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Tuesday, June 30, 2015

Business interruption insurance becomes an essential risk management tool

Business interruption insurance is a key risk management strategy for small businesses. (Photo: vinnstock/Shutterstock)

Business interruption insurance is a key risk management strategy for small businesses.

For business owners, these can be the best or worst of times.
It can be the best of times if you are running your business well, finding a niche in which you can thrive and experiencing success. However, the worst of times can be inflicted upon you by outside forces: crime, weather or some other power beyond your control.
Unfortunately, we see it time and again. Over the past year, we’ve seen businesses trashed by civil disturbances in Ferguson, Missouri, and Baltimore, Maryland. While 2014 was a relatively benign year for hurricanes in the United States, they still caused tens of millions of dollars in damage. Last year there were at least 831 confirmed tornadoes in the United States according to the NOAA. Now as we head toward summer, we’re looking at the start of another tornado season in the Midwest, and hurricane season in the Southeast.
While we hope these events will not occur, hope is not a strategy. A forward-thinking business prepares for potential calamity while hoping it never comes.
Unexpected events can happen anywhere, at any time, and could deal your business a crippling blow. According to the Small Business Administration, as much as 60% of small businesses never reopen their doors following a disaster. Small businesses are frequently underinsured and many do not carry sufficient business interruption coverage.
Whether it’s protests that get out of control, flooding caused by a hurricane, wind damage from tornados or the rising tide of cybercrime, businesses need to prepare for business interruption. Unfortunately, many small- to medium-sized companies fail to take time to do the needed scenario planning to protect their interests from disasters, and yet their survival may be at stake.
Business interruption insurance has become an essential risk transfer tool. Coverage provides resources that aid in recovery following a catastrophic event and can help get a company back on its feet quickly, enabling it to pay staff, meet credit obligations, and provide peace of mind for employees and shareholders.
Here’s how business interruption insurance works: Coverage is composed of two parts – business income and extra expense.
Business income coverage insures net income that would have been earned. “Would” is the key word here because unlike a loss due to physical damage, business income is based on assumptions of what would have happened had there been no loss. Business income insurance provides coverage for operating expenses that continue even after a loss such as payroll, leases and mortgages, and employee benefits. This insurance is a tremendous incentive for key employees to continue working for the business rather than seeking employment elsewhere.
Another component of business interruption insurance is extra expense coverage. This covers potential costs beyond normal operating expenses, including any expense that helps avoid or minimize business downtime and allows operations to continue. For instance, the cost of renting office space at a temporary location would be covered. Relocation expenses and costs to equip and operate a replacement or temporary location are also considered extra expenses.

Recent news headlines put the emphasis on an additional component of business interruption coverage that should be considered: civil authority insurance, which covers a loss of business triggered by a governmental action (police commissioner, mayor, state attorney general, etc.) that restricts access to the insured premises. A great example is an ordered evacuation ahead of a hurricane that’s about to come ashore.
Determining the exact business interruption coverages your company needs can be a rather complex process. It takes time to do scenario planning and work through the various potential calamities that could befall a business.
While many business owners and managers don’t want to consider these pessimistic scenarios, taking a cold, hard look at the possibilities is a smart thing to do. After all, there’s some truth to the title of the business book from former Intel CEO Andy Grove, Only the Paranoid Survive.
But don’t consider planning for calamity as paranoia. Think of it as advanced preparation that just might help your business survive if a disaster strikes.
Contact us for all your Insurance needs! (321)725-1620 
Bob Lancaster Insurance
Serving Florida since 1964

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