What happens when you have to close your business for a period of time to have repairs done after insured events such as fire, water damage, theft, hail, a hurricane, a tornado or other disasters? Closing even for a few days can greatly disrupt income for the business that still has to pay its employees, the rent, utilities and other expenses.
Business interruption might be a bigger risk than many people realize. A large global insurance company, Allianz, publishes an annual ranking of what risk executives worldwide view as the top business risks.
“For several years business interruption has been ranked as the top business risk,” said Robertson Chair of Insurance Andre P. Liebenberg, Ph.D., University of Mississippi. “The simplest context for business interruption losses is when a firm suffers physical damage to its property and is no longer [able] to sell its products or provide its services. This is why the business interruption risk is particularly important in areas subject to natural catastrophes.”
It doesn’t even have to be the type of disaster the physically impacts the facility. Cyber attacks and ransomware can also result in substantial income losses.
“The less obvious context is when a firm’s business is interrupted because of something that happens to other firms such as key suppliers or customers,” Liebenberg said. “This is often referred to as ‘contingent business interruption’. Regardless of the source of the interruption, closures or reductions in sales can have particularly severe consequences for small firms that may not have the reputational or financial capital that is necessary to absorb the losses.”
Another important issue, Liebenberg said, is when large income losses occur, firms may end up losing what is arguably their most important asset – their employees.
His suggestions for shopping for business interruption insurance is via an agent or broker who can identify and evaluate loss exposures, find appropriate insurance solutions and recommend ways to reduce or prevent losses.
Many years ago, business interruption insurance was a separate policy. Now, the coverage is typically bundled into one business package policy, said State Farm Insurance Agent Preston Derivaux, president of Derivaux Insurance Agency Inc. in Jackson.
“Most insurance companies today offer the business income coverage together with other property and casualty coverages as one business owners policy,” Derivaux said. “Business insurance is complicated, especially business interruption insurance. The best way to shop for coverage is to contact a local insurance agency and schedule an appointment. Having a face-to-face discussion is important as business insurance can be very complex and no one situation or business is the same. It would not be a bad idea to contact two or three different agencies to compare rates and coverage. Again, the face-to-face conversation is very important.”
Failure to have the proper business interruption coverage can potentially put someone out of business. It not only affects the business, but employees, as well. The last thing an employer wants is lose experienced employees.
“If your business is not able to rebound or re-open timely, then you’re at risk losing valuable long-term employees,” he said.
Nearly all businesses might need to consider business interruption insurance, but Derivaux said it is particularly important for restaurants, retail stores, offices, clinics, service providers, drug stores, dry cleaners and laundromats, barber shops and salons, auto services and other service-related businesses.
“The list goes on and on, but really any business that could suffer lost revenue because the business is temporarily closed or suspended due to an insured claim should have coverage,” Derivaux said.
Business in disaster prone areas, in particular, can benefit from the coverage. The magnitude of business interruption losses in disaster-prone areas like the Mississippi Gulf Coast can be much more severe.
“When a hurricane strikes, it could cause a business to be closed for months and months,” Derivaux said.
Even abnormally cold weather can trigger major damage. Derivaux once had a dental office client suffer a major loss due to frozen pipes. The water pipes in the ceiling burst and water damaged the entire clinic.
“The practice had significant loss of income as it had to close for several days,” he said. “By having the business interruption coverage, they were able to re-open within just a few days. The extra expense feature of the business interruption coverage enabled them to rent special equipment to mitigate the water damage, and they were also able to rent generators to provide power since the electrical system in the building suffered water damage as well. The practice was also compensated for the loss of income. Without the business income coverage, they would have suffered a huge financial loss.”
Not only do most business interruption polices provide coverage for loss of income, but many business interruption policies provide an additional benefit called extra expense coverage. This is coverage for the extra expenses the business incurs in order to mitigate revenue losses that result from partial or total shutdowns of the business during the time needed to repair or replace damaged property.
“Usually the extra expense coverage reimburses the business for reasonable repair expenses, over and beyond normal operating costs,” Derivaux said. “An example would be if you had to relocate your business temporarily because of a fire. The Extra Expense coverage could pay for the extra rent at the temporary location. Again, the primary purpose of the extra expense coverage is to help mitigate business interruption losses. As an added feature, some policies even reimburse payroll expenses for 90 days following the date of the covered loss. This feature is sometimes added because extra expense coverage is not typically designed for normal operating costs, but for those extra expenses that are over and beyond normal operating costs.”
One of the primary reasons for having business interruption coverage, besides the loss of income, is the potential loss of customers.
“I have been in business over 34 years, and it certainly hurts to lose a customer,” Derivaux said. “If the business cannot recover quickly, then they are certainly at risk of losing valuable long-term customers. The extra expense feature of the business interruption coverage is designed just for that purpose, to cover the additional extra expenses for the business to reopen and get back on its feet as quickly as possible.”
By BECKY GILLETTE
Filed Under: Business Insurance, Business liability insurance, Commercial Insurance