Ask SmallBiz: Insurance Coverage

Expert of the Month: Calvin Hiraoka, Senior VP and Chief Underwriting Officer for First Insurance Company of Hawaii

October, 2011

Q. How much business income insurance coverage do I need?

A. We’ve all heard stories about businesses that suffer a fire loss, take three months to rebuild and struggle to survive because of income lost during those months. That is why there is business income insurance.

Should you buy this coverage? Consider three things while making that decision:

• First, how likely is it that you will suffer a loss? For example, a fire might be more likely in a restaurant than in a grocery store.

• Second, if you suffer a loss and are closed for a while, would you be able to survive the loss of income?

• Finally, you must balance the risk of lost income against the cost of additional insurance.

If you decide to buy coverage, how much should you purchase? This decision requires a two-step process: deciding how long of a business closure you want your insurance to cover and then calculating how much this equates to in lost income and continuing operating expenses.

Length of business closure:

Any loss will most likely be from fire or wind. First, consider how long you would be closed. A small fire might close your business for two weeks; a larger fire might mean two months. If a hurricane strikes, your company could close for a year or more because repairs take much longer when a lot of businesses and homes are damaged.

Income and expenses:

After you’ve decided how long you would want to collect for the loss of income, you must determine the amount of that income. Calculate your net profit for the amount of time you want to collect for lost income. Add in operating expenses that would continue during that period. Decide what you want to do with your employees’ payroll: Do you want to keep paying them or not? If you do, add that amount to your continuing operating expenses. The total is the amount of insurance you should purchase.

Consider one last thing: Even after you’re open for business again, your customer traffic may still be down. Extended business income insurance will cover your lost income until you reach your previous level of sales.

As with any kind of business insurance, you should consult with your insurance professional to tailor coverage to meet your exact needs.

First Insurance Company of Hawaii
www.ficoh.com
527-777

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Author:

CALVIN HIRAOKA, SENIOR VP AND CHIEF UNDERWRITING OFFICER FOR FIRST INSURANCE COMPANY OF HAWAII