Differentiating business overhead and business interruption insurance

At one of McGill & Hill Group’s recent seminars, someone asked about business overhead coverage. Some members of the audience were confused when the coverage was explained.

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At one of McGill & Hill Group’s recent seminars, someone asked about business overhead coverage. Some members of the audience were confused when I explained the coverage. A few of the doctors thought business overhead coverage was actually business interruption coverage. While there are some similarities, such as both are insurance policies owned by the business, the function of each is very different and it is essential for doctors to know the difference. 

Business overhead coverage

Business overhead is coverage on a doctor-owner or a key person in the practice. Unlike personal disability insurance, which cannot be deducted by an S corporation, business overhead coverage is to be paid to the business and is deductible by the corporation. Business overhead coverage serves one primary function—to provide the practice with cash flow if a doctor becomes sick or is injured. 

Business overhead coverage is different than personal disability coverage in more ways than deductibility. Most business overhead coverage, including the popular coverage for doctors through the American Academy of Orthodontists and the American Dental Association, has a 30-day elimination period. This means that, while disability insurance often doesn’t pay for three to six months after a disability event takes place, business overhead insurance can begin to pay at the 30-day period. This is particularly helpful when a doctor is injured in a way that does not threaten his or her career. 

Business overhead coverage is intended to allow the practice to offset incurred overhead expenses that cannot be eliminated, such as labor, rent, utilities, and other fixed expenses. It does not replace personal disability coverage—a doctor should have personal income protected in a separate stand-alone policy, as business overhead policies typically pay for only 12 to 24 months after an injury. 

Business interruption coverage

While the names are similar, business interruption coverage is very different from business overhead coverage. Business interruption coverage protects a doctor in the event of a hazard such as a fire, a storm that doesn’t require a particular type of rider, or from flooding due to busted fixtures. Flooding from rainfall is typically excluded and requires a stand-alone rider in order to be covered.

Rather than disability insurance on a particular person, business interruption protects the practice if there is damage to the facility. However, much like business overhead coverage, proof of overhead expenses incurred is required. But unlike business overhead coverage, a reasonable profit (typically defined through a formula in the policy to cap the total impact for the insurance company) is paid to the doctor, meaning that the policy is intended to provide income. Additionally, these premiums are deductible through the practice and are typically found as a rider within a business owner’s policy or as a separate stand-alone policy to complement a practice liability policy.

One thing that both of these policies have in common is that insurance companies do not like to pay these benefits. As a result, meticulous record keeping that can be easily communicated is essential to eliminating any risk that the policy does not pay. Additionally, it is vitally important to understand limitations on these policies. For instance, business overhead coverage often will not pay if an associate is available in the practice to offset any drop-in collections that would represent a negative net income. In other words, if an associate can maintain a positive net income for the practice, insurance companies often will not pay a benefit. Additionally, exclusions and riders in business interruption coverage can prevent doctors from being paid for certain kinds of natural disasters if a state of emergency is declared.

Ultimately, both types of insurance are worth having as long as your personal needs analysis reflects a potential risk that can be covered adequately and at a reasonable premium. As with any insurance, it is a very good idea to seek in-depth advice about your specific situation before adding or eliminating coverage.  

ANDREW TUCKER, JD, CFP, CPA, CIMA, and JOHN K. McGILL, JD, MBA, CPA, provide tax and business planning for dentists and specialists. The McGill Advisory newsletter is published through John K. McGill & Company Inc., an affiliate of the McGill & Hill Group LLC. It is your one-stop resource for tax and business planning, practice transitions, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com or call (877) 306-9780.

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