Every car wash operation carries property insurance. It is often part of a Business Owner’s Policy (BOP) and may be included in a package plan. Property coverage can protect a wash operation from physical damage to its property from fire, windstorm, vandalism, and other similar events.
Sometimes, a wash cannot continue operations due to the damage, causing the wash’s revenue to decline or even come to a halt. It is this loss of income that often closes a business permanently after a property loss and is not typically covered by property insurance. Business income coverage can fill the gap and may provide protection against financial loss sustained while the wash is unable to operate.
Oftentimes, the expense of lost income is even greater than the expense of building or equipment repairs. Building or kiosk damage can greatly disrupt your business. During repairs, cars are going through at a much slower rate — or perhaps not at all.
Regular subscription customers move their business elsewhere while you rebuild, all while additional uncovered expenses are cropping up. These extra expenses may arise from the need to rent temporary equipment, extra shipping costs to expedite a special piece of replacement equipment, or retaining key employees during the outage.
While business income insurance can help you cover your lost income, insurance companies may not help cover lost income in the event of:
• Closures from inoperable power lines. Adding an endorsement to your policy can help cover this.
• Losses from closures caused by damages not covered under your insurance policy.
• Losses from partial closures.
• Income that isn’t documented.
It’s also important to note that business income insurance may not cover all your business’s utilities.
COVERAGE TYPES
There are several different types of business income coverage:
Actual Loss Sustained
If your wash is currently insured with a BOP, it is most likely that policy contains business income coverage on an “Actual Loss Sustained” (ALS) basis. It is the simplest and easiest method to understand. Actual loss sustained is defined as all actual costs and expenses incurred due to a claim as a result of direct physical loss, damage, or destruction to insured property by a covered peril.
This includes loss of profits as a result of the claim, including reduced income after reopening as the business ramps back up to normal operations or the loss of subscription customers.
It also includes coverage for fixed ongoing expenses such as rent or mortgage payments, utility bills, key staff salaries, property taxes, and other costs that aren’t reduced by virtue of the business being closed. There is still a limit in terms of time, with many ALS policies being limited to up to 12 months of indemnity. This can be increased to 18 or even 24 months, if needed, for an appropriate additional premium. Still, this time limit is also found in other business income policies, so given the absence of a dollar amount cap, Actual Loss Sustained is clearly the best form of business interruption coverage available to many commercial wash operations.
Monthly Limit
Monthly Limit is a simplified coverage. You select the insurance limit and the amount of time for it to be available. The insurance limit is split evenly over the time period selected. This coverage is usually available with a time period of three months, four months, and six months. On the policy, these are termed 1/3, 1/4, and 1/6 monthly limits, respectively. Payment is provided one month at a time and there is no carry over of unused limits from month to month. The longest available time period is six months.
Example of Monthly Limit: A small wash operation estimates that if they lost their building, they would be out of business for four months and would lose $10,000 of business income plus extra expenses per month. Thus, the total loss would be $40,000. The proper way to insure for Monthly Limit would be $40,000 at 1/4 monthly.
Maximum Period of Indemnity
Business Income Maximum Period of Indemnity is available for time periods up to 120 days (four months). Thus, this method is not good if the property repairs and business income cannot be restored by then. Coverage stops once business income is restored, even if less than 120 days. The main benefit of this method over Monthly Limit is it does not provide a per-month cap. Thus, if expenses are front loaded, this coverage is flexible enough to adjust.
Example of Maximum Period of Indemnity: A small wash operation estimates that if they lost their building, they would be out of business for four months and would lose $20,000 in month one, then $10,000 per month for the remaining three months. Thus, the total loss would be $50,000. The proper way to insure for Business Income Maximum Period of Indemnity would be $50,000.
MINIMIZE LOSS
Remember, as broad as business income coverage is, it is your obligation to minimize loss. This means you should still do everything you would do if the loss was not covered by insurance. Coverage is afforded for a loss of business income only during the reasonable time period required to rebuild, repair, or replace damaged property. In other words, it is in your and your insurer’s best interest to get your business back up and running as soon as possible.
Considering the many variables and asking the right questions will help you develop a business income policy that is a good fit for your business. Choosing a knowledgeable and experienced agent is critical to assist you in choosing the coverage that best suits your operations and keeps you protected so you can get back to running your wash.
Dan Tharp, CIC, RWCS, RCLS, is the vice president of business insurance lines for Pearl Insurance. Dan has been helping business owners protect their operations, customers, and employees for over 25 years. For questions regarding this article or any other insurance matter, he can be reached at (800) 447-4982 or dan.tharp@pearlinsurance.com. You can also visit pearlinsurance.com/automotive.