Question

Choose a business and describe examples of situations where the business might need business income insurance and consequential damage coverage.

Answer 1

Business Income Insurance is also known as Business Interruption insurance covers the consequential damages or losses incurred by a firm. These policies compensates the firm for the loss of revenue due to acatastrophic event regardless of the presence of physical damage to the property or equipment. It also covers the loss of income during a breach of contract dispute with a third party that led to stoppage of business.
Consequential Loss: It is an indirect loss resulting from an insured's inability to use business property or equipment. A business owner may purchase insurance to protect them against the secondary loss of property and equipment due to a natural disaster or accident. The consequential loss policy will compensate the owner for lost business income.
Let us understand the importance of this insurance by taking examples.
ABC is a textile company manufacturing fibres. It requires raw material in the form of cotton and machinery to extract fibres from the cotton. It also requires land and labour. To cover the direct loss occured due to fire or earthquake the owner purchased property or fire insurance. This insurance will only cover the damages to the raw materials or building only. It will not cover the lost income due to non functioning of the business due to the cessation of business. The loss of revenue is an indirect loss caused by the danmage to raw material or machinery etc. This loss is consequential to the damages occured to other items. If the firm don't have Business Income Insurance policy it will incur losses as the functioning of unit is stopped but the expenditures like salary payments, rent, loan repayments and interest payments has to be made irrespective of the functioning of the unit.

Hence, the Business Income Insurance and consequential damage cover is very important to protect a company from unforeseen and uncertain risks.