Contingent Business Income

Tom WallaceBusiness Income Insurance, Commercial Coverage

Let’s pose a what if situation that is very real in the specialty food and beverage business. Your great idea for a food or beverage product gets some traction but you have no desire or capital to begin a manufacturing business. What do you do? You find someone else to make your product to your specifications. Perhaps you even find another firm to package it for you as well. Maybe even ship it on your behalf.

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That leaves you with the time to continue to expand your product line, refine your existing product, market your products and spend some time selling it to retailers and distributors.  Sounds like a great way to get going without incurring large capital expenditures.

I Need a Certificate of Insurance?!

Then one day you get the call from a retailer that they will need to see a Certificate of Insurance as part of the contract negotiations. They also want to be named as an additional insured. No problem, you go looking for a source to provide a Liability policy so you can get that certificate and keep moving through the contract process.

Now, many insurance providers will take your needs on face value. You want liability, they give you liability. If you do not ask for it you most likely will not get it. That can be especially true for small businesses. This blog entry will give you a downside to just getting enough insurance to satisfy your retail account.

As was noted, you are essentially a wholesaler or marketer of your product. You rely on others for all other services. What if your primary manufacturing facility,that does a wonderful job at a great price, has a fire and will be unable to produce your product for six months!  Now what? Obviously you start looking for another manufacturer and fast. What if the pickings are few and what if the cost to produce your product on a short term basis costs you more money? Raising prices is not always easy especially in today’s world. What happens if you cannot fill your current orders while the search is continuing? Sounds like you might be losing money.

Contingent Business Income and Extra Expense

Did you know you could have bought insurance for this exposure? Trouble is you will need property insurance of some kind in order to get it. This coverage is called Contingent Business Income and Extra Expense. Insuring a loss of net income, continuing expenses and an increase in expenses due to covered property loss is known as Business Income and Extra Expense. The contingent coverage noted is an endorsement to this coverage. Business income coverage is essentially a disability policy for your business and the contingent endorsement extends coverage to your business for losses incurred by key contributors to your income.

One of the key items to this coverage is your property coverage would have had to respond to the same loss as your manufacturer. For example, if fire was the cause of loss your policy could be triggered if you had fire as a cause of loss in your policy as well. Another example would be earthquake. If your manufacturer suffered a loss due to earthquake and your policy did not respond to earthquake the contingent business income endorsement would not be triggered. This exposure came to light in the recent Japanese earthquakes. Many contingent business income endorsements were not covered because earthquake is not a common coverage unless  you live in an earthquake prone area.

What Insurance Coverage Do I Need?

Many specialty food and beverage businesses get very focused on liability coverage but overlook property insurance needs.  I am guessing this is because specialty food and beverage owners feel the values are not high enough to warrant coverage, someone else is providing the coverage or another overhead expense just cannot be taken on.  All valid points but what is left out is no coverage for the loss of your Business income.  Sometimes packaging the coverage makes more sense than buying one line at a time. You may also find your recall expense coverage options are broader if you have some type of property coverage as well.

As always we are an independent insurance agency who focuses our attention on the specialty food and beverage industry. We read trade journals, subscribe to many electronic newsletters, attend the festivals and farmers markets and even took a trip this summer to the Fancy Food Show in Washington, D.C. Does your agent do those things?

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Thanks for reading,