Many people buy life insurance. What they don’t think about is disability insurance — even though you’re 16 times more likely to be disabled than you are to die during your working life, says Chris Zito, president of Zito Insurance Agency, Inc. Similarly, employers understand lightning could hit their building, a tornado could blow the roof off or a fire could start. They know that they would have to fix their property, but they forget about the lack of earnings the company goes through while it gets back on its feet.
“Business interruption functions as the ‘disability insurance’ for your company. It is designed to restore your company’s financial condition to the same place it would have been if the claim hadn’t occurred,” Zito says.
Many business owners, however, underestimate the impact a business interruption claim can have and underinsure this exposure. Accordingly, inadequate business interruption limits account for a large percentage of the businesses that never reopen after a large loss.
Smart Business spoke with Zito about what employers need to know about business interruption coverage.
How does business interruption coverage work?
Business interruption coverage reimburses the business owner for ongoing expenses during the shutdown period, the profit the company would have earned during that time, and any expenses above and beyond the normal operating expenses — temporary facilities, outsourcing to friendly competitors or renting generators.
Not only can business interruption losses be caused by damage to the company’s own facilities, but also from damage to off-premises locations owned by others such as material suppliers, utility companies or key customers. You don’t want to overlook how the damage at another location can create a business interruption loss for you. A properly written policy will provide coverage for these exposures.
Both the business owner and insurance carrier should have the same interest in getting the insured back to 100 percent as fast as possible with the least amount of disruption to the business and impact to the customer base.
What mistakes do you see employers make?
The most common mistakes are business owners underestimating the amount of coverage they need or recognizing the likelihood that such a loss could happen to them.
Which companies have more of a need for business interruption insurance?
Typically, organizations with facilities that can’t easily be replicated will benefit the most. If you run an accounting firm, as long as you have computers and phones, you can set up quickly in a new office space. But manufacturers with specialized equipment or custom-made machinery may face long lead-times to replace that equipment or machinery. You can’t just move into a new plant and outsourcing your product may not be feasible.
How should this coverage be set up?
Similar to direct property claims, business interruption coverage in a policy will respond (or not) based on the cause of the loss. Business interruption claims also can be very complex, and typically are the most difficult for the insurance carriers to adjust.
For this reason, it is important to work with an agent or broker that understands the insured’s business, as well as the correct method of calculating the proper business interruption coverage limit. There are worksheets that help calculate the appropriate limit by ensuring your coverage reflects a worst-case scenario.
For example, in a large loss, it might take 90 days alone to clear the site of debris, investigate the cause of the incident and get the proper construction permits before reconstruction even begins — and it’s not uncommon to take nine months or more to get to full capacity.
Another concern is the indemnity period. Standard coverage stops once you are back in business. Due to the risk of loss of market share, you may want to buy an endorsement to lengthen the time after resuming business you have to get back to pre-claim levels.
Business interruption coverage isn’t prohibitively expensive, but it will take individual tailoring to get the policy to fit your needs. So, before disaster strikes, call your agent or broker.
Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.