What is Business Income Coverage?

According to global studies, business interruption ranks among the top risks for companies worldwide, alongside cyber threats. The study proves that business interruption is one of the main concerns for companies globally. A Forbes article has highlighted this shocking reality that 40% of small and mid-sized businesses never reopen after a natural disaster, and an additional 25% reopen but fail within a year. The reason is lack of financial backup, like business income coverage.

You have built your business with so much efforts, and would never want it to shatter. This is where business income coverage is useful. It helps to compensate for the income you lose while your business is unable to operate. Explore Bajaj General Insurance’s … All Risk Insurance Policy that safeguards businesses against unpredictable events and minimises downtime and loss of operations.

Why is Business Income Coverage Important?

Business income coverage is essential due to the following reasons:

1. Lost earnings are covered

Businesses may be affected due to incidents like fire, floods, or other natural disasters. During such times, business income coverage provides for the lost earnings.

1. Helps organisations pay fixed expenses

Even when the business is shut, fixed expenses continue to pile up like rent, loan repayments, utility bills, etc. Business income coverage reduces the financial strain in handling such expenses.

1. Supports recovery

When an unexpected event strikes a business, it takes an ample amount of time to repair, rebuild, and restart the business. Business income coverage provides financial support during this time, so one does not have to rely on loans or savings.

1. Maintains employee stability

Your business has grown due to the hard work of your employees. Even in times of crisis, employees need to be paid their salaries. This coverage ensures you pay your employees so that the team stays intact.

1. Reduces stress and uncertainty

Even a temporary shutdown of business operations can worry the owners. However, knowing that expenses are covered helps to remain stress-free and enables businesses to focus on recovery and plan for the future.

How Does Business Income Coverage Work?

Property insurance pays for repairing or replacing the assets that were damaged when an unexpected event like fire, flood, or storm occurs. However, such incidents impair the ability of the business to continue working. Business income coverage takes care of the revenue you lose during such a period of downtime.

Understand how business coverage works with this step-by-step process:

1. Covered Peril Occurs

Imagine a fire has damaged your business premises, or a flood has halted operations as it has destroyed machinery and other equipment.

1. Operations Halt

Because of the damage, you cannot run your business normally. Maybe your shop has to remain closed for weeks, or your office cannot function until repairs are done.

1. Claim Assessment

Your insurance company reviews your past financial records like sales, expenses, and profits to calculate how much income you would have earned if your business had been open.

1. Compensation Paid

You will be paid the compensation amount after the claims have been assessed. The compensation money will be useful to cover:

1.  
   • Lost profits, which is the amount you would have earned in the normal course of business, if the business was in operation.
   • Fixed expenses like rent, employee salaries, and utility bills.
   • Any extra costs needed to reduce downtime like renting a temporary place to run your business.

How to Determine the Right Coverage Amount?

Follow these steps to determine the right coverage amount:

1. Review Your Past Financial Records

When you study the past financial records like profit and loss statements, balance sheets, etc., you will be able to arrive at the average monthly income that your business generates. Now estimate how much revenue will be lost if your business comes to a halt for a few months.

Example: If your shop earns ₹10 lakh annually, and you consider stoppage of work for 6 months; that could mean a loss of around ₹5 lakh. This is how you arrive at the potential loss of work stoppage.

2. Consider Fixed and Ongoing Expenses

Make a list of all fixed costs like rent, mortgage payments, salaries, utility bills, insurance premiums, etc. that you will need to pay, irrespective of whether the business operates or not, and add them to your expected lost profits so that you have enough coverage to rebuild the business.

3. Think About Recovery Time

Different businesses take different times to recover. Ask yourself: How much time would it take to get back to normal if my business was seriously disrupted? Then, calculate how much income and expenses you need covered during that recovery period.

4. Account for Extra Expenses

You may have to incur additional payment on temporary solutions like renting a location, leasing equipment, or advertising to inform customers you are back in business. Your coverage amount should be high enough to account for these unexpected but necessary costs.

5. Plan for Industry and Location Risks

A few businesses are at higher risk of interruptions as their office or factory may be near the disaster area, or some may face supply chain disruptions due to heavy dependence on a single supplier or distributor.

If your business operates in a disaster-prone area or relies on a specific supplier, then you should go for a higher coverage since your recovery may take longer.

Conclusion

Business income coverage can be a lifesaver when unexpected events strike your business and derail its functioning. For maximising the benefits of this cover, ensure that your financial records are accurate and as your business grows, update the sum insured. Thoroughly go through the policy documents to understand the exclusions and inclusions, as having this cover can mean the difference between recovery and closure.

Bajaj General Insurance’s Industrial All Risk Insurance compensates for loss in profits due to interruption caused by insured perils. For more details, visit our website.

FAQs

1. How can I buy business income coverage in India?

You can buy business income coverage from a trusted insurer like Bajaj General Insurance, which offers tailored business income protection as part of its commercial and MSME insurance plans.

2. Is business income insurance the same as property insurance?

No. They are different as property insurance covers the cost of repairing or replacing the assets that were damaged due to an insured peril, whereas business income insurance covers the loss of income during downtime.

3. Who needs business income insurance coverage?

All businesses, small, medium, or large, that rely on steady revenue to meet their ongoing expenses should buy this coverage.

4. How long does business income coverage last?

Business income coverage usually lasts for the “restoration period” which is defined in your policy. It is the time necessary to repair the damage caused and begin your normal business activities.

5. Does business income coverage include pandemic-related losses?

Unless specified in the policy, in most cases, pandemic-related losses are excluded. But review your policy terms for clarity.

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***Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.