NEW YORK — An industrial plant explodes in Texas. A tornado ravages Oklahoma. A hurricane floods the East Coast. Bombs shut down the city of Boston.
Those recent disasters caused tremendous human suffering. All of them, too, brought devastation to businesses large and small. From damaged buildings to wrecked inventory to disrupted supply lines, natural and man-made disasters can tear a huge hole through profitability. In many cases, businesses close their doors for good.
REVIEW PROPERTY INSURANCE
Have you sufficient property insurance in place? What may be good one year may no longer be adequate several years later. So, revisit your policies with a trusted adviser.
“It’s always good to have a regular session with your agent every year or so to review what you have,” says Chris Hackett, director of policy development in the research division of Property Casualty Insurers Association of America.
The No. 1 insurance category is, of course, property insurance that covers fire.
“As it relates to fire, policies should insure your structure for 100% of its replacement costs,” says Hackett. Replacement cost is the amount necessary to rebuild your structure using construction materials of like kind and quality.
If you are thinking of adding an addition or making renovations that will substantially increase the amount necessary to repair or replace your property, you should inform your agent. If you have not done so, the settlement under the policy will be based on the replacement cost information the carrier had on file at the time of the loss.
Consider, too, your deductibles.
“There are pros and cons to having higher and lower deductibles,” points out Hackett. “Lower deductibles mean less money out of your own pocket after a covered loss but cost more in premiums. Higher deductibles mean lower premiums but more out-of-pocket costs when disaster strikes. You have to decide for yourself what you prefer. Ask yourself, if a loss happens tomorrow, would I be able to come up with the deductible or not?”
Insurance is great, but be prepared to prove your losses.
“It’s important to take inventory of the items in your business,” says Hackett. “Walk through your building with a camcorder and make a video. That will help expedite the settlement of your covered loss with the claims adjuster.” Store the video offsite in a safe or bank safe deposit box.
PROTECT YOUR REVENUE STREAM
A disaster can interrupt sales, and that means your expected revenue stream can dry up quickly. Think about buying protection.
“Business interruption insurance provides critical coverage for lost income—what your business would have earned but for the physical damage of a disaster,” says Hackett.
Purchasing interruption insurance requires thorough consultation with your agent. “It’s not as simple as an auto policy,” says Hackett. “The carrier will ask you questions about the nature of your business, your employees, your typical income in a month, and whether your business is seasonal in nature.”
You might also consider ‘extra expenses coverage,’ notes Hackett. “This insurance covers the higher expenses you might incur by moving to a new location, such as higher rents, and the costs of relocation.”
You can also get coverage for payroll expenses. “Just because your business is shut down, that doesn’t mean people will not expect a paycheck,” he says. “Paying them can be difficult if you are not taking in any income.” You can purchase such insurance just for the highest-paid employees or for your entire staff.
Two more things: “Contingent business interruption insurance” covers the lost income that results when a supplier is unable to deliver. You can also purchase what’s called “extra contingency expenses insurance.” That covers the higher prices you might end up paying to an alternative supplier.
Should you get either? “It depends on the nature of your business,” says Hackett. “It’s particularly important for manufacturers which assemble products in one location but utilize parts from elsewhere. Retailers may also need the insurance if they depend upon suppliers in different locations to keep their doors open.”
Standard property insurance policies generally cover water damage that results from pipes bursting. Not covered, however, is flooding from causes such as tidal surges, the overflow of rivers, or water flowing down from a mountain or along the ground.
“Damage from flooding can be catastrophic,” says Michael Sapourn, a Satellite Beach, Fla.-based attorney who has dealt extensively with flood damage insurance and litigation. “Those who own buildings located in areas vulnerable to such events should purchase flood insurance.”
“Much litigation results from the difficulty in distinguishing between water damage caused by windstorm (which is covered by standard property insurance policies) or from other causes such a tidal surge. Carriers often litigate the gray areas where windstorm ends and tidal surge begins.”
Mortgage lenders will require you to buy flood insurance if you are located in a flood zone, as defined by the Federal Emergency Management Agency (FEMA). “Businesses which have paid off their mortgage often drop flood insurance since they no longer have a lender who requires it,” says Sapourn. “That’s a mistake.”
Finally, don’t make the common mistake of being underinsured. “Don’t try to save money by lowering limits. Get the coverage limits you need to protect you from a total loss.”
Flood insurance policies are typically not available on a replacement cost basis, so you will need to estimate what you need to rebuild. If you have an older building, you may not be able to get the policy limit you want from FEMA, so you may end up going into the private market for excess insurance.
Once you have your recovery plan and your insurance policies in place, you are in a much better position to survive should you be hit with a disaster. But don’t just toss your recovery plan in a desk file and forget about it. Advisers counsel reviewing the program annually.
“Disaster recovery planning is an evergreen issue that is never done,” says Jeffrey Williams, president of Binomial International, a disaster planning consultancy in Ogdensburg, N.Y. “People change jobs, functions change, mobile phone numbers change. Keep revisiting your plan.”
You don’t want to be caught without a lifeline when a crisis hits.