Disaster insurance can keep
your business humming
By Kara Stefan • Bankrate.com

As the devastation in Louisiana makes clear, tornado season is in full swing in much of the United States -- and tornadoes don't care whether they wreck homes or businesses. Is your business prepared?

Whether it's fire, lightning, explosion, earthquake, riot, vandalism, storm, flood, broken pipes, theft or your garden variety airplane dropping out of the sky, no business -- small or large -- is immune from disaster.

Best advice: be prepared
While you can't control if and when a disaster strikes, you can be prepared. A proactive plan with backup copies of company records and adequate property and business interruption insurance coverage will go a long way toward protecting your company.

Business owners may already have property insurance, but that pays just for damage repairs. What about the income lost if the company has to close down for a few days, a few weeks or even longer? Business interruption insurance, also known as business income coverage, protects the profits that an owner would have earned had there been no problem. The insurance is generally bought as a package with property insurance.

"Whatever perils you have covered under your commercial property insurance, the same conditions will also be covered under your business interruption policy," says Jeff Olmstead, production manager for small commercial business at Connecticut-based insurance provider The Hartford.

There are two types of business income coverage policies:

• Named Perils -- This less-popular option provides coverage only for specified perils, such as fire, windstorm or vandalism. If damage occurs due to any unnamed peril, the policy will not provide coverage.
• All-Risk Policy -- This option covers damages caused by all types of perils except those specifically excluded. Perils typically excluded are flood and earthquake coverage, but even these can be added on for an additional fee (flood coverage is underwritten by the federal flood insurance program). Olmstead says that 95 percent of the policies The Hartford sells are all-risk policies.

Business interruption coverage
Business interruption insurance provides for two financial loss scenarios: Loss of income due to interruption of operations, and additional expenses incurred as a result of efforts to continue business operations.

David Russell, assistant professor of insurance at Illinois State University and author of Insuring the Bottom Line and It's A Disaster (Silver Lake Publishing, 1996 and 1999), cites the example of a small manufacturer who requires three months to remodel after a fire. "In this situation," says Russell, "the owner faces more expenses than just the loss of profits from being closed that long."

The owner also may face paying for:

• Lease or mortgage payments and ongoing utilities.
• Relocation to a temporary building.
• Quick replacement of materials from vendors, who may charge higher prices and delivery charges.
• Overtime to keep up with production demands.
• Securing the products and/or services of competitors to help manufacture or supply orders.
• Advertising to confirm the business is still operational.
• Re-compiling business records, financial and legal documents lost as a result of the fire.

Business interruption insurance can also provide paychecks for key salaried employees that an owner does not wish to lose while the business is shut down.

Business interruption premiums
Unless you want to pay through the nose, you will have to shoulder some of the post-disaster costs. "It's inordinately expensive to get 100 percent coverage," Russell says. "The insurance company generally requires that the business owner assume responsibility for some part of the loss."

An 80/20 policy is typical, and generally provides for lower premiums while paying for 80 percent of the loss. The business owner picks up the tab on the other 20 percent.

"As a ballpark figure, the policy premium will cost you about 2 percent of the income and extra expenses that you insure," Russell says. "For example, if you anticipate needing $10,000 a month in operating expenses and profit losses, your premium would be $2,400 a year."

At The Hartford, small business premiums generally begin at $350 or $500 a year for property and liability policies that include business income coverage, with the average premium costing about $1,500. The small commercial business market "is one of the fastest growing segments at The Hartford, as well as throughout the country," Olmstead says.

"There's a trend in the insurance marketplace to bundle policies in order to provide more coverage at a lower cost," he says. "For example, our flagship commercial insurance policy, Spectrum, comprises property, business liability, employment practices liability, equipment breakdown and business income all as basic coverage."

Business interruption claims
One of the most important disaster preparations you can make is to secure your business documents offsite so you can get your hands on them quickly should a disaster occur. Financial records are necessary to verify the value of claims made. Indeed, it may be difficult for a new business with no history to establish its actual loss of income, but Olmstead advises, "Every enterprise should have business income coverage from Day One."

Even if profits cannot be reimbursed -- either because you don't have any or you cannot prove a history of making money -- you are still likely to incur additional expenses while trying to keep your business buoyant.

Kara Stefan is a freelance writer based in Virginia
To comment on this story, please e-mail the Bankrate.com editors

-- Posted: April 24, 2000