Business Income Coverage Form: What it is, How it Works, Example

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

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What Is Business Income Coverage Form?

Business income coverage (BIC) form is a type of property insurance policy, which covers a company's loss of income due to a slowdown or temporary suspension of normal operations, which stem from damage to its physical property.

Coverage typically includes the loss of income but can exclude some ordinary operating expenses, such as utilities. Usually, coverage applies during the time required to repair or replace damaged property. However, for additional premiums, the term could be extended to cover a specified number of days after the completion of repairs.

Key Takeaways

• Business income coverage (BIC) form is insurance that covers the loss of income due to damage to a company's physical property.
• ​​​​​​​While property insurance covers physical damage, business income coverage pays for lost revenue during the restoration period.
• However, the restoration period typically has a time limit, which is usually 30 days–although it can be extended for an additional cost.

Understanding Business Income Coverage Form

Commercial property insurance covers physical property damage to a business as a result of an event, such as a fire. Property insurance also covers damage to merchandise and equipment in the location of the business, whether the business owner owns or rents the location.

If the damage is extensive, it may take time for the business to get back to operational performance. During this waiting period, while the physical business is being restored, revenue can decline significantly or stop altogether.

​​​​​​​Business income coverage provides insurance for the loss of business income due to damage to physical property during a covered event. While the business is being repaired, called the restoration period, business income coverage will help pay for additional expenses and lost income. However, the restoration period typically has a time limit, which is usually 30 days–although it can be extended for an additional cost. Business income coverage (BIC) is also called business interruption coverage.

Although it can vary, depending on the insurance carrier, there are standard coverages within business income coverage. However, in many cases, a rider can be added, which provides extended coverage but would likely cost an additional premium.

Business Income Coverage

Below are some of the most common costs and expenses covered under BIC:

• Mortgage and rent payments
• Employee wages and payroll
• Loss of net income or profit for the period of restoration
• Loan payments
• Tax payments

Business Income Coverage Exclusions

As with most insurance, the policy will not insure against acts of war, government seizure, and nuclear hazards. Other events that are typically excluded from business income coverage might include:

• Extreme weather events, such as earthquakes, flood, and mudslides since these events typically fall under a separate policy
• Certain operating expenses, such as marketing, insurance, and funds allocated for research and development
• Epidemics, diseases, and viruses

The cost of business income coverage can vary depending on the industry involved and the location of the business. A business location that's near the coast and more prone to negative events, such as hurricanes would likely mean higher premiums for the policy. A restaurant, for example, might have to pay higher premiums since the industry is more prone to fires than most businesses.

Determining Coverage

The insurance agent who sells the business income coverage policy must help the owner determine the amount of business income to cover. Also, policies may include an extra expense as a coverage category. An additional expense is any other expenditure the business incurs during the period of property damage, which would hasten a return to regular business activity. However, to be covered, an extra expense must not cost more than the amount of business income it brings in.

The process of determining the details of the business income coverage policy requires the owner to break down elements of the business income and outlays as well as create contingency plans to determine the proper and allowable amount of coverage. An owner, for example, might analyze past earnings and calculate forecasts for profits in determining the amount of coverage. This process is critical because if the business income coverage policy doesn't cover all of the costs, the business owner would have to pay for any remaining costs out of pocket.

Special Considerations: A Second Location

Business income coverage covers the loss of income as a result of an event, but that coverage stops if revenue resumes. If the company can get up and running from another location to begin doing business, even before the property is repaired, the business income coverage will cease and only cover the time the company could not operate. However, some policies may allow a specific rider added to the coverage, which would allow additional protection.

Many insurance companies offer extended business income coverage, which helps cover the loss of revenue if the revenue hasn't returned to normal operations. Even after the restoration has been completed, it can take time for a company to return to normal business operations.

The extended business income coverage would cover the time following the completion of the restoration and when the business income coverage has elapsed. This added coverage helps protect the owner from losses in revenue due to the business returning to profitability more slowly than anticipated. Both the time frame and amount of coverage would be stipulated in the extended business income coverage policy.

Example of Business Income Coverage Form

A company called Mary's outfits manufacturers clothing outfits and sells the items from her one-store location. Unfortunately, extensive damage to Mary's store occurred as a result of a fire, which damaged her inventory, equipment used to make the clothing, as well as other damages to the building itself. As a result, it will take approximately four months to complete the restoration of the business.

Mary has property insurance coverage, business income coverage, and extended business income coverage for 30 days after the restoration. Mary also added extra expense coverage to help pay for the cost of making her product at another location.

It turns out that Mary was able to make the outfits at another location, and the restoration was completed in three months. However, Mary's revenue didn't return to normal once the restoration had been completed.

Below is how Mary's coverage played out:

• The property insurance covered the restoration of the physical damage.
• Business income coverage covered losses of profits and revenue during the restoration period of three months.
• The extra expense coverage covered the additional costs of making the clothing at another location.
• The extended business income coverage paid Mary for losses in revenue for 30 days after the restoration had been completed and her business had resumed operations.