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Business-Interruption InsuranceProtecting your income during temporary business shutdowns

July 1, 1998

4 Min Read
Business-Interruption InsuranceProtecting your income during temporary business shutdowns

Business-Interruption Insurance

Protecting your income during temporary business shutdowns

By David Wilhite

Every self-storage facility owner needs to protect his income against businessinterruptions. If you should sustain a direct physical loss from a fire or other coveredcause of loss, the chances are good that you will also suffer an indirect loss of income.(Indirect losses refer to the lost profits and the fixed expenses that continuemonth-to-month whether your facility is operating or not). You're also likely to incurextra expenses as you attempt to resume your normal business operations.

Business-interruption insurance--specifically, loss-of-income insurance andextra-expense insurance--are designed to minimize your risk in the event of a loss.1Also known as time-element coverage, business-interruption insurance provides severalimportant benefits:

  • It protects you against reduced sales income (and increased expenses) that result from damage to your buildings or business personal property.

  • It allows you to retain key employees by maintaining their salaries and benefits.

  • It encourages prompt settlement of building and business personal-property losses.

  • It helps you to retain your tenants.

  • It can restore you to the same position you were in before the loss occurred.

Business-interruption insurance is usually included in most business-owners policies asa standard endorsement, which might lead you to take it for granted. However, when youconsider that business-interruption losses can easily exceed direct-damage losses, theimportance of this coverage becomes clear. Business-interruption insurance is ofparticular value to self-storage owners who sustain a covered loss in that it compensatesyou for lost profits based on your operation's projected monthly earnings, thus takinginto account the seasonal nature of the market.

When shopping for business-interruption insurance, keep in mind that loss-of-income andextra-expense coverages are limited to the actual length of time required to rebuild,repair or replace your damaged buildings or business personal property. In other words,the amount of financial loss is determined by the length of time it takes to get yourfacility back in business. For loss-of-income coverage to kick in, the suspension of yourbusiness operations must be caused by direct loss or damage as a result of a covered causeof loss. Payment is based upon your operation's past history of seasonal profits andlosses. (Note that, as with all insurance policies, it is your responsibility to makeevery reasonable effort to resume complete or partial operation as soon as possible inorder to minimize loss).

It is a surprising but true fact that a small percentage of self-storage owners chooseto operate without business-interruption insurance, perhaps because the coverage is notrequired by most lending institutions. However, when you consider value of the insuranceand its very reasonable cost, it's difficult to understand why anyone would knowingly skipthis essential coverage.

It is strongly recommended that you secure a full 12 months of loss-of-income coverageto protect yourself against business interruptions. While it may only take three to sixmonths to rebuild your business after a covered loss, you will first be required to removedebris, obtain bids and building permits, and perhaps face ordinance and zoningrequirements prior to starting reconstruction. Since most conventional coverage ends whenrebuilding is complete, it is advisable that you ask your insurance agent about anextended period of indemnity. This important enhancement provides for loss of rentalincome during a specific period following reconstruction. While an average retail store orrestaurant can begin generating profits as soon as it is re-opened after a covered loss,self-storage facilities may take several months to locate enough new tenants beforebecoming fully profitable. No matter how large or small your self-storage facility may be,securing adequate coverage is essential for protecting your business and your peace ofmind.

1To define our terms, loss of income refers to the suspension of yourbusiness operations by direct loss or damage as a result of an insured cause of loss.Extra expense refers to any extraordinary expenses you incur during the period ofrestoration that you would not have incurred had there been no direct physical loss ordamage to property. The "period of restoration" begins with the date of directphysical loss or damage resulting from any covered cause of loss.

David Wilhite is the marketing manager of Universal Insurance Facilities Inc.Universal offers a complete package of coverages specifically designed to meet the needsof the self-storage industry, including loss of income, employee dishonesty, comprehensivebusiness liability, hazardous-contents removal and customer storage. For more information,contact Universal at Box 40079, Phoenix, AZ 85067-0079; phone (800) 844-2101; fax (602)970-6240; Web: www.vpico.com/universal.

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