Your company just burned to the ground.
Are you prepared to deal with the aftermath? The building and contents were probably insured, but it will take a year to rebuild. What's going to happen to your customers who need product tomorrow? How will you make payroll?
Unfortunately, for many businesses, these questions are not asked until after the fact. Some are lucky and able to set up temporary operations elsewhere until they recover, while others have to close permanently.
Business interruption insurance is one tool that may help your business survive in the face of disaster. Business interruption policies are intended to reimburse policyholders for profits they would have earned if not for an event such as a fire. They are typically issued as an endorsement to property policies or can be bought separately.
When looking at a policy, examine the details carefully. Will your business be covered if you only have to operate at reduced capacity rather than shutting down entirely? Will you be reimbursed if the company is operating at a loss at the time of the disaster?
"Policyholders and insurance companies often interpret policy terms and conditions differently," says Clarissa Weiant, an attorney with the Washington D.C. law firm of McKenna & Cuneo.
Most business interruption policies require a policyholder:
- Incur a necessary suspension of business income operations. A necessary suspension may also include a slowdown in some circumstances. One company successfully argued that even though it resumed operations in a new location within one day of a fire, the new location had fewer phones and was thus costing it business. Most policies also require the business to begin operations as soon as possible after a loss.
- Suffer direct physical loss of or damage to property at the the premises. Covered losses are usually limited to fire, lightning, explosion, windstorm, hail, smoke, riot, vandalism, sprinkler leakage, sinkhole collapse, volcanic action, breakage of glass, falling objects, weight of snow, ice, aircraft or vehicles and water damage. Weiant says if a business operation is suspended as a result of both a covered and an uncovered peril, insurance companies often argue that no coverage exists because policies sometimes require that the business income loss be "solely by" a covered peril.
- Suffer an actual loss of business income. Business income is sometimes defined as "net income that would have been earned or incurred, and continuing normal operating expenses incurred, including payroll." The problem is determining how much a company would have earned, and what happens when the company was operating at a loss.
"A company should safely store the records they need to prove what their inventory and revenues were," says Weiant. "The big problem is when the building burns down with the records in it. That's why they should be kept off site."
Otherwise, an estimate will have to be determined from vendors, bank accounts and other receipts that may be able to be tracked down.
If your business has a seasonal increase in sales, be ready to prove it with yearly records. Also, fast-growth companies may have sales that won't accurately be reflected in last year's reports. Any suspension in business will likely hurt a small, growing company more than an established one. Weiant recommends that growing companies keep track of market trends, their growth potential and the manner in which a business interruption may have an impact on their future business. A business operating at a loss usually only receives operating expenses, and any additional revenue needed must be taken from that.
Beware of exclusions in the policy. Losses from governmental actions, including those from the Food and Drug Administration or Securities and Exchange Commission, may not be covered. Losses occurring off premises may not be covered either.
For companies that heavily rely on information, be very careful in understanding how computers will be replaced. Some policies will only cover the loss of the computers, or income lost until the computers are replaced. There may be no allotment for the actual data on the computers. If your business is selling databases, or is heavily information based, the loss of the data is far more significant than the loss of the computers and any policy should reflect that fact.
Policyholders have certain duties under business interruption policies. Weiant recommends the following in the event of a loss:
- Notify the police if a law may have been broken.
- Give the insurance company prompt notice of the direct physical loss or damage. Include a description of the property involved.
- As soon as possible, give the insurance company a description of how, when, and where the direct physical loss or damage occurred.
- Take all reasonable steps to protect the covered property from further damage by a covered cause of loss. If feasible, set the damaged property aside and in the best possible order for examination. Also keep a record of your expenses for emergency and temporary repairs for consideration in the settlement of the claim.
- As often as may be reasonably required, allow the insurance company to inspect the property proving the loss or damage and examine your books and records.
- Send the insurance company a signed, sworn, proof of loss containing information the insurance company requests to investigate this claim. You must do this within 60 days of the insurance company's request. The insurance company will provide you with the necessary forms.
- Cooperate with the insurance company in the investigation or settlement of the claim.
- If you intend to continue your business, you must resume all or part of your operations as quickly as possible.