NFIB

Business Interruption Insurance: Are You Adequately Covered?
05/ 03/ 2004

If damage to your business' premises force you to close while repairs are made, you will still need to pay employees, mortgages, leases and other debts. These ongoing expenses can mount up quickly for a business that has reduced income--or no income at all. In today's Workshop, contributor Jeffrey Moses discusses business interruption insurance, which takes the place of normal business income when insured losses interrupt cash flow.

Most retail stores and other types of small businesses are covered by a business owner's policy, usually referred to as a BOP. The great majority of BOPs contain business interruption insurance, which will reimburse a company for loss of normal income until full operations are resumed. Payments usually are based on previous sales volumes. If a store is out of business for one month, for example, insurance reimbursement might be the equivalent of what the store brought in during the same month the previous year. Often, a percentage increase is also given, based on average sales growth from the previous year.

You shouldn't assume your policy includes business interruption coverage. Many business owners don't even think about it until such coverage is needed. Trey Hutt, a property and casualty insurance broker in Panama City, Fla., insists that business owners need to know, in advance, if they're covered.

"Call your agent and ask if you have business interruption insurance," he says. "If you don't have it, ask how much it will cost."

Hutt says that typically there is no limit on the amount of financial coverage provided by business interruption insurance. This is important, because even if a store is out of business for a month or so while repairs to the premises are made, the store's revenue may not fully recover for several months after it reopens.

Frequently, stores do not reach former sales levels for six months or even a year. This means you'll need to work out an ongoing reimbursement for your continuing reduced sales revenue. Insurance companies have coverage tables for various types of businesses and provide an ongoing percentage of revenue loss for some time after the business is again up and running.

Some types of businesses find it harder to purchase business interruption coverage because of its cost. Drycleaners, for instance, use various chemicals and heating equipment, resulting in a greater likelihood of property damage. Businesses with special risks may not be covered for business interruption in their BOPs and should contact their agent.

Many home-based businesses do not have BOPs but can purchase business interruption insurance. It's not particularly expensive, depending on your type of business.

"If you're a home-based writer, designer, computer consultant or in any other type of field that is based almost purely on your creativity, damage to your home would of course slow down your business," Hutt says. "But you'd be able to buy another computer and get back to work quickly. In these cases, the best insurance is good back-up systems, which can help you avoid losing records or stored materials."

When contacting your agent to determine if you are covered for business interruption, check if your BOP excludes damage that is covered by special policies such as windstorm (often sold as a separate policy in Florida, for example), earthquake (sold separately in all states) and flood. If your BOP excludes damages that are covered by these other policies, you'll need to determine whether these other policies include business interruption insurance. If they don't, you could be stuck without this coverage in case of damage by wind, earthquake or flood. If you find that these policies don't include business interruption coverage, you might want to purchase a separate business interruption policy.

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