Business income insurance covers the income of the business,therefore, it's fundamental that there be earnings and thatearnings continue to be possible. If a business is idle and likelyto remain that way for a long time, there are neither present norprospective earnings and no need for business income coverage.Construction companies and contractors may face this situation whenthere's a significant slowdown in large projects.

But the mere fact that a business is not operating doesn'tnecessarily eliminate the need for this coverage. If a contractoris definitely scheduled to resume operations but the property isdamaged or destroyed by an insured peril, there will be a loss ofincome and, hence, a business income exposure. The exposure beginson the date operations were scheduled to resume. A seasonalbusiness, such as an ice cream shop in a vacation area, is oneexample.

Similarly, insurance can be written for a business operatorwhose premises are under construction. Loss to an uncompletedbuilding postpones the date of occupancy, and any loss of earningsfrom the date business operations should have begun can be insured.Contractors and their clients often deal with this situation.

Coverage can properly be written for businesses whose earningsare sufficient to meet all or part of the operating expenses butnot enough to show a profit. Some construction contractors,although currently unable to produce a profit, still have asubstantial exposure in the form of continuing expenses if asuspension of business occurs. Coverage is to the extent that thoseexpenses were being earned prior to loss. But, for businesses notoperating at a profit, close underwriting scrutiny isnecessary.

Related: How businesses can minimize the impact of Harvey'sservice interruptions

Extra expense coverage

Some businesses must make every effort to continue operating nomatter how serious the damage and regardless of the cost. Forexample, contractors located in the Houston, Texas, area might havebeen damaged during Hurricane Harvey but they have clients withprojects that were unscathed. For such risks, the principal need isextra expense insurance.

These contractors, along with other businesses damaged byhurricanes and wildfires in 2017, also may not be able to avoid atemporary suspension following severe damage. To avoid long-termloss of customers they will spend substantial amounts of money toget back into operation. In some cases, a combination of businessincome and extra expense insurance is needed.

'Blanket' coverage

When a contractor has interdependent operations in two or moreseparately rated buildings or at more than one location and a lossat one location will curtail business at other locations, blanketbusiness income insurance is ordinarily recommended.

Blanket coverage may also be arranged when the separatelocations are independent of one another, but the principaladvantage here, if any, is cost. If the average rate results inlower overall costs than would be the case with each locationcovered separately, then blanketing might be advised. Otherwise,the necessity of adjusting any loss on the basis of the businessbeing done at all covered locations (for coinsurance purposes) mayoffset any blanketing advantage.

Blanket business income insurance should not be confused withbusiness income from dependent properties coverage. Blanketinsurance covers two or more separately rated units of thecontractor's own operations. Income from dependent propertyinsurance covers the loss that the contractor would suffer if theoperation of a key supplier, customer or leader property on whichthe contractor's operations are dependent is shut down by aninsured peril.

Three elements are required for coverage to apply: (1) anecessary suspension of business operations during the period ofrestoration, (2) a direct physical loss of or damage to property atthe described premises caused by or resulting from a covered causeof loss, and (3) an actual loss of business income.

A “suspension” of business is defined as:

• The slowdown or cessation of your business activities; or
• A part or all of the described premises is rendereduntenantable if coverage for Business Income including “RentalValue” or “Rental Value” applies.

Documenting the loss of business income may also be an extraexpense, covered by insurance. (Photo: Shutterstock)

Categories of extra expense

Extra expense is not a defined term in many policies,but the term is usually given a specific policy meaning forcoverage purposes: “necessary expenses you [the insured] incurduring the period of restoration that you would not have incurredif there had been no direct physical loss or damage to propertycaused by or resulting from a covered cause of loss.” Mostfrequently the kinds of expenses for which coverage is afforded arerental of a temporary office or store, computer or communicationsrental equipment, and items of that kind.

Generally, policies provide coverage for two categories of extraexpenses:

• Extra expense to avoid or minimize the suspension of businessand to continue operations at the insured premises or atreplacement premises or temporary locations. Relocation expensesand costs to equip and operate a replacement or temporary locationare included. The costs to rent, move, and set up a temporaryfacility or obtain temporary or replacement equipment would be paidby this portion of the policy.
• Extra expense incurred to minimize suspension of business ifoperations cannot be continued. The hiring of additional workers orpaying existing employees overtime in order to reopen the businesswould be covered here.

The form also provides coverage for extra expenses necessary torepair or replace property but only to the extent the amount ofloss otherwise payable is reduced.

Exclusions and limitations

In most cases, business income and extra expense losses causeddirectly or indirectly by power or other utility service failurethat do not result in a covered cause of loss are excluded. Forexample, a storm causes a power outage to the contractor'spremises, and computer equipment, communications services, lightsand heat are not operable. Business income coverage is nottriggered because there is no physical damage to the property.

The exclusion encompasses power surges related to the powerfailure event and defines communication services to includeelectronic network access and internet service.

Interference at the insured premises by strikers or others withrebuilding or replacing the property or with the resumption orcontinuance of business is specifically excluded as well. Becausethe reference is to delay by interference at the premises, anincrease of loss caused by a strike elsewhere — such as oneaffecting material suppliers, transportation lines, or theavailability of workers to work on the construction project — iscovered.

Related: Protests, riots, and loss of businessincome

Suspension, lapse, or cancellation of any license, lease, orcontract not directly caused by the suspension of operations isalso excluded. Extra expenses incurred beyond the period ofrestoration due to suspension, lapse, or cancellation of anylicense, lease, or contract are not covered, either.

Who pays for accountingdocumentation?

Contractors may find that they're required to provide accountingdocumentation to support the claim. To comply with this requestfrom the insurer, the contractor might have additional costs for anaccounting firm to accumulate the data and provide the report.These fees for accounting and other professional services would nothave been incurred had there been no direct physical loss and theyshould be considered as insured extra expenses under thepolicy.

This article is an excerpt from of the Commercial Property Coverage Guide, 6th edition, published byThe National Underwriter Company, Erlanger, Ky., and authored byGeorge E. Krauss, Donald S. Malecki & Susan Massmann. For moreinformation or to obtain a copy of the Guide, visit The National Underwriter Company website.