Companies developing new technologies and drugs anticipate rapid growth from those products. Strong growth, however, can render this years business income limits inadequate for a loss that continues into the following year.

For example, a company growing at a 25 percent annual rate that bases its business income limits of $5 million on this years projected income of $25 million and then suffers a loss on day 364 of the policy year, would find that those limits fell short of its actual needs by $1.25 million, or 25 percent.

To make sure a policy provides adequate protection, it is crucial to look not only at where a business might be a year from now but where it will be two years, and then establish limits based on that calculation. Besides growing organically, many companies are expanding rapidly by acquiring businesses to add to their product offerings or expertise. Growing companies also may add new manufacturing capabilities or move into new markets. An insurance policy for such a company needs to take into account the expected evolution of that business.

New products are the lifeblood of technology companies, and speed to market is crucial. Often, its not necessarily who has the best product, but who gets it to market first. When new products are delayed by a property loss, a company can suffer significant income losses by being beaten to the market by a rival. A business income policy that includes protection against such a new product delay can help offset the lost profit opportunity. This important feature recognizes that the income loss from a new product delay may take significant time to manifest itself. To address this, the insured is given up to 24 months to make a claim after a direct physical loss.

The competition to be the first to market means a heavy reliance on research and development. Technology companies may invest 30 percent or more of their profits into R&D. Those companies need a policy with a two-part definition for business incomethe traditional definition of net profit or loss, plus continuing expenses for the core business. They also need a separate definition for the R&D operations that includes continuing expenses and net profits, if any, but does not subtract losses from those operations.

For many technology companies, operational profits are a long way off. A standard business income policy would not respond to an income loss when, after calculating the amount of loss, it was determined that the companys losses exceeded its expenses.

For instance, a telecommunications switch manufacturer, that has both R&D and manufacturing operations, would not be eligible for any recovery under a standard business income policy if it was operating at a net loss of $3 million and incurring continuing expenses of $2 million.

Under the standard business income definition (net profit or loss plus continuing expenses), the recovery in this case would be a negative amount, $1 million. For this reason, policies targeting companies heavily engaged in research and development operations should always include insurance for continuing expenses and extraordinary expenses for R&D operations, regardless of whether the company is profitable.

Start-up and research firms often rely on milestone payments such as endowments or grants to further R&D operations. A property loss that prevents them from completing a milestone on time could cause a loss of funding.

Business income policies for such companies should protect the insured against the loss of benchmark payments that the insured was on track to earn, but for the property loss occurring.

Many technology companies find their fortunes tied to the decisions of government regulators. A pharmaceutical manufacturer must not only restore its property to a pre-loss state, it also must secure regulatory validation of the facility before it can resume production. A damaged facility may not start generating revenue for months after it has been restored, because the company must await regulatory approval before it can resume operations. A business income policy for such companies should include an indemnity period that continues beyond physical restoration of property to operational restoration.

Rapid growth, market changes, research and development, and reliance on government regulators are key issues when developing business income programs for technology companies, as are new product delays and reliance on outside financing. Other factors to consider include:

An extended or unlimited period of indemnity. Companies may face continuing losses for years after property is restored as they woo back customers that have switched to their rivals.

Unique property exposures. Because business income can only be triggered by a covered property loss, a tailored approach to unique technology industry property exposures, such as cell cultures, scientific animals, communication towers, R&D documentation, or prototypes, is critical.

Controlled environments. Technology firms may rely on controlled environments such as clean rooms, which present catastrophic business income loss potential even in the wake of relatively small property losses, like a small, smoky fire.

Extraordinary expenses. Because of competition, technology companies need the flexibility to incur extraordinary expenses to resume operations as quickly as possible. Disaster recovery plans and extra expense insurance limits should be developed accordingly.

Reliance on data and communications. Companies that are dependent on the Internet are susceptible to network failure or corruption of products and data by physical damage or malicious programming. Malicious programming costs businesses $1.5 trillion worldwide, according to estimates by PricewaterhouseCoopers. Insurance may help offset such losses.

Interdependencies. Companies not only outsource work, they also provide outsourced services. They need dependent business premises insurance (also known as contingent business interruption insurance) with a global coverage territory, in case of the loss of a key customer or supplier.

An off-the-shelf business income policy can spell disaster for a technology or life sciences company. Insurance that doesnt keep pace with the speed of these businesses can leave a company unable to recover from a loss. A policy tailored to a companys needs, combined with underwriting, claims and loss control representatives who truly understand the business, can not only protect it from a property loss, but also make sure it regains its competitive footing in todays unforgiving markets.

Steven R. Pozzi is managing director and senior vice president at Chubb & Son, as well as chief underwriting officer for Chubb's Commercial Insurance business unit. Mr. Pozzi, based in Whitehouse Station, N.J., can be reached at [email protected].

Reproduced from National Underwriter Edition, January 20, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.