Hundreds of businesses were recently destroyed or severely damaged in the Joplin, Mo., tornado, and if statistics hold true, fewer than 20 percent of those will be up and running again within three years.
If that happened to your business, would you be in the 20 percent or the 80 percent?
“Too many business owners fail to obtain business interruption coverage, or, if they do have it, are surprised in a disaster to find it is not written to properly cover their needs,” says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. “If your plan is not properly designed, you may find you don’t have the coverage you assumed you did.”
Smart Business spoke with McTeague about how having the right business insurance coverage can mean the difference between rebuilding and going out of business.
What is business interruption insurance?
A business interruption occurs when you have a physical loss to your location. For instance, if there is a fire at your manufacturing plant, there will be a loss of income because you are no longer able make a product.
The insurance will pay for loss of business income, expenses such as moving to another location while the building is being rebuilt or repaired, and continuing to pay your employees until they are able to work again.
Business owners should look at it as disability insurance for the business itself.
What types of businesses need this insurance?
Most should at least have the extra expense piece of it. For example, contractors make most of their money in the field, but if they have office operations, and something happens to that physical location, they will still have those extra expenses, and some lost income.
With a manufacturer, restaurant or retail location, all revenue comes from the physical location. So there are certainly some classes of businesses that need it more than others.
How does a business determine how much coverage it needs?
There are formulas your agent can use to give you a good idea of the amount of coverage you need. Other businesses will use monthly multiples of sales.
For example, if you are a manufacturer that uses certain machines and they are destroyed, you’ll need to replace them. But there may be a six-month build-out time. You are never going to start loss adjustment from day one because you have to clean up and take inventory. Then you have to order new equipment and it’s a minimum of six months before it arrives.
Do you have a contingency plan? Is there disaster planning? How quickly can you replicate what you’re doing somewhere else? Those are all items for discussion when determining the amount of coverage.
Each business is different, and it’s an art to figure out the right number. This is why an experienced agent is critical when working through the process.
What questions should business owners ask their agent to make sure they’re getting the right coverage?
Are there coinsurance limits? Are there time limits? Is the coverage paying for a regular work force? Is it covering ordinary payroll — because if it’s not, your employees are not going to wait for you to start paying them again. Is it paying fixed bills like utilities and rent? For what length of time is the coverage?
The agent should be asking questions of the business, as well. While most businesses have some form of business income coverage, it may be poorly written because the coverage isn’t designed specifically for them, or the agent isn’t asking enough questions.
Without a true understanding of your business, the agent won’t be able to design the best coverage for your needs.
What other areas should a business consider when buying business interruption coverage?
You can have ordinance or law issues, or power interruptions. For example, an ice storm could cause a manufacturer to be out of business for weeks without power. Or if a restaurant loses water service, it’s out of business until that is restored. The building itself may not be physically damaged, but the business has sustained a business interruption loss.
There is also a form of contingent business income. Say you have a large vendor or client that is damaged by a fire. That can have an impact on your ability to do business.
Or you may have a retail business anchored by another large business that pulls in a lot of traffic. If that business is damaged and no longer operating, causing a loss of traffic and, as a result, income, you can recover that through dependent property coverage.
How can an agent work with a business to minimize the chances of a disaster and increase its odds of recovering if one does occur?
An agent can do a risk management audit, trying to find the weaknesses in coverage and where the company is weak in loss control. Risk management can help prevent bad things from happening, but if they do occur, it can help ensure you have the right coverage in place.
Business owners can do a lot to make sure that if a claim does happen, it will move quickly and in the way they want. If data are backed up offsite, they will be easier to recover than if everything is inside those four walls.
You will recover much more quickly if you truly spread your risk and have a disaster plan. If you lose your physical plant and don’t have a plan, it’s going to be a long road back.
Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or [email protected]