Risk Management: Understanding Business Interruption Insurance

by Ed Schirick

In the November/December issue, we identified business interruption as one of the risks camp directors have a tendency to overlook. Many risks might cause an interruption of your business, such as physical damage to your real and personal property (buildings and contents) from a catastrophic fire or windstorm. The magnitude of the loss of income that could result is determined by the type of loss, when it happens, and how long it will take to resume operations.

By asking yourself "what if" questions you can plan solutions and respond more effectively if you are confronted with a real-life interruption of your business. The objective of your planning and problem-solving should be to stay open at all costs. To accomplish this, you will probably need to consider different scenarios. You will also need to work with your insurance representatives to become more familiar with the insurance offered to help you cope with a business interruption situation. Insurance does not solve all of the problems you will be confronted with in the event your camp business is suspended or interrupted. However, by becoming more knowledgeable about how business income insurance responds, you will avoid blindly assuming risk.

Brainstorming Real-life Scenarios

Consider what would happen if your dining hall burned to the ground two weeks before opening day. What would you do? How would you respond to this possible interruption of your business? Here are some issues to consider after the fire is out and everyone is safe:

  • How quickly can your insurance company get a claims representative on site to authorize clean up?
  • Who would you hire to clean up the debris and grade the site? How much would this cost? Could they complete the job in time for camp to open?
  • If the site can't be cleaned up in time, should you cancel camp or delay opening?
  • What should you tell your camper families? How would you do it? Who will help you with this task? What can you do to maintain their goodwill in this time of crisis?
  • What are the obstacles to staying open and using a field kitchen, large tent, picnic tables, paper plates, and plastic utensils? How would you manage these obstacles? Is there anything you can do in advance to reduce these obstacles or eliminate them? Where would you find this equipment? How much will it cost?
  • As an alternative to a field kitchen, is there another location or brother or sister camp nearby that you could use by transporting your campers to their site to eat? This is the mutual aid concept. Is there a firehouse, grange hall, or other facility you could use temporarily? How much would one of these solutions cost?
  • If none of these alternatives is viable and you have to cancel the season or session, what are the implications for your business? How many employees are you obligated to pay? What other expenses would continue (i.e. mortgage, taxes, telephone, electric, automobile leases)?
  • How would you deal with refunding tuition? Would you have enough financial resources to refund tuition immediately?
  • Are you likely to lose customers to other camps? Will you be able to get them back next year? How long will it take you to recover from the closing and build your enrollment back to pre-loss levels?
  • Would your situation be different if this fire occurred the day before camp opened? While camp was open and the campers were already there? In September?

What Business Income Insurance Covers

The business income and extra expense coverage form designed by the company's insurance services office is typically used to insure a camp for loss of business income and extra expense when a business is confronted with interruption or suspension. Some insurance companies have modified this basic coverage, but this form is the basis for business income insurance used by most camp insurance carriers.

Business income insurance covers net income (profit or loss) that would have been earned had there been no loss to your dining hall, plus continuing expenses incurred. The physical damage to your dining hall must be from a covered cause of loss, such as fire. Reimbursement for the loss of net income is for "actual loss sustained." There is a misconception that business income insurance provides reimbursement for gross income. Or, that the limit of insurance purchased is what is paid in the event of a suspension or interruption of operations. The coverage does not work this way.

In some situations, you may recover under business income insurance even if your business would have incurred a loss, rather than earned a profit, during the period of restoration. In such a situation, you may recover continuing expenses, to the extent they would have been earned by the business during the period of restoration. But certain payroll expenses, if they are not vital to restoring the business, may not be covered.

Expense Insurance Covers Necessary Payments

Expense insurance is an important part of the coverage camps need and is built into the business income and extra expense coverage form mentioned above. This insurance covers necessary expenses incurred, as a result of the fire, during the period your business is being restored and is designed to provide you with financial resources that may help you stay open. It will pay:

  • extra expenses to avoid or minimize the suspension of business and to continue operations at your location, at a temporary location, or at replacement location.
  • extra expenses to minimize the suspension of business if you cannot continue operating.
  • relocation expenses and the costs to equip and operate the temporary or replacement location if you can continue operating.

Coverage also includes extra expenses to repair or replace any property or to research, replace, or restore information on damaged valuable papers or records - to the extent that the expenditure reduces the amount of a loss that would otherwise be covered under the loss of net income portion of the coverage.

There are numerous options and nuances to these coverages too extensive to discuss here. It is imperative that you work with your insurance representatives to fully examine your risk and the solutions in this area of business income insurance as part of your response to the risk of business interruption or suspension.

Knowing How Much Insurance to Buy

How can you determine how much insurance to buy? This takes some thought and planning. First, with the help of your insurance representative and your accountant prepare a business income worksheet based upon your worst what-if scenario. Your insurance representative can supply you with a copy of the worksheet. This will result in a formal determination of your net income. Then, as a result of your thought and planning, you should be able to identify how much extra expense insurance you may need in this worst-case scenario.

These two amounts should be added together plus some cushion for unforeseen contingency. This will establish the amount of business income and extra expense insurance to purchase. Don't over insure; only buy as much as you think you need after thoughtful analysis.

This seems like a lot of work. But the reality is you can do it now or do it later if you have a loss. Prudent management and good stewardship would suggest that you take the time to do it now. A claim, particularly a property insurance claim, can be a nightmare because the settlement requires so much documentation. As a risk manager, one of your primary responsibilities is to keep the enterprise operating. You will accomplish this goal more effectively and have a better experience with your claim adjustment if you take the time to prepare and buy the right amount of insurance.

Remember, insurance is only one of the methods of managing risk. It is not always a complete solution. By learning more about what business income insurance covers, you will be able to identify what is not covered so you can make appropriate financial arrangements. There are many other risks of business interruption and suspension that cannot be transferred to an insurance company. Be prepared and use the risk management process to your advantage.

Originally published in the 2000 January/February issue of Camping Magazine.