I am often asked by my broker friends, if a business that operates at a loss needs business interruption coverage. My answer is a resounding, “maybe.” Each business in this situation needs to be evaluated separately.
First, determine the amount of continuing expenses that would be incurred under various loss scenarios. Make sure to consider whether or not continuing ordinary payroll and rent needs to be included in the continuing expenses.
Second, determine whether or not the sum of the continuing expenses exceeds the estimated amount of net operating loss estimated for the same period. The excess amount would be the potential recoverable value. If the continuing expenses do not exceed the projected loss then it is unlikely a business would recover any losses with this coverage.
Finally, evaluate the need for and appropriateness of pure extra expense coverage. Make sure this coverage is not limited to covering expenses “to the extent they minimize the business interruption loss otherwise payable.” The coverage needs to apply for the purpose of continuing to operate the business as normally as possible without regard for minimizing losses, which will allow the business to recover as quickly as possible.
Each business and situation is unique. The situation should be reviewed by management, their broker, and their loss valuation expert to determine the best possible coverage and contingency plan in the event of a loss.