The recent natural disasters that have struck across the country highlight the need for businesses to review their insurance policies, says the Automotive Parts Rebuilders Association (APRA). Your business could become a victim of Mother Nature, or any other catastrophe, without warning. In this event, you want insurance coverage that allows you to relocate or temporarily close so you can make the necessary repairs — and still be provided with a source of income.
Commercial property insurance or business owner’s insurance doesn’t typically pay the costs of this type of disruption. Consider adding business interruption insurance that protects you from both a loss of income and any expenses you incur while your normal operations are suspended.
There are two basic types of business interruption coverage. The first, perils policies, only covers specific occurrences that are listed in the policy, such as fire, water damage and vandalism. The second, all-risk policies, covers all disasters, unless they are specifically excluded. Typically, an all-risk policy excludes damage from earthquakes and floods, although coverage can generally be added for an additional fee.
Business interruption insurance usually pays for income that is lost while operations are suspended. It also covers continuing expenses, including salaries, related payroll costs and other costs required to restart a business. Depending on the policy, additional expenses can include:
- Relocation to a temporary building (or permanent relocation if needed).
- Replacement of inventory, machinery and parts.
- Overtime wages to make up for lost production time.
- Advertising to communicate your business is still operating.
Business interruption coverage that insures you against 100 percent of losses can be costly. Typically, policies cover 80 percent of losses while you shoulder the remaining 20 percent. Annual premiums average 2 percent of the income and expenses that a business wants covered.
Before something happens that could bring your business to a screeching halt, consult with your accountant and insurance agent to calculate the coverage you need. Come up with a worst-case scenario and ask “what if” questions to cover all the possibilities.
Of course, you don’t want to over-insure. But you also don’t want to overlook critical possibilities, such as a prolonged loss of power or even multiple power outages.
Business interruption insurance is not sold as a separate policy, but is added to a property insurance policy or included in a package policy, such as a business owner’s policy (BOP).
Here’s a sobering fact: According to the Council on Foreign Relations, the terrorist attacks of Sept. 11 destroyed more than 13 million sq. feet of commercial property and damaged an additional 17 million sq. feet. Nearly 700 companies closed — permanently.
Business interruption insurance could have helped some of them re-open. This type of insurance obviously won’t solve all your problems after a disaster, but it can improve the chances of survival.
