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Disability Business Overhead Expense Insurance Coverage

Disability business overhead expense insurance is typically purchased by a sole proprietor or small business owner in conjunction with a disability income insurance policy.  The disability income insurance policy is designed to replace some of the salary or wages lost by the policyholder as a result of a disabling illness or accident.  In the case of a sole proprietor or small business owner, however, disability has other consequences.  Most businesses cannot be closed down immediately.  Client or patients may need to be referred on or transferred.  Utilities, telephone, internet and other similar services may need to be terminated and the accounts closed.  Termination of an office lease may need to be negotiated.  Outstanding orders may need to be paid and goods or supplies received.  Existing supplies and stock may need to be returned or sold.  Administrative and support staff will likely need to continue throughout this process to see that these varies winding-down tasks are accomplished.  In short, all the ordinary expenses of running a business will need to continue for some period of time in order to ensure an orderly closure of operations.  However, if the disabled small business owner was the principal source of income – through the provision of his or her own direct services (such as a lawyer, doctor, chiropractor, podiatrist, consultant, photographer, dentist, artist, accountant, or other personal service provider) – the disability eliminates the principal source of money to pay these continuing expenses.  The whole purpose of the small business owner’s disability income insurance policy would be undermined, as the disabled proprietor would be required to use the disability benefits (and perhaps savings as well) to pay these business expenses.  

Disability business overhead expense insurance was designed to solve this problem.  As with a disability income insurance policy, the trigger for benefits is disability.  Unlike disability income insurance policies, which typically have a fixed benefit amount, disability business overhead expense insurance operates more like a health insurance policy, paying benefits only for expenses actually incurred.  However, such benefits are usually limited, both in terms of a maximum monthly benefit amount and in terms of the payment period.  Unlike disability income insurance policies, which will usually pay benefits until age 65 (and in certain cases beyond), the disability business overhead expense policy will usually pay benefits for a relatively short duration, such as 2 years, and/or will set a maximum total benefit payable under the policy.  In either case, the understanding is that the disability business overhead expense insurance is designed as a short term bridging solution – that is, to get the business owner through the time required to sell, transfer, wind down, or otherwise close the business.  Like disability income insurance policies, privately purchased disability business overhead expense insurance policies have the same procedural distinctions and advantages relative to employer ERISA group long term disability plans (see Special Rules Governing Privately Purchased Individual Disability Income Policies).  Also, as with disability income insurance policies, the disability business overhead expense insurance policy may present special challenges for the claimant to demonstrate disability because of issues – such as documenting an earnings loss, engaging in multiple or hybrid occupations, and remaining at work by modifying occupational duties – that are more complicated in the context of business ownership (see Disability Income Insurance Policy Issues).

Disability business overhead expense insurance claims may give rise to specific disputes that are different from those involved in other sorts of disability insurance.  A common point of disagreement between claimant and insurer is over what sorts of business expenses are actually covered by the policy.  The policy definition of covered expenses may be unclear, for example, as to whether coverage will be provided for such costs as hiring a replacement service provider (that is, a substitute professional to stand in for the business owner) to provide services to clients or patients for a period of time.  Claimant and insurer sometimes also disagree over when benefits end.  While the disability business overhead expense policy may specify a maximum duration, it may also identify other triggering events (such as the “closure” of the business) for the termination of benefits.  The insurer may assert that closure occurred when the business owner stopped working, or the last client was serviced, whereas the claimant may believe that expenses are covered until the business sale has been fully consummated. 

As with other types of disability insurance, it is generally best to review your business overhead expense policy with our disability insurance attorneys as soon as you become aware of a potentially-disabling medical condition.  It is better to have a good understanding of how your disability business overhead expense benefits will operate well before you experience significant symptoms and the need to stop working becomes imminent.  Consulting
with our disability lawyers can provide this understanding and better prepare you in the event your disabling illness ultimately requires the closure of your small business or sole proprietorship operations.

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