Business Interruption Insurance May Assist Businesses
Forced to Close Due to Sandy
CHICAGO— Helping businesses re-establish normal operations
is one of the most important ways insurers can help a community get back on its
feet following the devastation associated with a catastrophe.
“The disruption of business operations due to a hurricane can have a
significant impact on a region,” said Christopher Hackett, director of personal
lines policy for the Property Casualty Insurers Association of America (PCI).
“While most businesses have insurance to cover their buildings and equipment,
many businesses hit by a disaster may not survive because they have to shut
down and, as a result, they have no income for days, weeks or even months. The
businesses that will weather a storm are the ones that have business
“While the first steps businesses should take involve
securing the safety of the business operations and property, it is also
important to consult with your insurance agent to make key decisions regarding
damage assessments and cleanup work. For businesses forced to close due to a
hurricane, business interruption insurance may help replace lost income.”
A Complicated Risk and a Complex Policy
"Business interruption insurance is very complicated
and not everyone buys it," said Hackett. “Time frames for coverage vary
from a month or two to a year or more. Individual policies will have to be
examined to determine the extent of coverage and a realistic projection of the
total insured loss.
“Each business affected by a hurricane should contact its
insurer or insurance agent as soon as possible to verify what their policies
cover and to help them begin putting together the financial and other records
needed to receive payment.”
Business owners should inspect their property as soon as
possible and take steps to protect it from further damage. Developing a list of
steps that will be necessary to get the business operating either partially or
fully will be very helpful. Documenting damage to inventory, or the loss of
inventory, with receipts or other information will help in the reimbursement
Business owners also should obtain copies of a recent
operating statement or income tax return to indicate income that is lost
because of a storm. Financial reports prepared by the company's independent
accountants may provide the most complete financial information for those
businesses that did not store copies of their records off-site.
Other sources of some needed information could be tax advisors
or a bank where the business obtained a loan, as well as records kept by their
customers and vendors, although that information may be scattered and
incomplete. The more records a business provides, the sooner claims can be
"The most important element of business interruption
insurance is coverage for lost profits," said Hackett. "Insurance
claims representatives work with their policyholders to determine the
companies' actual expenses and revenue in order to calculate lost income and
pay the claims."
While businesses are trying to re-establish operations
they should maintain a separate record of their operating expenses and keep
track of any extra expenses necessary to expedite their resumption of business.
Payroll is also a major expense of normal operations that
may optionally be included in business interruption insurance. The coverage can
be purchased for all employees or just for executive officers with a specific
timeframe spelled out in the policy.
Many small businesses purchase "business owner"
policies that include broad coverage provisions similar to a homeowners policy
that automatically covers basic losses when business is interrupted, Hackett
Essential Coverage Elements
While coverage limits and details will vary from policy to
policy, a basic element of business interruption insurance is for extra
expenses needed to conduct business in a new location, such as higher rent,
equipment costs or site alterations.
Options that can be purchased in addition to a basic
policy include co-insurance (like a deductible), payroll coverage for employees
or officers and a specific time period for anticipated return to normal
operations. A policy also may have a specified maximum total dollar amount or
an agreed value – providing a specified regular payment, such as $10,000 per
month, which is accepted rather than requiring voluminous financial records to
be submitted to document all lost profits while the business is trying to
rebuild or set up operations elsewhere.
Other options could include income that is lost from renting
space to another business or extra contingency expenses to cover higher prices
paid to an alternate supplier when the original supplier is shut down and
cannot provide crucial items.
PCI is composed of more
than 1,000 member companies, representing the broadest cross-section of
insurers of any national trade association. PCI members write over $190 billion
in annual premium, 40 percent of the nation’s property casualty insurance. Member
companies write 46 percent of the U.S. automobile insurance market, 32 percent
of the homeowners market, 38 percent of the commercial property and liability
market, and 41 percent of the private workers compensation market.