Owners Often Overlook Need for Business Interruption Coverage

Although most small business owners know they need property and casualty insurance for their premises, many don’t realize they need specialized insurance coverage to limit their losses from a disaster.

Perhaps the biggest omission owners make when buying a commercial policy is business interruption insurance, according to Loretta Worters, vice president for communications of the Insurance Information Institute, a New York-based trade group. “They fail to think about what would happen if their business couldn’t open again,” she said.

Worters noted that business interruption insurance should be part of a company’s business plan, and the blueprint needed for any kind of loan or financing. Even the many owners who fund their companies themselves should buy this type of insurance — or they could see their hard work and dreams become a casualty of a fire, flood, earthquake or storm, she added.

Business interruption insurance covers profits that are lost and expenses that continue to be incurred when a company is forced to shut down by a disaster, or even by an event such as an extended power outage. Policies typically have a 48-hour waiting period before coverage starts, but, depending on how much coverage a business buys, interruptions up to 360 days can be covered.

Among the expenses that business interruption insurance covers are salaries, rent and electricity — costs that businesses still need to pay although they may not be able to operate.

How much business interruption insurance a company should buy is, of course, an individual decision, Worters said, but it should be considered along with a disaster recovery plan. If businesses are certain they could quickly relocate operations to another site and keep working, they might not want to buy the maximum amount available. However, disasters like the Sept. 11, 2001, terror attacks and Hurricane Katrina have shown that the unthinkable can happen — companies can be uprooted and put out of commission for months. Without business interruption insurance, many have failed, she said.

“The biggest hazard of all is being shut down,” said Carol Chastang, a spokeswoman for the Small Business Administration. “Business interruption insurance is absolutely vital.”

A type of coverage related to business interruption insurance and also often overlooked is extra expense insurance, which reimburses a business for costs related to having to shut operations down. Worters said that kind of insurance covers expenses such as moving costs, new equipment and supplies.

Companies also can buy contingent business insurance to protect themselves from the fallout from a disaster that befalls a critical supplier — for example, a company that custom manufactures a part that the business depends on to produce its own goods.

“If it [a disaster] shuts down a business and it affects business, it helps to defray the costs,” Worters said.

As many companies have learned, property and casualty insurance can also have its limits. Damage from flooding is not covered by a typical commercial package; it must be purchased separately. The same goes for earthquake insurance.

The Insurance Information Institute’s Web site has a section at www.iii.org/individuals/business that discusses the kinds of insurance, including business interruption insurance, and the kinds of policies needed for disaster coverage that companies should be aware of.

There are even more specialized kinds of disaster insurance that companies should consider. Worters noted what’s called “boiler and machinery” insurance, which typically covers damage to premises caused by a sudden and accidental equipment breakdown.

Companies in specific industries should consider purchasing policies tailored to their line of work. For example, food purveyors should have food spoilage insurance to cover their losses from a power failure, she added.

Worters noted that many small businesses are cost-conscious, and are likely to be concerned about spending a great deal of money on insurance. But even if they’re tempted to put the money they might spend on insurance into another part of the company, businesses need to think about what they stand to lose if disaster strikes.

Worters’ advice to owners is to ask, “What are all the risks that are going to happen to you?” Then figure out what insurance you need and buy your coverage accordingly, she said.