Disaster insurance can keep
your business humming
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.
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
There are two types of business income coverage
- 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
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
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
- 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.
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."
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
-- Posted: April 24, 2000