Business Income Coverage for NonProfits

VU Faculty

Abstract We recently got this "Ask an Expert" question from a member: "What is the business Income exposure for a non-profit organization? We understand the extra expense component but are having trouble with the business income part." Keep reading to learn that business income is often a LOT more than just lost profit.

"What is the business Income exposure for a non-profit organization? We understand the extra expense component but are having trouble with the business income part."

Business income insurance covers profit and continuing expenses. Unless you’re Microsoft, it is very common for continuing expenses to be far more than lost profits, even with for-profit organizations. In addition, there is a need for extra expenses to expedite recovery. Below are some VU faculty observations.

HUGE. Use non-profit worksheets. Take a careful look at the impact a non-profit's inability to function will change their ability to receive local, state or federal funding. Separately, many non-profits occupy space funded under bond issues. The insurance requirements in the bond issue financing agreements are onerous. 

They have operating expenses that continue plus payroll. 

I think it really depends on what the source(s) of income is/are for the non-profit.

It depends on the source of funding for the non-profit. If they raise some of their funding themselves, then they have the same BI exposures as any "for profit" business.
 
For example, if they have fundraisers at their site/building, and it is damaged/destroyed, their ability to raise funds during the time of repairs ("period of suspension") is impaired. In cases where non-profit groups have dances, dinners, concerts, etc. at their site, this is a significant exposure.
 
Also, they may raise money based on selling things ("products"). If they have received a shipment of these items (cookies [think Girl Scouts], seeds, cookbooks, calendars, Christmas wrapping paper, etc.), and this property is destroyed, they would likely suffer a loss of income, especially for items tied to a specific time of year, like Christmas wrapping paper, since they may not be able to obtain another shipment in time to complete the sale/delivery. 

You may wish to begin by making a distinction between a non-profit and a charity. There are many non-profits that have income, significant income. Trade associations (such as the Big I), citizen associations (like AARP) are non-profits that take in a lot of money and file reports of their "income" every year. That income is used to provide services for members or others either in the current year or the future. If a non-profit had to cease its operations because of a loss they could lose income that could be replaced by business income coverage.

Its income is the donations. If the donations stop because of a loss there is coverage under BI.

If a non-profit organization lost revenue at a two week fundraising event because a fire damaged the building that housed the event, would the organization not want to receive payment for more than just its expenses associated with the event – i.e., the loss of income from that event? 

“Profits” for a non-profit, such as a charitable organization, can be measured as the collected dollars the organization can distribute to the recipients of the charitable gifts. If an event causes direct reductions in the amount of dollars collected for redistribution, and that event is a covered loss under the appropriate Property forms, then you have a Business Income loss. 

While a nonprofit may not have an profits, they certainly would have continuing expenses. That is covered by the Business Income form. Both the Business Income and Extra expense are crucial for any nonprofit that is dependent on their location (i.e., daycare, residence for developmentally disabled, etc.). Just because they do not have a profit does not exclude all of the coverage from both of these coverages. In addition, they may have an accumulated surplus that is for all practical purposes (except hopefully in the eyes of the IRS) a "profit."

The business income calculation is net profit plus continuing expenses. There is no net profit but there are continuing expenses during the recovery period. Additionally, any kind of “store” sales will be interrupted. Also, memberships, fundraisers, and income generating activities may be interrupted. A good starting point for a combined business income and extra expense limit is 15% - 20%  of revenues. It is imperative they have a contingency plan for their disaster recovery or they may not survive. 

“Profit” is revenue minus expenses. You can be a nonprofit and still have “profit” depending on what you do with the revenue. It’s possible that revenue can be substantial and expenses, via donations and volunteering, can be minimal. That creates insurable “profits” though legally these funds are diverted to other uses.

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