When a storm has passed, floodwaters have receded, or the flames on a burning building are put out, what remains is not just the physical damage, but the toll it's taken on impacted businesses.
While many businesses invest in property insurance in case of fire and other disasters, they're often missing a key piece of the puzzle: how to cover expenses and replace lost income in that period when money isn't coming in.
It's a challenge that haunts many businesses trying to recover from disaster, says Neal Zonfrelli, product manager for commercial property at Liberty Mutual Insurance. At least one in four businesses that close after unforeseeable events such as building fires and natural disasters never reopen again, according to the Institute for Business and Home Safety. Small businesses are disproportionately affected given that they typically have tighter margins and limited cash.
But there is an insurance solution to help with these challenges: business interruption insurance, which Zonfrelli says is all too often overlooked by businesses until it's too late.
Having this important coverage can be the difference between losing and saving your business.
Plan for interruptions.
Insurance is all about managing the unseen. While many businesses have property insurance in the event that their businesses get damaged and need repairs, that coverage does not replace the income lost when facilities are destroyed and operations are forced to close during reconstruction. That's where business interruption insurance comes in.
Take, for example, a restaurant that's been destroyed by a fire. While property insurance will cover the cost of repairing the building itself, it won't cover the loss of income or help pay ongoing business expenses in the wake of the disaster.
"Say a smaller business has two locations," says Zonfrelli. "If it loses the ability to do business in one location, it could lose half its income. The purpose of business interruption coverage is to put a business in the same financial position it would have been in had the event not occurred."
Understand your coverage.
While a destroyed property might seem like the most immediate crisis, owners quickly discover that there are other indirect consequences that threaten their business: how to keep paying the bills and employees when no money is coming in. Business interruption can be a key part of an overall insurance program, but only if small-business owners understand how it works and interacts with primary insurance.
Business interruption insurance protects small businesses from events for which they have primary insurance. For example, a small company purchases both property insurance and business interruption insurance. The property insurance covers losses as a result of fire, but losses as a result of flood are excluded. If a fire destroys the business’s location, the owner would be able to replace the building and equipment as well as lost income. However, if the business suffers damage as a result of a flood and is unable to operate, it would not be able to recoup lost income as these losses are not covered by the property policy.
For many of the businesses destroyed in Hurricane Sandy in 2012, having business interruption insurance and property insurance was not enough because they lacked flood insurance. If they had flood insurance, the business interruption insurance would have covered lost income and expenses during recovery. "In order for coverage to apply, the loss needs to be to property covered by your policy and as a result of an insured peril, such as fire or vandalism,” says Zonfrelli.
Another important aspect to understand about business interruption is your coverage limits, both in terms of the monetary value replaced and the time length covered. Coverage can replace the actual loss your business sustains (including lost income, payroll, and other expenses) or losses up to a specific dollar amount. In addition, you can elect to have your business interruption policy cover losses for three months, six months, or longer while your property is repaired.
Consider these questions.
Certain businesses are more prone to particular types of disaster given their line of work or location, but business interruption insurance is critical for all businesses regardless of industry. With a damaged facility often taking anywhere between nine months to a year to rebuild, according to Zonfrelli, considering what you'll do in the meantime is crucial.
Before disaster strikes, plan ahead by asking yourself these key questions:
- Is there another location that I can use if my current facility is destroyed?
- Will I be able to make up the loss in sales?
- Do I have additional inventory in case what I had was destroyed?
- How long can I keep paying the bills and my employees without generating an income?
Knowing the answers to these questions can help you determine the amount of coverage you need. Notes Zonfrelli, “On average, $100,000 of business interruption coverage can cost between $100 and $150 per year. A variety of factors affect the cost, such as a building’s construction, location, and occupancy.”
When business is out of your hands.
There are also other types of business interruption insurance for specific situations.
During the Boston Marathon bombings in 2013, businesses that were shut down by authorities could have benefitted from civil authority coverage, which protects you from losses as a result of being forced to shut down by local authorities.
Another type covers losses when disaster strikes a key supplier. Contingent business interruption offers protection should a catastrophe prevent a key vendor from providing the goods needed to keep your business running.
You don't need to figure it out on your own.
You’ve worked hard to build your business and having the right insurance to protect it is critical.
However, it can be difficult to know what types of coverage you need and how they work together. That's where an independent agent can be an invaluable resource. Having worked with other businesses in your industry and area that are similar in size or faced the kinds of catastrophes you might one day encounter, an independent agent knows what you should expect and helps make sure your business stays protected.