And Other Insurance Questions
Disclaimer: I am not an insurance agent, and if you are buying insurance, you should use one, not my blog. My blog is to give you an idea of what you might need to know, and what could happen if you buy the wrong amount. [/Disclaimer]
When buying business interruption insurance, you need to know how much to buy. An agent can help you, but you still need to know your business well enough to answer a couple questions about it. Basically, you want to cover the worst possible scenario. So, you need to know many months you would be out of business if the entire place was leveled.
Secondly, you need to have an idea of what kind of sales you will have for the next year, by month. Basically, come up with a trend percentage. "We are going to do 10% more sales this year." Well, then, you have to base the amount of insurance you buy based on that trend. You know your business better than the agent, so that's your job.
Now, why do you have to know how much insurance is enough? Well, you don't want to buy too much, because then you are paying premiums for nothing. BI insurance is an actual loss sustained policy, so you only get what you lost, not your limit. And, you definitely don't want to be underinsured. It might make it easier for the accountants, but that's not worth the loss you will suffer.
Another reason to buy enough insurance is coinsurance. Coinsurance is basically the insurance industry's volume discount. If you insure a certain portion of your business for the year, they will give you a discount. As far as I know, the current coinsurance percentages are 50, 60, 70, 80, 90, 100, and 125. The higher the percentage, the bigger the discount.
Why would you insure more than 100% of your business? Because, coinsurance is based on a year, and your worst case scenario may have you out for longer than that.
But what does coinsurance mean? Well, the first thing you need to know about coinsurance is that it does not force you to buy a certain amount of insurance. However, if you do not buy enough, a coinsurance penalty kicks in in the event of a loss. Let's say you bought 100% coinsurance policy, with a business income of $100,000 for the year. If you only bought $80,000 of insurance, you will have a coinsurance penalty. Whatever award you would have been paid will be reduced, by 80k/100k, or 80%. So if you were going to be awarded $50,000, now you only get $40,000. You are a coinsurer.
AVOID BEING A COINSURER AT ALL COSTS!
The best way to avoid it, is to have an agreed value clause. This means that you and the insurance company agree that the value of the business is X, therefore you need to buy however much insurance based on the coinsurance penalty. That way, even if your sales go up 200% instead of 10%, you are still not a coinsurer. An agreed value policy costs a little more, but if your agent is smart, he'll throw it in for free. He does not want to be sued for making you a coinsurer.
Good luck buying business interruption insurance.