The US hospitality industry has suffered significant blows over the past few years. With a slew of unprecedented weather events such as tornadoes, wildfires and hurricanes added to a global pandemic – many restaurants and bars found themselves not prepared for the unthinkable.
When your business closes due to an event that is no fault of your own – is it possible to recover your projected net income? The answer is – that it’s possible.
Business Interruption/Income Insurance
A part of any solid risk management portfolio for restaurant and bar owners includes “Business Interruption or Income Insurance,” which will help you replace your income when your business closes temporarily due to a covered loss such as property damage from a storm.
Where it can get sticky – as in the case of the pandemic – is in the fine print.* What is covered, and what event will trigger a loss. Here are the general rules of the Business Interruption Policy.
To collect on a claim, there must be:
- Direct physical loss or damage – such as a tree falling on a building during a storm or damage due to a fire. Many carriers argued that Covid-19 and the executive orders forcing restaurant closures did not cause “direct physical loss”; many Courts agreed with them.
- The property must be listed on the policy. It seems obvious, but when multiple properties are owned, and there is much buying and selling, owners often forget to endorse their insurance policies with new purchases.
- The event triggering the claim MUST be a covered peril.
- The event must result in the suspension of business operations for the company.
What precisely can I get coverage for?**
Your policy will cover your business income and some extra expenses caused by the loss. Although every policy is different most cover the following.
- Lost profits/income
- Taxes Due
- Mortgage or rent payments
- Loan payments
- Relocation costs if you must move to a temporary place
How much Business Interruption Insurance Coverage do I need?
A common question with a complicated answer! The formula shared by IRMI, The International Risk Management Institute, is as follows:
BI = T x Q x V
BI = business interruption
T = the number of time units (hours, days) operations are shut down.
Q = the number of goods typically produced, or sold per unit of time used in T
V = the value of each unit of production, usually expressed in profit.
To break it down in layman’s terms:
You need to use historical data and combine that with your income forecast for the next 12 months, combined with an estimate of how long you think it will take your business to get back up and running. The more data you have, the better served you will be.
- Who are the essential people I need, and what will the payroll costs be?
- What are my expenses – loans, taxes, mortgage/rent that will need to be paid during a temporary closure?
- Will I need a temporary location, or can my team be virtual?
- What is my projected net income for 12 months?
- If I own a building – what is the estimated time to rebuild in the case of a total loss?
It’s important to note that many Business Interruption Insurance policies have a 48-72 hour waiting period before the policy will kick in after a covered loss. However, some carriers will remove the waiting period upon request. Policies will also have a “Restoration Period, ” the length of time the policy will pay for a covered loss. This is important if you need to have a temporary location. If your Restoration Period is 12 months, and you will be in a temporary place for 18 months, the expenses for 6 of those transitional months will not be covered.
Business Interruption insurance can be complicated, and it’s not a DIY project to calculate what you need. It’s best to sit down with a Risk Management professional with deep industry knowledge in the hospitality industry to help you navigate the complex waters.
At Power Risk Management, we offer free consultations to review your current coverages. Give us a call at one of our convenient locations:
Chicago Office: 5343 W. Devon Avenue, Chicago, Illinois 60646 | 773-273-8777
Bourbonnais Office: 1410 Argyle Ln N, Bourbonnais, IL 60914 | 815-922-4754
Denver Office: 1400 16th Street, Suite 400, Denver, Colorado 80202 | 720-779-1190
*The information within this document should not be construed as legal advice.
** Business Interruption and Extra Expense coverage varies by state and insurance carrier – the information above is informational only and does NOT depict what your policy coverage entails or what you need for your business