Imagine a kitchen fire damaging part of your restaurant.
The fire department gets it under control, and thankfully no one is seriously hurt. But now you have damaged cooking equipment, smoke damage, repairs to make and inspections to pass before you can reopen.
Physical damage may be the most visible problem, but it may not be the most expensive one. That is because while the restaurant is closed, the revenue can stop even though many of the bills do not.
That is where Business Income and Extra Expense coverage can become an important part of a restaurant’s property insurance program.
Property Coverage and Business Income Solve Different Problems
Commercial property insurance can help pay for covered damage to things such as the building, furniture, kitchen equipment and other business property. But replacing damaged property does not automatically replace the money the restaurant would have earned while its doors were closed.
Business Income coverage is designed to help replace lost income when a business must suspend operations because of covered property damage. It may also help with continuing expenses such as payroll, rent, mortgage payments and other financial obligations while the property is being repaired.
For a restaurant, that distinction can be huge. A fire may happen in minutes. Recovery may take weeks or months.
Think Beyond the Day of the Fire
Suppose the physical repairs take three months. During that time, the restaurant may still have expenses such as:
- Rent or mortgage payments
- Salaries or payroll the owner wants to retain
- Loan payments
- Utilities and other fixed expenses
- Taxes and other continuing obligations
- Costs associated with temporarily operating somewhere else
Meanwhile, normal customer revenue may be severely reduced or disappear entirely.
Travelers describes Business Income and Extra Expense coverage as helping replace income and covered expenses while property is being repaired or replaced after a fire or other covered loss.
That is why a restaurant’s property review should not only ask: “How much is the building and equipment worth?” But it should also ask: “How long could this business financially survive if we couldn’t serve customers?”
Extra Expense Can Matter Too
Sometimes the best way to reduce a business-income loss is to spend money. A restaurant might be able to:
- Rent temporary equipment
- Expedite replacement equipment
- Temporarily relocate certain operations
- Pay additional costs to speed up repairs
Depending on the policy, Extra Expense coverage may help with certain additional expenses incurred to avoid or minimize the shutdown. That can make the insurance conversation less about simply reimbursing a loss and more about getting the business operating again as quickly as practical.
Restaurant Recovery Can Take Longer Than Expected
Reopening after a restaurant fire may involve more than replacing a damaged stove. There can be:
- Smoke and water remediation
- Electrical repairs
- Hood and suppression-system work
- Equipment replacement
- Building inspections
- Health department requirements
- Contractor scheduling
- Permitting
- Supply delays
Those delays matter because Business Income coverage is generally tied to the policy’s terms regarding the covered loss and the period during which the business is being restored. That is why the amount and structure of Business Income coverage deserve attention before a loss happens.
How Much Business Income Coverage Is Enough?
There is no single answer for every restaurant. A useful review should consider things such as:
- Annual revenue
- Normal operating expenses
- Payroll
- Gross profit or expected income
- Seasonality
- How long repairs could realistically take
- How dependent the restaurant is on its specific location
- Whether temporary operations would be possible
- Whether there is any waiting period before coverage applies
- Whether the policy provides additional time after reopening if revenue takes time to recover
The Hartford notes that extended business income coverage may help when operations resume but revenue has not yet returned to normal. That last point can be especially relevant for restaurants. Reopening the doors does not necessarily mean every customer immediately returns.
A Restaurant Property Review Should Include More Than the Building
When we review restaurant insurance, some of the questions worth asking are:
- What would it cost to replace the damaged property?
- How much revenue could the business lose during a shutdown?
- How long might the restaurant realistically be closed?
- What continuing expenses would still need to be paid?
- Would extra expense coverage help the restaurant reopen sooner?
Because after a serious fire, the goal is not simply to rebuild the kitchen. The goal is to keep the business alive long enough to reopen it. If it has been a while since anyone reviewed the property and Business Income portion of your restaurant’s insurance program, that is something we can help take a closer look at.