Business income is the most technical corner of commercial insurance, and it's where good brokers can become dangerous.

I'll say it again, this is an area where if you become very proficient, you can crush your competition. Buyers are constantly asking for help here, and frankly the broker community and carriers have underperformed. When I was broking, getting real help from an underwriter on a business income evaluation was about as common as a quiet January 1 renewal season.

It's hard because it’s one of the few areas in insurance with no definitive answer. There's no "if this, then that." You have to be comfortable sitting in a meeting where you don't know the outcome, and you have to understand how a business actually operates and how to read financials. My best client relationships were built in hour-long meetings going line by line through interim financials, talking through business income. Not glamorous. But those are the meetings that make customers stay.

My recent business income episodes kicked up a wave of follow-up questions (apparently I'm not the only one who finds this stuff fun). Four topics kept coming up.

Here are my answers, and a few cheat sheets for you too.

Extra expense is typically wrapped into your business income number, and the form is "business income and extra expense."

But it's not the same thing as business income, and it behaves differently in one critical way, which is that extra expense has no deductible. Business income carries a waiting period of 24, 48, 72, 120 hours from the moment of a qualified loss. Extra expense starts right away, because it would be counterintuitive for the carrier to make you wait. They want you spending money to stop the bleeding.

I always called it the slush fund, and I always told clients to buffer the number up and gross it up by 20%. Then there are the expenses nobody thinks about. After a fire, the fire marshal can take a month and a half before telling you whether the building can even be demolished, and the whole time you're paying for a security fence around it, maybe $25,000 a month. Temporary space, because most businesses need a home base and you're renting at a disadvantage. Expediting equipment, because getting anything faster costs more, and the carrier will pay for it if it reduces the overall loss. Temporary labor and overtime, which is different from payroll. Paying a third party to make your product so you don't lose the customer relationship. Your salespeople schmoozing customers so they don't walk while you're rebuilding. Come up with as many as you can, then gross it up.

There are two special cases worth knowing. You can buy an extra-expense-only policy with no business income at all. Hospitals do this because they have zero tolerance for downtime and just need the expense engine. And for startups operating at a net loss, it's cleaner. It's hard to justify a business income number when you're projecting negative $10 million, so skip the coinsurance and deductible baggage and take the EE-only form. Sometimes those forms also drop coinsurance and the period-of-restoration requirement entirely, which makes the slush fund more usable.

Start with profit, then work through continuing expenses line by line out of the client's accounting system.

The biggest decision is payroll, and I always encouraged clients to include it. If your facility burns down and ordinary payroll isn't in the calculation, you're paying workers out of pocket while producing zero revenue, or you're rehiring an entire workforce six months later after they've all found new jobs. Good luck with that.

Here are the mechanics. Executive and management payroll is automatically covered in business income. Ordinary payroll, your production workforce, is not, unless you elect it. You can exclude it entirely (never recommended), or buy 30, 60, or 90 days of ordinary payroll by endorsement, which also gets you away from potential coinsurance issues. I pushed for the full annual inclusion. There's a sausage manufacturer in Wisconsin that got glowing local press after a fire, with workers volunteering, cleaning up roadsides, and everyone praising their generosity. I always giggled, because it wasn't benevolence footing that bill. It was the insurance company, through a properly built business income form.

Beyond payroll, there are the forgotten ones, like health insurance, debt service and interest on lines of credit, property taxes, and rent, especially the common setup where the owner holds the building in a separate entity and leases it back to the operating company. The smart move is to make that lease say rent continues for 12 months even after a fire, so the owner keeps getting paid and the operating entity gets reimbursed through the abatement coverage.

And then there's the tricky one, depreciation. It's a non-cash expense and often a top-five line item, especially for manufacturers with hard assets. You'll stare at a seven-digit number and wonder whether it belongs. Typically, take it out, since it's not cash, unless there's a specific reason or policy modification. But don't get to depreciation unprepared.

Know your answer before the meeting.

The monthly limitation is an old-school way to dodge coinsurance while buying less limit.

Say you have $1.2 million on a one-third monthly limitation, which means you can only draw $400,000 per month. I don't like it. Your need is front-loaded, and you need more money in month one than month six. A monthly limitation handcuffs you exactly when you need the cash most.

There are three ways to handle coinsurance. Some clients told me they'd never need 12 months, saying "if I need 12 months of limit, I won't have a business to come back to." Fine. Start with the 12-month number, then reduce via coinsurance, going to 75% if you think you're back in 9 months, or 50% for 6 months. A monthly limitation technically eliminates coinsurance, but at the wrong price. The real answer is to talk to your underwriter and get agreed value. Agreed value kills the coinsurance risk entirely, and business income is the last place you want coinsurance, because it's hard enough to know once a year what you'd actually need at the time of loss.

Extended business income, or extended period of indemnity, gets overlooked because it's an "oh yeah" coverage. The period of restoration runs from the loss until you're operating at pre-loss capacity. Extended BI lets you keep drawing on business income after you're rebuilt, to plug income gaps. Your third-largest customer walked away during the rebuild and found another supplier? That lost net income while you earn them back is collectible, even though you're operational again.

Two catches. First, you need limit left. If you went too narrow on BI, extra expense, and continuing expenses and burned through everything in nine months, there's nothing to draw on two years later. Second, get at least 365 days of extended BI from the end of the period of restoration. Some carriers will even give you unlimited extended BI, so you can collect until the limit's gone, as long as you can demonstrate the income loss. But again, budget a cushion, the same way you do with extra expense. Most people underinsure business income at the time of a total loss, and this coverage is worthless without leftover limit.

Business income is complex, but it's where the relationship gets built. If you do it right by sitting with the financials, buffering the slush fund, making the payroll call, killing the coinsurance risk, and leaving room for the extended period, the buyer stops seeing you as a vendor and starts seeing you as the person who understands their operation.

Be dangerous. Become a BA at BI.

This is a guest post by Derek Laczniak, CIC. You can connect with Derek on LinkedIn here.

If you’d like to guest post for Max Revenue please shoot us an email at [email protected]