No interruptions Featured

8:00pm EDT September 25, 2009

Basic insurance covers direct damage to your property and its contents in the event of fires, hurricanes, freezing pipes and many other perils, but what about the money your business would have been making during that time?

Business interruption insurance can help your company keep making money — even when it’s physically impossible to do business.

Rick Theders, CEO of Clark-Theders Insurance Agency, Inc., says this coverage should be part of a comprehensive property insurance program that encompasses loss of income as well as the extra expenses that result from a business interruption.

“The intent of business income insurance is to keep you in the same place you would have been in if your business had not been interrupted by a responding insurance peril,” Theders says.

Smart Business spoke with Theders about how this coverage can help you stay in business.

How does business interruption coverage work?

If your building is struck by lightning and catches on fire, your insurance is naturally going to pay to repair or replace the building and the contents that were damaged. The extension of coverage to loss of business income is going to continue the income that you would have had if the business operations had not been interrupted by damage caused by the lightning strike.

If you are a manufacturer that produces items for your customers, the lightning strike may have caused you to call your customers and say you were going to deliver items to them tomorrow, but now the business is temporarily shut down. The customer might wait for you to get back in business, but more than likely, it will cancel its order with you and take its business elsewhere.

In that regard, your business would be impacted because of your customer’s decision to take its business elsewhere. Business income insurance would pay for that loss of income.

The intent of the insurance is to cover the cost of your profit and overhead that you count on to sustain your business. It wouldn’t cover the cost of raw materials that you didn’t use to not make that product or the energy costs. But it would cover payroll of key employees and lease or mortgage costs you’ve committed to pay. That’s important because your bank might say, ‘I am sorry you had that fire, but you still owe us your monthly payment.’

Also, it would cover your estimated profit. If you would have made a 20 percent profit generating those products to customers, it would pay for that loss of profit.

How can you cover the extra expenses that can result from business interruption?

Business owners can get a combination of loss of business income coverage with extra expense insurance. In the same situation with the lightning strike and fire, the manufacturer’s extra expenses to generate the product and deliver it to the customer are covered, including relocating to a new space, moving equipment that was not damaged to that location and changing the utility services to the new location.

The customer still receives the product it ordered from you, but it’s much more expensive to generate because you couldn’t do it at your primary business location.

You can even subcontract that part. Ask a friendly competitor to make the item, or ask if you can use its facility after it closes for the day. You’ve incurred extra expenses to maintain your business elsewhere.

The extra expenses are money that insurance makes available to continue operations and not be forced to pay the loss of business income because you are still going to make income off your business practice.

This same insurance applies for all types of businesses, not a particular industry. You still need to see customers. Your customers might be able to go to a temporary location and the insurance would pay to advertise to them, to send out special mailings and to pay overtime for staff.

This combined coverage is the broader, better form of insurance. It says to the insurance company, ‘Just help me stay in business as best as I can during this misfortune.’

How can you develop a plan for business interruption?

You should develop a risk management process. Your insurance agent should ask you, ‘What keeps you up at night? What would the consequences of an event to your business be that would just devastate you? What makes you most vulnerable?’

If that is an earthquake, then here’s earthquake insurance. If it’s losing electrical power, here is some insurance that is going to respond to that concern. Part of that is asking, ‘What other plan can we work with you to put in effect so you have continuation of power?’ You can invest in a generator in the back of your business, so if power is interrupted, you start up your personal power generators to continue your business.

Another peril of insurance that you can choose to buy coverage for is utility service interruption. That takes care of the same loss of business income and extra expense losses but also includes damage done to the utility service of electric power. You can also purchase coverage for overhead transmission lines.

Try to plan ahead. Find that critical thing that would cause financial distress or concern. Then find out what you can do to buy insurance to reimburse you for that concern or, better yet, help you continue your operations.

Rick Theders is the CEO of Clark-Theders Insurance Agency, Inc. Reach him at (513) 779-2800 or