What it means
When a fire, flood or similar event closes a factory or shop, the repair bills are only part of the loss. The business also stops earning sales while still having to pay rent, salaries and loan instalments.
Use and occupancy cover is designed to fill that gap, so the business can survive until it reopens. The policy normally pays two things: the net profit the business would have earned and the continuing fixed costs that must still be paid.
Costs that stop during the closure, such as raw materials, are not included. Some policies also pay extra expenses needed to speed up reopening, such as renting temporary premises.
Cover is usually linked to physical damage by an insured event. If the building is damaged by a covered cause, the policy pays during the period of restoration, which runs from the date of loss until the property could reasonably be repaired and operations resumed.
A waiting period of 48 or 72 hours often applies before payments start. Setting the right limit is where many businesses go wrong.
They estimate their annual profit too low or forget how long it would take to rebuild and replace specialised equipment. A policy limit that looks adequate on paper may fall short if the restoration takes a year instead of three months.
The term is also used in another sense in building regulation, where a use and occupancy certificate confirms that a building is fit to be used for its intended purpose. That meaning is unrelated to insurance, so check the context.
In finance and insurance conversations, U&O normally means the income protection cover. Underwriters ask for detailed financial records when they set the limit.
They look at past profit, the expected growth in sales and the time needed to replace key machinery or reopen a site. Businesses that supply a single large customer may also need contingent cover, which pays if damage to the customer's or supplier's property stops trade.
In practice
Real-world examples.
Example
A restaurant is closed for four months after a kitchen fire. Its use and occupancy policy covers lost profit and keeps paying the staff and rent, so the owner does not lose the business while the repairs are done. The owner provided her last two years of accounts to the insurer, which used them to calculate the monthly loss it paid.
Example
A small manufacturer loses its only specialised machine to a fire and needs six months to replace it. The insurer pays continuing costs and lost profit for that period, but the manufacturer discovers its limit only covers three months. After this experience the owner asks his broker to extend the restoration period to 12 months at the next renewal.
Example
A boutique hotel is closed by storm damage during the busy season. The insurer pays the lost profit and fixed costs based on figures from the previous peak season. The hotel's manager had agreed a seasonal rating with the insurer beforehand, which avoided an argument over how to value the lost summer income.
Formula
Calculation
Claim = (net profit that would have been earned + continuing fixed expenses) x months of restoration
Suppose a bakery would have earned $40,000 of net profit each month and has continuing fixed expenses of $60,000 a month, such as rent, salaries and loan payments. A fire closes it for three months. The monthly loss covered is 40,000 + 60,000 = $100,000, so the claim is 100,000 x 3 = $300,000, subject to the policy limit and any waiting period.Case study
Seen in the real world.
Oakridge Printing is an illustrative, fictional commercial printer with annual sales of $3,600,000. The owner buys property insurance for the building and equipment but has never reviewed her income protection cover.
After a flood closes the plant for five months, her insurer calculates the loss as lost profit of $30,000 and fixed costs of $50,000 a month. The total is $400,000 over five months, but her policy limit is $300,000, leaving a $100,000 gap.
In this illustrative story the owner uses savings to bridge the shortfall and then increases the limit and the restoration period on renewal. She now reviews the cover every year alongside her budget. She also asks her broker to model a worst case in which the plant takes ten months to reopen.
Watch out
Common mistakes.
- Assuming the policy pays out whenever sales fall, when it only responds to income loss caused by a covered physical event.
- Setting the limit based on one or two months of profit, when restoring a damaged site can take much longer.
- Confusing the insurance with a use and occupancy certificate, which is a building approval and has nothing to do with income protection.
Questions
People also ask.
Is use and occupancy the same as business interruption insurance?
In practice yes, since business interruption or business income cover is the modern name for the same type of protection.
What costs does it cover?
It typically covers lost net profit and continuing fixed expenses, and some policies add extra expenses to reopen faster.
Does it cover a pandemic closure?
That depends on the wording, and many policies require physical damage to property before they pay.
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