Question

2. Explain how payroll expenses should be evaluated and handled in setting the business income interruption policy.

the text book we are using is SURVEY OF COMMERCIAL INURANCE 2ND EDITION BY ARTHUR L. FLITNER

Answer 1

Answer

Introduction of Business Income Interruption Policy

Business interruption Policy (also known as business income insurance) is a type of insurance that covers the loss of income that a business suffers after a disaster. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster.

Business interruption insurance compensates your business for lost revenue and other expenses if a fire or other property insurance claim forces you to close your doors temporarily.

Payroll expenses evaluated and settled in Business Income Interruption Policy

A working definition of business income is, “net profit or loss before income taxes and continuing normal operating expenses incurred, including payroll.” However, coverage for payroll can be excluded or limited (30, 60, 90 days, for example) through endorsement

Business interruption insurance can cover:

• Lost revenue
• Rent or lease payments
• Relocation costs
• Employee wages
• Taxes
• Loan payments

Lost revenue

If your business can’t serve customers, make sales, or work with clients because of property damage, business interruption insurance will help compensate your business for lost revenue. This policy ensures that a temporary shutdown doesn’t become a permanent closure if you don’t have the means to keep your business open.

Example: Heavy rain causes serious water damage at a restaurant. A contractor tells the owner that renovation could take up to a year. While commercial property insurance covers the repairs, the owner can’t make money while the business is under construction. Business interruption insurance helps recoup the lost revenue.

Rent or lease payments

When a devastating event forces your business to close temporarily, you might still have to make rent or lease payments on your business property or equipment that you don’t own. Business interruption insurance covers the cost of rental and lease payments while your business isn’t making money.

Example: A fire damages an electronics store, making it impossible for the business to serve customers. While the business is closed for renovations, it still needs to make rental payments on the store. Business interruption insurance covers these costs until the shop reopens.

Relocation costs

If your business is forced to relocate due to a devastating event, business interruption insurance can help cover your moving costs. It can also pay for rent in the new location.

Example: An intruder breaks into a law firm, vandalizing the office and breaking several windows. The law firm is forced to relocate to a new office space until the windows and locks are replaced. Business interruption insurance pays for moving costs and rent at the new location.

Employee wages

To retain employees while your business is closed, you’ll need to continue to meet your payroll obligations. Business interruption insurance covers the cost of payroll while your business isn’t making revenue. Most business interruption policies cover the cost of up to one year of pay for each employee.

Example: A pipe bursts at an architecture firm, flooding the office and destroying walls, carpeting, and furnishings. The firm is forced to close for a month for renovation. Business interruption insurance helps the firm meet payroll obligations while the repairs are underway.

Taxes

Even if finances are tight during a temporary shutdown, you’ll still have to meet your quarterly or annual tax obligations. Business interruption insurance ensures that you have the funds to pay the taxes you owe, even if your business is no longer bringing in revenue.

Example: A fire destroys a contractor's trailer, forcing him to withdraw from bids and miss revenue expectations. At the end of the quarter, the business still needs to pay estimated taxes on the revenue it made before the fire. Business interruption insurance covers these costs so the contractor can use his money to get the business up and running again.

Loan payments

If your business has loans, you’ll still need to meet your loan obligations when your business isn’t making revenue.

Example: An accounting firm is forced to suspend business after a property inspection finds that its office is structurally unsound. While the business isn’t bringing in revenue, it still needs to make monthly payments on a small business loan. Business interruption insurance covers payments while the business is closed.

Conclusion

Business interruption insurance does not cover:

Property damage,Extra expenses,Contingent business interruptions,Losses unrelated to property insurance

Given above explanation saying Payroll expenses evaluated and settled in Business Income Interruption Policy or Insurance.