A kitchen fire starts after closing at a family restaurant off Main Street in Norman. The fire department has it out in twenty minutes, but smoke and water have ruined the dining room, the hood system and half the equipment. The building damage comes to about $90,000. Repairs, permits and a back-ordered hood will keep the doors closed for three months. The bigger number is usually the one owners don’t see coming: the income the business doesn’t earn while it’s closed, plus the bills that keep arriving anyway. That’s the job of business income coverage. It’s designed to replace lost net income and pay continuing expenses while a covered loss keeps the business shut. Whether it carries a business through all three months depends on a few lines in the policy.
Why can lost income cost more than the building?
Because the building is a one-time repair bill and the closure is a monthly one. Here’s an illustration using round numbers. It isn’t anyone’s actual books.
The restaurant normally takes in $70,000 a month. While it’s closed, some costs stop, like food purchases and a share of hourly payroll. Plenty of others keep going:
- Rent or mortgage: $7,000
- Equipment and building loan payments: $3,500
- Payroll for the managers and key cooks the owner wants to keep: $14,000
- Insurance, utilities that stay on, software and other fixed bills: $3,500
- The owner’s normal net profit: $8,000
That’s about $36,000 a month, or roughly $108,000 over three months. That’s more than the $90,000 of fire damage. And it doesn’t count the customers who found somewhere else to eat in the meantime.
What does business income coverage actually pay?
Most business income forms are built around two things:
- Net income the business would have earned if the loss hadn’t happened
- Continuing normal operating expenses, including payroll, during the shutdown
Many forms also pay extra expense, meaning reasonable costs to cut the shutdown short, such as renting temporary space or expediting equipment. The coverage is usually triggered by direct physical damage from a covered cause, like fire or wind, at the business’s own premises.
Where do the three months fall short?
These are the places the illustration above can run into trouble:
- The waiting period. Many forms don’t start paying income until a set number of hours after the loss, often 72. The first few days are on the business.
- The period of restoration. Coverage typically runs for the time it should reasonably take to repair, not the time it actually takes. Some forms also cap that time.
- The limit. If the business income limit was set when revenue was half what it is today, it may run out before the doors reopen.
- Reopening isn’t recovery. Customers don’t all come back on day one. An extended period of indemnity provision is what some businesses add to cover the ramp-up weeks after reopening.
Policies vary on every one of these more than people expect. Your policy is the thing that answers how long and how much.
Why three months is often optimistic around here
A single kitchen fire is one thing. After a regional event, every roofer, electrician, glass company and permit office in the county is booked at once. Cleveland County has had 20 major federal disaster declarations since 2000, covering tornadoes, ice storms, wildfires and the pandemic, and 111 recorded tornadoes since 1950. When the whole area is rebuilding, a three-month estimate can turn into six. We looked at what that meant for commercial buildings after May 2013 in commercial property lessons from Moore.
There’s also a gap people don’t expect. If the building is fine but the power is out, or the street is closed by authorities, or a key supplier is damaged, many standard forms respond only in limited ways, through provisions like civil authority or utility service. Some require an endorsement. That’s worth knowing before an ice storm, not during one.
A quick test you can run this week
Add up what the business would need each month to stay whole while closed: net profit plus the bills that wouldn’t stop. Multiply by the number of months a realistic rebuild would take. Then compare that number with the business income limit on your policy. If the two numbers aren’t close, that’s a conversation worth having.
Let’s run the numbers together
If you’re not sure your business income limit still matches your business, take a look at our commercial property options, or call (405) 701-5368. We work with business owners across Norman and the OKC metro, and we’re happy to sit down with your numbers and your policy side by side.
This article is general information about how coverage typically works, not advice about your specific situation. No two insurance contracts are the same, and your policy is the only thing that says what you have. If you’d like someone to read it with you, that’s what we’re here for.
