How to Calculate Business Interruption Insurance

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Calculating business interruption insurance is easy, so long as you make good use of a very particular equation. Calculate business interruption insurance with help from a top insurance attorney in this free video clip.

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Video Transcript

I'm Frank Darras, America's Top Insurance Attorney. Today, we're going to learn how to calculate business interruption insurance. Catastrophic events and acts of God can interrupt or prevent a business from doing their work, but so can everyday business practices. Did you know that 72 percent of companies that have their operations significantly interrupted for power outages? Not hard to imagine if you watch the tragedy that hurricane Sandy brought to the East Coast. Fifty two percent of every business has had computer hardware problems. Forty six percent have had business interrupted by telecommunications failure. Forty three percent because of a software problems, 34 percent because of lightning storms and let's sure not forget about the hurricanes, the floods and earthquakes. Business interruption insurance is usually added onto your existing business property insurance or part of your business owner's protection package. It covers the loss of profits interrupted from conducting your business and helps with those expenses when that business owner's business is temporarily shutdown or interrupted from their normal daily business activities. Business owners should make sure there's no waiting period so the reimbursement starts immediately after the disaster. Most policies kick in after only 48 hours and if you've been watching the television, you can see how important it is to have fresh funds within 48 hours. Also, ask for weekly rather than monthly business interruption reimbursements. Imagine the worst case scenario when setting the length of the indemnity period or the length the time you want to get covered. Think how long it would take to restore your business including the possible delays by local government to issue rebuilding permits, re-training staff, obtaining new equipment. I generally use 24 months; it's a good number, it's two years, it's not too long and it's not too expensive. Calculate your expected gross revenue by adding your net sales and other income that would be lost if normal business operations were interrupted. Project the past 24 months of fees or sales forward over the indemnity period and adjust your calculations depending on whether your business expects to grow or you're in a little bit of a decline and don't forget, expected inflation. When you calculate the gross earnings of the business over the indemnity period, you get to that number by subtracting merchandise or materials consume from your total revenues. Don't forget to calculate the cost of moving, to and operating your business from a temporary location during the hardship period. This applies to everybody whether you have a hairdressing salon, plumbers, electrician, real estate agent, include the rentals, the equipment hired, the payroll, employee benefits, workers' compensation and allowances for staff at the temporary location, along with those real estate commissions for teeing up a new lease. Calculate the expected saved expenses during the period of time that you've framed in a loss. These are expenses you're not going to have to pay because of the property loss; maintenance, building services, delivery, utilities and advertising. Check your lease agreement and find out if you're liable for rent even if you're location is demolished. Think about that. All those stores, along the ocean front that are demolished now, their lease may still require them to pay rent even if there's no business left to operate. If so, you need to estimate that cost during this recovery period. If not, add it to your expected savings. Calculate the expected payroll for the staff who won't be employed during this time of loss. This includes their wage expense, employee benefits and saved workers' compensation insurance. Add the figures for gross profits, moving expenses and the continuing rentals, then deduct the expected saved expenses. The number left is what you need for your business interruption insurance. The catastrophe and the devastation we saw from hand from Sandy was repeated with hurricane Katrina and all the devastation of floods that we seen across the Mid-West in the Southeast; the earthquakes, all the wind and tornadoes, these are businesses that have been leveled and demolished by disaster. Business interruption is cheap and it's something we need to add to predict or protect against financial disaster. I'm Frank Darras, Founding Partner of Darras Law, Ontario, California.


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