Using Insurance To Ensure Business Continuity

Recently, I had the good fortune to attend a workshop on “Business Continuity” that was hosted by a local company United Services Disaster Restoration Specialists.  The audience was made up of local insurance agents and brokers.  They came to learn about business continuity and how they might use business continuity planning to add value to the services and programs they offer their customers, primarily small businesses.  What great business partners these insurance folks will be to the businesses they work with.

Over the years, as business continuity and emergency preparedness planners, we’ve recognized the importance of insurance.  For most, it might have been simply making sure to include someone from Risk Management on the “Disaster Response Team” while for others it may have been contacting out “insurance guy” and make sure you had the “appropriate” coverage’s.  For me, I began talking with insurance professionals a few years ago and realized that insurance should be viewed in a much more strategic light.  Since then, I’ve been encouraging others, both business and personal, to go steps further and find out what resources their insurance provider might bring to their business continuity or emergency preparedness efforts … things such as data on risk and threats … things such as planning tools and inventory forms.  Additionally, we need to thoroughly understand and plan for what will be needed post-incident in order to process or settle our claims as quickly and completely as possible. After the fact is not a good time to learn from our mistakes.

Recently, I found that according to the Rocky Mountain Insurance Information Association a catastrophe, as defined by the insurance industry, is a natural disaster that causes a certain dollar amount, currently set at $25 million in insured damage. I find it interesting their definition is focused on only natural disasters rather than any incident, natural or man-made.  Individual insurance companies may declare a “catastrophe” based on the anticipated loss to their policyholders in the impacted area.

Review Your Insurance Plan Now

Make sure you have sufficient coverage to pay for the indirect costs of the disaster—the disruption to your business—as well as the cost of repair or rebuilding. Most policies do not cover flood or earthquake damage and you may need to buy separate insurance for these incidents. Be sure you understand your policy deductibles and limits.

New additions or improvements should also be reflected in your policy. This includes construction improvement to a property and the addition of new equipment.

For a business, the costs of a disaster can extend beyond the physical damage to the premises, equipment, furniture and other business property. There’s the potential loss of income while the premises are unusable. Your business continuity efforts should include a detailed review of your insurance policies to ensure there are no gaps in coverage. Your policy should include business interruption insurance and extra expense insurance. Even if your basic policy covers expenses and loss of net business income, it may not cover income interruptions due to damage that occurs away from your premises, such as to your key customer or supplier or to your utility company. You can generally buy this additional coverage and add it to your existing policy.

Basic Commercial Insurance to Consider

  • Building Coverage provides coverage up to the insured value of the building if it is destroyed or damaged by wind/hail, or another covered cause of loss. This policy does not cover damage caused by a flood or storm surge nor does it cover losses due to earth movement, such as a landslide or earthquake, unless added by endorsement.
  • Business Personal Property provides coverage for contents and business inventory damaged or destroyed by wind/hail, or another covered cause of loss.
  • Tenants Improvements and Betterments provides coverage for fixtures, alterations, installations, or additions made as part of the building that the insured occupies but does not own, which are acquired and made at the insured’s expense.
  • Additional Property Coverage provides for items such as fences, pools or awnings at the insured location. Coverage limits vary by type of additional property.
  • Extra Expense provides coverage for the extra expenses incurred, such as temporary relocation or leasing of business equipment, to avoid or minimize the suspension of operations during the time that repairs are being completed to the normal place of business.
  • Ordinance or Law provides coverage to rebuild or repair the building in compliance with the most recent local building codes.
  • Business Income (also known as Business interruption insurance) provides coverage for lost revenue and normal operating expenses if the place of business becomes uninhabitable after a loss during the time repairs are being made.

Business owners may already have property insurance, but that only pays just for damage repairs. What about the income lost if the company has to close down for a few days, a few weeks or even longer?

Business interruption coverage

Business income coverage, also known as Business interruption insurance, protects the profits that an owner would have earned had there been no problem. The insurance is generally bought as a package with property insurance.  Business interruption insurance provides for two financial loss scenarios: Loss of income due to interruption of operations, and additional expenses incurred as a result of efforts to continue business operations.

Let’s say you are a small manufacturer who requires three months to remodel after a fire. In this situation you might face more expenses than just the loss of profits from being closed that long.

You might also face paying for:

  • Lease or mortgage payments and ongoing utilities.
  • Relocation to a temporary building.
  • Quick replacement of materials from vendors, who may charge higher prices and delivery charges.
  • Overtime to keep up with production demands.
  • Securing the products and/or services of competitors to help manufacture or supply orders.
  • Advertising to confirm the business is still operational.
  • Re-compiling business records, financial and legal documents lost as a result of the fire.

Business interruption insurance can also provide paychecks for key salaried employees that an owner does not wish to lose while the business is shut down.

Business interruption premiums and claims

Unless you want to pay through the nose, you will have to shoulder some of the post-disaster costs. An 80/20 policy is typical, and generally provides for lower premiums while paying for 80 percent of the loss. The business owner picks up the tab on the other 20 percent.

One of the most important disaster preparations you can make is to secure your business documents (vital records) offsite so you can get your hands on them quickly should a disaster occur. Financial records are necessary to verify the value of claims made. Indeed, it may be difficult for a new business with no history to establish its actual loss of income, but every business should have business income coverage from Day One.

Even if profits cannot be reimbursed — either because you don’t have any or you cannot prove a history of making money — you are still likely to incur additional expenses while trying to keep your business buoyant.

Disaster insurance can keep your business humming

Developing a Small Business Disaster Recovery Plan

Looking ahead to what’s coming up

I’ve got a real treat for you … and me.  I’m getting ready to head out for another adventure training others to be prepared and I want you to come with me.  Starting February 12 (hey, that’s my sister’s birthday!), I’ll be writing a daily blog that will chronicle where I’m at and some of the terrific people I’ll meet along the way.  So, mark your calendars now, and plan to join me on February 12!

Until then, be safe!

Getting Prepared In a Year

It’s time to move to our third destination on our journey to becoming prepared this year.

When you are at the grocery store, I want you to pick-up the following items:

  • One gallon of water (and remember one gallon of water for each pet too)
  • A canned meat (i.e. tuna, chicken, ravioli, chili, beef stew, Spam, corned beef, etc.)
  • A canned fruit (i.e. peaches, pears, mandarin oranges, applesauce, etc.)
  • Sanitary napkins – beyond feminine hygiene, these are excellent first aid supplies
  • Video recording media (i.e. DVD or tape)

Things to do:

  • Use a video camera to record the contents of your home for insurance purposes
  • Store your “insurance video” with a close friend or family member that lives out of town (off-site storage).
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