When natural disasters strike, it highlights the need for businesses to review their insurance policies. Your business could become a victim of Mother Nature, or any other catastrophe, without warning. In that event, you want insurance coverage that allows you to relocate or temporarily close so you can make the necessary repairs and still be provided with a source of income.
Commercial property insurance or business owner’s insurance doesn’t typically pay the costs of this type of disruption. Consider adding business interruption insurance that protects you from both a loss of income and any expenses you incur while your normal operations are suspended.
After a disaster, an estimated 25% of businesses are unable to reopen. Depending on the type of business and the owner’s financial stability, just one or two weeks of lost income can be enough to keep the doors closed.
There are two basic types of business interruption coverage:
- Named perils policies, which only cover specific occurrences that are listed in the policy, such as fire, water damage, and vandalism.
- All-Risk policies, which cover all disasters unless they are specifically excluded. Typically, an all-risk policy excludes damage from earthquakes and floods, although coverage can generally be added for an additional fee.
Business interruption insurance typically pays for income that is lost while operations are suspended. It also covers continuing expenses, including salaries, related payroll costs, and other costs required to restart a business. Depending on the policy, additional expenses can include:
- Relocation to a temporary building (or permanent relocation if necessary).
- Replacement of inventory, machinery and parts.
- Overtime wages to make up for lost production time.
- Advertising stating that your business is still operating.
Business interruption coverage that insures you against 100 percent of losses can be costly. More typically, policies cover 80 percent of losses while you shoulder the remaining 20%. Annual premiums average two percent of the income and expenses that a business wants covered.
Before something happens that could bring your business to a screeching halt, consult with your accountant and insurance agent to calculate the coverage you need. Come up with a worst-case scenario and ask “What if” questions to cover all the possibilities.
Of course, you don’t want to over insure. But you also don’t want to overlook critical possibilities, such as a prolonged loss of power or even multiple power outages. (See box at right).
Business interruption insurance is not sold as a separate policy but is added to a property insurance policy or included in a package policy, such as a business owner’s policy (BOP).
Secure business documents offsite so you can get your hands on them quickly if a disaster occurs. To file a claim, you need financial records to verify your loss of income.
Sobering fact: According to the Council on Foreign Relations, the terrorist attacks of 9/11 destroyed more than 13 million square feet of commercial property and damaged an additional 17 million square feet. Nearly 700 companies closed permanently.
Business interruption insurance could have helped some of them reopen. This type of insurance obviously won’t solve all your problems after a disaster, but it can improve the chances of survival.
The Impact of Power Outages
In the wake of hurricanes and tropical storms in recent years, many businesses experience a prolonged loss of power and, in some instances, recurring losses. Two examples of restaurant damages in Florida:
1. One restaurateur thought it was safe to restock his fresh food inventory, only to go though a second power outage. Not only that, but the unstable electricity supply burned out some expensive equipment. The owner did have a business insurance policy that covered income and property. The irony: He had a named peril policy that only covered certain disasters and loss of power wasn’t named.
2. A Florida restaurant chain reported the combined impact of several hurricanes significantly damaged several outlets. The company estimated it cost more than $600,000 in lost sales but business interruption and property insurance covered a significant portion of the losses. Many of the chain’s restaurants are located along Florida’s coasts where mandatory evacuations, curfews and loss of power forced closings for extended periods — mostly on weekends, when sales are strong.