Business interruption insurance: Save the day when disaster strikes

Have you thought about what you would do if your business were damaged by fire? Since you have insurance, you’ll be able to rebuild. But, have you considered the impact on sales during the reconstruction? Depending on how long your business needs to be closed, will the revenue stream be stable enough to keep business going until the doors are reopened?

After a disaster, 40 percent of businesses don’t reopen at all and another 25 percent fail within one year, according FEMA. Business interruption insurance is essential to help cover the gap so operations can resume quickly. 

Types of insurance available

Business interruption insurance can be added to a property insurance policy or included in a package policy. Covered risks may include disasters such as fire, hurricane, hail, lightning, windstorm, explosion and vandalism. There are typically three types of coverage:

• Business income coverage: Provides compensation for lost employee income if a business suffers property loss or damage from a covered peril. Coverage remains in place until restoration of the lost or damaged property is complete. In addition, the policy will cover operating expenses, such as utilities, that continue while a business has temporarily halted activity.

• Extra expense coverage: During the restoration period, a business may incur extra expenses. This coverage reimburses a company for money it spends during the restoration period over and above the normal operating expenses. These expenses would help the business avoid having to shut down. Extra expense coverage may also cover payroll for key employees until a business is back up and running.

• Contingent business interruption insurance: Reimburses expenses and lost profits affecting a supplier or manufacturer. For example, the massive earthquake and tsunami that hit Japan in March 2011 led to supply chain disruptions around the world. Companies that were affected and that had contingent business interruption insurance used this coverage to reimburse expenses and lost profits during the shipment delays.

Be aware that damages due to a flood or earthquake are usually excluded from a business interruption policy. There is generally also a 48-hour waiting period after the loss before coverage can take effect.

Why business 

insurance is essential

Disasters can have a variety of effects on a business. A fire may only destroy part of a building, but it could take a few weeks or months for repairs. Broken windows and roof damage after a hailstorm may leave a lot of water to clean up. A major hurricane, such as hurricanes Maria, Irma and Harvey, which all struck in 2017, could hit one of your suppliers and significantly impact your business. From lost income compensation to coverage for fixed and disaster-related expenses, business interruption insurance is essential to any business’ survival. 

How much is needed?

The amount of coverage needed depends on a few different factors: annual sales revenue, repair time before reopening, temporary relocation operating costs and ongoing payroll. It’s a good idea to work with your accountant to correctly forecast the next 12 months of income and expenses. The cost of business interruption insurance will further vary depending on your business type, the amount of coverage needed and potential risks of your geographic location.

Protect your business 

with a recovery plan

In addition to having business interruption insurance, it’s important to have a recovery plan in place. Develop a plan with these tips:

• Identify risks: What disasters and emergencies are likely to occur in your area? How will your business be impacted and how will you respond to them? Identify a plan of action as well as materials and supplies needed to ensure you and your employees are safe.

• Client retention plan: Decide on a communications strategy to prevent loss of customers. Post notices on social media, your company website and outside your premises. Contact clients by phone, text, email or regular mail. Place a notice in local newspapers.

• Backup resources: Consider the resources needed during an emergency, such as a back-up power source, communications system and digital information security plan.

• Business-to-business coordination: Even if your business escapes the physical damage of a disaster, operations may suffer significant losses due to delivery challenges or decreased customer demand. Businesses should communicate with their suppliers and markets (especially if they are a business supplier) about their disaster preparedness and recovery plans to promote confidence and ensure that everyone is prepared.

• IT recovery plan: Develop a specific information restoration strategy to get back online faster and decrease the chance of sensitive data getting into the wrong hands. Include procedures and requirements pertaining to networks, hardware, applications and wireless devices. To lessen potential damage, take steps to secure any equipment that could shift or fall over during a disaster. Keep computers above the flood line and away from large windows.

• Protect your building: Conduct regular inspections of the business property to identify potential hazards and risks. Look for signs of defective electrical wiring, leaky gas connections and structural defects. Reduce the threat of injury or death and minimize property damage in the event of a disaster by identifying hazards ahead of time and making the necessary repairs.

• Continued business activity: Identify critical business activities and the resources needed to support them. If you cannot afford to shut down operations, even temporarily, determine what would be required to operate the business from another location.

As you assess risks and make plans, consider having at least one employee train as a volunteer in FEMA’s Community Emergency Response Team (CERT). Having someone trained in the CERT program means you’ll have someone in-house with fire safety training, light search and rescue, team organization and disaster medical operations. Your CERT-trained employee(s) can help advise you about your disaster plans and can also serve as a liaison with first responders and other emergency preparedness groups in your area.

• For guidance on generating a business recovery plan, visit https://www.fema.gov/preparedness-checklists-toolkits for preparedness checklists and toolkits. Consult with your insurance advisor for the right amount of coverage to protect your business.

This article was supplied by Mountain America Credit Union, a full-service insurance agency offering a wide range of products for auto, home, family and business.