Streetsmart insurance Blog
The tsunami that struck Japan in April 2011 and the horrifying floods that inundated Thailand cause massive supply chain disruptions the world over due to the many global manufacturers operating in those countries. While those events may not had direct effects on companies in the U.S., they did significantly disrupt global supply chains and hence production even here in America
For many companies, the loss of income coupled with continuing expenses after a fire or other disaster can be even more costly than the event itself. Business interruption can be affected by an event such as a fire, flood or other calamity or it could be caused by something similar happening to one of your suppliers.
While you would be wise to carry business interruption insurance, you also need to make sure that your policy is current by regularly assessing your exposure.
But business interruption coverage is difficult to purchase because you have to make an educated guess about future business profits and base the amount of coverage on those projections as well as how long you might be out of business if your company experienced a crippling event.
Also, business interruption policies may carry significant coinsurance penalties for under
insuring. A coinsurance penalty is a deduction applied by the insurer to the claim amount paid. Depending on the type of policy, the penalty can range from 20 - 50% of a claimed loss.
You can do that by asking yourself five questions.
1. What is the most my company can lose if its operations cease?
Commercial property insurance policies define "loss of income" as the sum of the expected pre-tax profit or loss and necessary continuing expenses. For example, if the expected profit is $500,000 and necessary continuing expenses are $150,000, the potential loss of income is $650,000. The best way to calculate your exposure to losses stemming from business interruption, you should start with your balance sheet, income statements and cash flow spreadsheets. Ask your broker because your insurer may also have worksheets that you can use to calculate. You can calculate this based on how much money you would lose if you were unable to conduct business for a week, a month or multiple months.
2. How much insurance should be carried?
Once you know your exposure, you can then decide the level of business interruption coverage you would need. The key consideration is how long the insurance may apply and the coinsurance percentage the organization must meet. Coverage typically starts 72 hours after your property incurs damage and runs until you can resume operations, either at another location or after repairs done to your existing facilities make start up again feasible.
3. How long will it take business to return to normal?
Even after operations resume, it may be some time before revenue returns to normal levels. Customers who had gone elsewhere during the shutdown may be slow to return. The standard insurance policy extends coverage for 30 days after operations resume, but some businesses may need more time than that, especially if they are seasonal. For example, ski resort near Lake Tahoe that makes most of its profits during the winter will need additional coverage even if it can re-open in February.
4. How much of the normal payroll expense will continue during the shutdown?
The organization will need the continuing services of some employees while it attempts to re-open, but other employees may not be necessary. For example, accounting staff will be needed to pay mandatory expenses such as property taxes and collect receivables earned before the shutdown. Employees who stock shelves will not be needed if there are no shelves to stock.
5. Does the business depend on other businesses for revenue?
A business can suffer a loss even if its own building is untouched. A loss that shuts down a key customer or supplier or damage to nearby property that causes authorities to close off access to the street can devastate a business's bottom line (this happened to many businesses affected by 9/11.) Special insurance coverage is available to protect against this possibility.
One final note: Insurers are becoming increasingly aware of the difficulty business owners have in estimating future losses for these polices and many of them now a premium adjustment endorsement to safeguard against any shortfalls.
We can help you answer these questions and identify insurance companies that can meet coverage needs. With some effort and planning ahead of any catastrophic event, we can help ensure that you can successfully recover from a shut down and return to being a profitable ongoing concern.