Do I Need Business Interruption Insurance?
Business interruption insurance can be as vital to your survival as a business as fire insurance. Most people would never consider opening a business without buying insurance to cover damage due to fire and windstorms. But too many small business owners fail to think about how they would manage if a fire or other disaster damaged their business premises so that they were temporarily unusable. Business interruption insurance coverage is not sold separately. It is added to a property insurance policy or included in a package policy.
A business that has to close down completely while the premises are being repaired may lose out to competitors. A quick resumption of business after a disaster is essential.
- Business interruption insurance compensates you for lost income if your company has to vacate the premises due to disaster-related damage that is covered under your property insurance policy, such as a fire. Business interruption insurance covers the revenue you would have earned, based on your financial records, had the disaster not occurred. The policy also covers operating expenses, like electricity, that continue even though business activities have come to a temporary halt.
- Make sure the policy limits are sufficient to cover your company for more than a few days. After a major disaster, it can take more time than many people anticipate to get the business back on track. There is generally a 48-hour waiting period before business interruption coverage kicks in.
- The price of the policy is related to the risk of a fire or other disaster damaging your premises. All other things being equal, the price would probably be higher for a restaurant than a real estate agency, for example, because of the greater risk of fire. Also, a real estate agency can more easily operate out of another location.
BUSINESS INTERRUPTION AND EXTENDED PERIOD OF INDEMNITY
If you run a business, there is no greater life support to your business’ survival than business interruption coverage. Having adequate coverage for the profits you would have earned had the disaster not occurred provides the support you need while rebuilding your business, a process that can take several months or longer. Business interruption coverage can also pay for continuing expenses, such as payroll, while your operations are down.
A business owner may choose coverage at a fixed dollar limit, or for the “actual loss sustained” which covers your loss from the date the coverage is triggered to the return to “normal business operations.” In addition, an “Extended Period of Indemnity” is an endorsement option that will extend your business interruption insurance claim beyond your return to “normal business operations.” This endorsement can be 30 days, 60 days, 90 days, and so on, and provides a cushion as you return to your pre-loss sales volume. Understanding your potential losses, and having an idea about how long it will take to regain a steady flow of business after rebuilding is key to properly insuring against your potential business interruption exposure.
Extra expense is defined as the necessary expense incurred by the insured during the period of restoration that it would not have been subjected to if there had been no physical loss to real or personal property caused by a covered peril. The intent of extra expense coverage is to have monies available to pay for reasonable expenses required to mitigate any further exposure to a business interruption insurance claim. When it comes to windstorm, businesses sometimes need to cover extraordinary costs associated with massive cleanup, e.g., rental equipment; relocating to a temporary location while they rebuild the space; distributing goods from a different warehouse with an associated increase in shipping costs; or paying overtime for employees. These extra costs fall under extra expense coverage. This is complementary to business interruption coverage, but some policies are written for business interruption without extra expense. If you don’t have extra expense coverage, consider talking with your broker about obtaining it.
CONTINGENT BUSINESS INTERRUPTION
Contingent business coverage is designed to cover an insured’s business income loss resulting from loss, damage, or destruction of property owned by others, including: direct “suppliers” of goods or services to the insured and/or direct “receivers” of goods or services manufactured or provided by the insured. For instance, if a supplier provides an important component for your manufacturing process, a severe insurance loss to that supplier could result in a shutdown of your manufacturing operations when that part becomes unavailable. This coverage can be purchased as an extension of your standard property insurance, and it only applies if the dependent property sustains a loss caused by a “causes of loss” stated in your policy.
There are three situations in which this coverage is most widely used:
- When the insured depends heavily on a single supplier or a few suppliers for materials or merchandise.
- When the insured depends heavily on one or a few major customers to purchase the bulk of the insured’s products.
- When the insured counts heavily on a neighboring business to help attract customers (known as a leader property).1
All policies have language for civil authority, but some policyholders do not understand how it can work in their favor. When a windstorm causes a massive mandatory evacuation and a coastal area is extensively damaged, residents and business owners are often not allowed to return for several days or weeks due to safety concerns. In these cases, civil authority can trigger coverage for business interruption for a specified limited period. Most civil authority language requires that the situation extend beyond 72 hours in order for the coverage to come into effect.
Leader Space is an endorsement that provides coverage to the insured for direct physical loss, damage, or destruction of the type insured by the insured’s property policy to property not owned or operated by the insured, located within the stated distance to insured’s property or business, and which attracts business to the insured. Examples would include a nearby amusement park, casino, mall, or destination retail store.
Because a windstorm can cause massive power failures or mechanical breakdowns, perishables need to be insured with spoilage coverage. Prescription drugs and other pharmaceuticals, fruits, meats, miscellaneous foods and beverages, etc., need to be protected in case of a failure to maintain required refrigeration, cooling or humidity levels. These are common losses resulting from windstorms, especially if there is not a generator or other backup equipment in immediate operation to help protect perishable inventories.
UTILITY SERVICE INTERRUPTION
Windstorms make businesses highly vulnerable to utility service interruption losses such as electricity, gas, water and telecommunications. Vulnerable businesses may be able to buy insurance coverage for losses resulting from this “service interruption” or “off-premises power failure.” The service interruption must result from a covered peril. Be aware that some policy language excludes coverage for damage to overhead power lines. When the power goes out, deductibles may vary from four hours up to 72 hours of service interruption before coverage kicks in. Review your coverage to assess whether you are adequately insured in case of a service interruption.
There has been a spike in the number and severity of hurricanes in recent years. In the aftermath of these storms, there have been too many occasions where businesses were not adequately covered due to the complexities of the loss and inadequacy of coverage. Understanding your full exposure and minimizing your risks can help you financially survive the next major hurricane that comes your way.