Business Income Insurance
How to Win Clients and Influence Business Survival
By Lee Puttin

When fire destroyed three buildings at textile manufacturer Malden Mills Industries in December 1995, Chairman Aaron Feuerstein gained international fame as a committed businessman, a community leader and a sensitive employer. He did this by immediately announcing he would guarantee jobs, full wages and benefits for the employees affected by fire for 90 days  -- the amount of time he anticipated it would take to rebuild at the existing site and get the plants up and running.

In fact, it took about six months to resume most of the operations and 21 months to resolve the remaining construction delays and get the rest of the operations back on line. The insurance payouts were not adequate to cover additional financing and other unexpected costs. Despite Feuerstein's addition of his own money, he had to sell the business.

While details of the mill's insurance program are not widely known, the history of the Malden Mills fire demonstrates that rebuilding a business after a major disruption is difficult. Even a man who'd spent most of his life in a closely held business was unable to accurately predict how long it would take to get up and running -- and how much it would cost.

When a major fire strikes a business of any size, that business' recovery depends on foresight and planning. Assisted by a well-trained insurance professional, business owners can readily see the need to carry enough insurance to cover the business' buildings and contents. However, the need to insure the business' fiscal stream -- its actual existence -- can be another matter. For several reasons, Business Income coverage may be a tougher sell, and when an insurance professional does not recognize the need, the business' managers may not realize they lack sufficient coverage until a catastrophic fire or hurricane strikes.

Business Income coverage, still known in some circles as Business Interruption or Time Element insurance, is a property coverage that is designed to pay the loss of income and continuing expenses that help a business to recover following a total or partial shutdown of business operations. With proper insurance coverage, Business Income is designed to replicate the insured's income stream and covers expenses as if no loss had occurred. Once this insurance is triggered by a covered loss such as fire or windstorm, it is designed to replace the business' net income stream, pays ongoing expenses and covers payroll while the business is out of commission.

While the importance of Business Income coverage should be self-evident, selecting proper coverages and limits is made complex by the variety of coverage-form options that exist, the terminology contained in the coverage forms, and the Business Income worksheet that exists to help validate an insured's exposure. This combination has made the sale of Business Income complex and time-consuming. At The Hartford School of Insurance, we've noticed that new producers, CSRs and account executives come to us nervous about the topic. They do not fully understand what the coverage is intended to do, and they are uneasy about the process of helping insureds validate limits and coverage needs.

But this coverage can be as important to them as it to their clients. By showing them several ways to help their business clients determine how much and what specific Business Income coverage they need, we give producers an opportunity to differentiate themselves by adding more value to the relationship than competing agencies.

The Review
An agent approaching a new customer to win business traditionally offers to review the business' current insurance program. Then the agent makes recommendations to try to convince the insurance buyer that he'll do a better job handling the business owners' insurance program. Business Income insurance is a great choice for starting a policy review. Its potential complexity makes it the prime place to find out quickly whether the incumbent agent understands the business needs of a client. Due to its complex nature, errors found in Business Income coverage may signal possible coverage and risk-management opportunities throughout the remainder of the insurance program.

Once a producer or CSR can identify where a business' existing coverage is insufficient to meet very real needs, he may be rewarded with the business owner's trust and business. Business Income can be the foundation on which the account is built.

The Sales Process
Verification of proper Business Income coverage is traditionally calculated through top-down worksheets. Businesses are asked to furnish a lot of information, including financial details that the business may feel are proprietary. Insureds are often reluctant to share financial information. After all, all they want initially is a quote for their business. To help overcome the possible objection to sharing financial information, we suggest taking a bottom-up approach that allows the insured to prove to him or herself the value of Business Income.

How Long to Re-open?
In our approach, the producer comes to the meeting with a picture of a major fire to show the buyer and help him or her focus on the effects of a catastrophe and how long it will take to get back in business. Together, they walk through the sequence of events involved in reopening after a disaster, starting with the fire investigation and debris removal.

Setting up this scenario, we'd have the business consider how long it would take to either rebuild operations at the current site, or find and move to a suitable location to resume business. Now the agent would use consultative sales skills to ask the insured several critical questions to help the customer validate the potential shutdown time. For example, would the new facility require architectural changes before it could be used? If the company doesn't have architectural plans to rebuild or remodel, it is asked to estimate the time needed to draw up those plans.

What Else?
Business owners may not have contemplated the regulatory climate in determining reopening time. If the business would need planning and zoning board approval to rebuild and that board meets monthly, that can add significant delay. A producer who comes to the client meeting knowing how long the local board typically takes to grant such approvals can help advise the business how much time to build in to recovery planning. The business also will have to hire a contractor and wait for building supplies to arrive before construction or reconstruction can start. The availability of contractors should be factored in, as should weather, which is more likely to delay construction projects in certain parts of the country.

Then there are labor issues to consider. If employees are let go, new ones may have to be hired and trained before opening for business. Business owners also will have to keep in mind the time required to replenish stock and replace machinery.

Even after the business reopens, the income stream may continue to be disrupted if customers have moved business to a competitor, and some may never return, especially if the business is forced to move to a less-convenient location by local regulation or building availability. Closing during a peak season is bound to have a bigger impact on the business income stream, and if the business' contracts include deadlines with penalties, a shutdown will likely have further impact on the bottom line.

Talking through and considering all of these items will enable a client to understand the potential impact of a loss on the entire business and to better estimate the time needed to repair or replace the facility, resume operations and rebuild the revenue stream. That way, the agent will help the business choose the most appropriate limits and the time period for coverage.

Now What Limits Seem Adequate?
While Business Income worksheets are helpful, we also suggest a bottom-up analysis to determining net income, payroll and other continuing expenses. In its easiest format, the agent asks the business owner to complete a form that involves listing 12-month totals for net profit, and continuing expenses that may include the following: payroll, benefits, marketing, distribution, professional services (lawyers, accountants, etc.), travel and entertainment, general business supplies, telephone and other utilities, insurance premiums, taxes, collection expenses and regular repairs/maintenance of undamaged equipment and assets. This piece of the discussion ends with the agent asking the insured if there are any other continuing expenses that we missed during the discussion. Added together, these profit and expenses provide a picture of the Business Income exposure (the Profit and Continuing Expenses figure) over a 12-month period.

Tying It All Together!
Now, the agent and insured can contemplate the earlier loss scenario in which they estimated the number of months required for the business to reopen. In its simplest form, the number of months needed to get the business up and running is divided by 12, then multiplied by the 12-month Profit and Continuing Expenses figure. For example, if a business has a yearly Business Income exposure of $2,000,000 and would take approximately nine months to reopen, simply divide the nine months by 12 to see the business will need limits of 75% of its yearly Business Income exposure. Then multiply the $2,000,000 annual Profit and Continuing Expenses figure by the 75% to determine that the limit needed would be about $1,500,000. Other factors may raise or lower this figure, depending on the specific circumstances of the business. For example, peak seasons, key customers or suppliers, contract penalties and loadings for Extra Expenses should be considered. We always suggest writing Business Income and Extra Expense coverage.

We teach all 1,200 students who attend our classes each year the importance of being consultative with their clients. The evolution of errors and omissions litigation against agencies makes buyer choice a critical business practice for the industry, but Business Income is a limits-driven coverage and buyers are coming to agents because they want advice on how to insure their business -- including recognition of when coverage seems inadequate. Buyers may need assistance in walking through their specific exposures to loss including discussing the limits of insurance, and a well trained insurance professional is up to the task.

The producer, CSR or account executive can finesse this assistance by working as a guide to the business, asking and helping the purchaser to ask the right questions, then helping the purchaser come up with the right answers. That way, the business' income stream can be insured in the event it is interrupted by a loss.

Each business is different. While the best insurance program cannot assure the survival of every business, an inadequate program can dramatically lessen the likelihood of reopening after a major fire or hurricane.

With a solid Business Income product sold by producers armed with information and ideas we advance, a business can take steps to help look forward to its future instead of mourning its past. And by approaching a potential client with this coverage, the producer will often win over and keep a valued client for years to come.

Lee Puttin is an executive training director at The Hartford School of Insurance, a division of The Hartford Financial Services Group, Inc. To learn how The Hartford School of Insurance can help supply you with the solution to your training and development needs, please visit www.HartfordSchoolofInsurance.com or call Shelley Thomsen at 860-547-4378.

This document outlines in general terms certain coverages that may be available. All policies must be examined carefully to determine suitability for your needs and to identify any exclusions, limitations or any other terms and conditions that may specifically affect coverage. the amount of time he anticipated it would take to rebuild at the existing site and get the plants up and running.