprehensive continuity plan for your business should include serious consideration of your interdependence with other companies and the possible impact that their misfortune could have on you. Contingent Business Income may be an effective component of your continuity plan and risk management program. If so, consult with your insurance professional to determine the limits and coverage most appropriate for your business, as well as a documentation plan that will be most helpful and comprehensive in the event of a loss.

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