Disaster insurance can keep your business humming
it's fire, lightning, explosion, earthquake, riot, vandalism, storm,
flood, broken pipes or theft, 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
of 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).
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, author of Insuring
the Bottom Line and It's
A Disaster, 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."
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