Don’t cut corners on business interruption insurance
In a struggling economy, cutting corners is an art form. But getting too creative with your business insurance may be unwise.
Complexities surrounding the purchase of a businessowners policy demand a greater degree of partnership between the insurance agent and the customer. It’s also important to understand business interruption insurance. Simply, business interruption coverage is survival insurance. Yet, a survey by the National Association of Insurance Commissioners found that only one-third of small businesses, defined as firms with fewer than 20 employees, have business interruption coverage. Almost 60 percent of firms with 20 to 99 employees have it. Without it, businesses may be doomed.
Many small businesses never reopen after a disaster, and some close soon afterward for lack of a contingency plan.
Business people are skeptical of the value of business interruption insurance because they make these mistakes:
- Fail to understand that coverage was triggered by direct physical loss to the property. Business interruption insurance is tied to property insurance and is not a stand-alone product. It doesn’t kick in unless the building sustains physical damage.
- Lack of knowledge of the waiting period or of timeframe limits for coverage. Policies usually have a 48- to 72-hour waiting period before business interruption insurance kicks in. After coverage is activated, a basic policy may provide for just 30 days of coverage. The recommendation is to purchase enough coverage for a 12-month period.
- Not knowing there are additional types of business interruption coverage to consider. “Contingent business” interruption insurance extends coverage to income losses that may result from a key supplier or customer suffering a property loss. While some policies combine “extra expense” coverage with business income coverage, it is also available as an add-on to help with additional costs, such as rent for a temporary location.
- Underestimating the amount of documentation required to support a claim. Of course, the amount of information needed depends on the complexity of the claim; however, a well-documented claim for business interruption insurance requires financial information, and if a business has not maintained offsite backup files, this step in the process can prove to be a major stumbling block. Additionally, the terminology to define loss calculations in a business interruption policy are often difficult to interpret, so business owners would be wise to involve an accountant who is familiar with these policies in the claims process.
Ultimately, the responsibility to make good decisions about disaster recovery is the business owner’s. If you own a business, get your insurer involved in helping you assess your risk. Remember that the largest losses to a business may not come from direct damage from the disaster itself, but from the struggle to survive in the months and years following it