Businesses that plan for disasters are more likely to continue to operate and flourish than those who simply leave things to chance, according to the Insurance Information Institute (I.I.I.).
With an above average hurricane season expected this year and record level tornadoes already this spring, now is the time for businesses to develop a catastrophe plan that includes a thorough review of insurance coverages.
“Business insurance provides financial protection for property damaged or destroyed by a hurricane or other disaster listed in a policy. In addition to coverage for the business’s structure, it can also cover office furnishings, inventory, raw materials, machinery, computers and other items vital to business operations,” said Loretta Worters, vice president, I.I.I. “Property insurance does more than protect physical assets; it may also provide operating funds during a period when a businessowner is trying to get the business back on track after a catastrophic loss like a hurricane.”
At least 30 percent of small businesses have been closed 24-hours or longer in the last three years due to a natural disaster, according to the National Federation of Independent Businesses. The most destructive individual events are tornados, hurricanes and typhoons.
Basic Business Insurance to Consider
Small and mid-sized businesses typically purchase a package policy known as a businessowners policy (BOP). BOPs are created for businesses that generally face the same kind and degree of risk. The typical BOP includes:
- Property insurance for buildings and contents owned by the company. There are two different forms, standard and special; the latter provides more comprehensive coverage. Depending on the insurer, this comprehensive coverage can be included in the overall policy or may be purchased at an added cost. Types of coverages available include: undamaged stock protection, which covers undamaged items that can no longer be marketed because of damage to related goods; data or records protection, which covers loss of data or company records that were destroyed and will take time and cost money to reproduce; computer virus protection, which covers the loss of data and business through computer viruses; off-premises property protection, which extends your property coverage to include protection at other locations such as trade shows, fairs, installations, exhibits or any place where your company is doing business with company-owned equipment; and intangible coverage, which includes patents, copyrights and trademarks.
- Business interruption insurance, also known as business income insurance (BI), covers the loss of income resulting from a hurricane or other disaster that disrupts business operations during a period of restoration. Business income is net income (net profit or loss before income taxes) that would have been earned plus continuing normal (necessary) operating expenses incurred, including payroll. So in essence, BI pays continuing business expenses as well as profits. While the standard BI policy limits the period of restoration to 30 days, this period can be extended to 360 days with an endorsement.BI coverage can include extra expense insurance, which covers all necessary expenses incurred during the restoration period. For example, the costs incurred from leasing a new location in which to conduct business while repairs are being made to the permanent location. Reimbursement under business interruption insurance is usually triggered by physical damage to the property where the business is conducted. Usually, there is a deductible either in a flat dollar amount or as a waiting time. Waiting time deductibles are at least 24 hours, meaning that payments do not begin until the business has been disrupted for one day.Coverage may also be available for loss of business income and extra expenses sustained as a result of government denial of access to your property, due to a covered loss at a location not owned by you. There may be a two- or three-day waiting period before coverage begins, and coverage generally only applies for a few weeks.
- Liability protection covers the company’s legal responsibility for the harm it may cause to others as a result of things that you and your employees do, or fail to do, in the course of business operations that may cause bodily injury, and property damage due to defective products, faulty installations and errors in services provided.
BOPs do NOT cover professional liability, commercial auto insurance, workers compensation or health and disability insurance. Separate insurance policies are needed to cover professional services, vehicles and employees. Larger companies often purchase a commercial package policy or customize their policies to meet the special risks they face.
Other Coverages to Consider
- Flood insurance is usually not covered under a standard businessowners policy. Make sure to purchase flood insurance for both the structure and the contents of the building. Flood insurance can be purchased through the federal government’s National Flood Insurance Program (NFIP) as well as through some private insurance companies. Excess flood protection, which provides coverage over and above the limits provided by the NFIP, is also available from some insurers. Keep in mind that there is a 30-day waiting period before flood insurance goes into effect.
- Contingent business interruption insurance (CBI) and contingent extra expense coverage reimburse lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. The contingent property may be specifically named, or the coverage may extend to all customers and suppliers. CBI insurance, also known as contingent business income insurance or dependent properties insurance, is usually triggered by physical damage to customers’ or suppliers’ property or to property on which the insured company depends to attract customers. The type of physical damage must be the same as that insured under the controlling policy.
- Additional property coverage provides for items such as fences, signage or awnings at the insured location. Coverage limits vary by type of additional property. Since these items are particularly vulnerable to high wind, it is an important coverage to have during hurricane season.
- Ordinance or Law provides coverage to rebuild or repair the building in compliance with the most recent local building codes.
- Umbrella liability insurance (also known as excess liability) provides coverage for claims that exceed the amount of coverage on a general liability policy and may also add coverage to commercial auto policies as well as the employers’ liability coverage on a workers compensation policy. Umbrella liability coverage is triggered only when claims are in excess of the underlying insurance.
The I.I.I. suggests that businessowners review their insurance policy annually to reflect any new additions or improvements in the business. This includes construction changes to a property and recently purchased equipment.
It is also important for companies to maintain an up-to-date business inventory as this can help with purchasing the right amount and type of insurance, and substantiating property losses to make filing an insurance claim faster and easier in the event of a disaster. In order to help businessowners create and store an inventory as efficiently as possible, the I.I.I. has developed Know Your Stuff®, a Web-based software that includes secure, online storage.
“A business that prepares before a disaster is more likely to be up and running after a disaster,” Worters pointed out.
Companies should also consider developing a disaster recovery plan before a catastrophe strikes. Such a plan should include:
- Finding alternative faculties, equipment and suppliers.
- Protecting computer systems and data by backing up computerized data files regularly and storing them off-premises.
- Compiling a list of important phone numbers and addresses, which should include state emergency management agencies, major clients, contractors, suppliers, realtors, financial institutions, insurance agents and insurance company claim representatives and employees.
- Training employees so they are familiar with offsite meeting places. Those who practice for emergency situations are less likely to panic and more likely to remember the plan.
“Most businessowners are complacent about natural disasters until one affects their business,” said Worters. “It’s only after the owner has gone through a disaster that a disaster plan, including purchasing the proper insurance, is usually considered. And by then, it’s too late.”
For information about protecting your business, see the Insurance Institute for Business & Home Safety.
Source: Insurance Information Institute, “Having the Right Business Insurance Is Key to Survival When There Is a Hurricane, Tornado or Other Disaster” http://www.iii.org website. Accessed July 28, 2014. http://www.iii.org/press-release/having-right-business-insurance-key-survival-when-there-hurricane-tornado-or-other
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