CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS |
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BUSINESS INTERRUPTION INSURANCE OFTEN A MUST FOR SMALL
BUSINESSES Tens of thousands of New York City area businesses—and
many beyond the area—suffered loss of income due to direct or indirect damage
from the destruction of the World Trade Center towers. While nearly all of those
businesses carried property/casualty insurance to compensate for direct physical
damage, many didn’t have insurance to replace lost income and cover continuing
operating expenses. That’s where business interruption insurance is helpful.
Depending on the provisions of the policy, this type of insurance will pay for a
firm’s lost profits, payroll, rent, taxes and other overhead expenses. It may
even cover extra costs such as relocating to a temporary or permanent site or
the cost of obtaining new suppliers. Some policies will cover these expenses
even if the business does not sustain direct physical damage, yet suffers lost
earnings due to property damage to associated businesses or even area-wide
perils that reduce the firm’s revenues. Business interruption insurance, sometimes called business
income coverage or loss of profit insurance, is typically a rider or endorsement
added to a business’s property/casualty policy. As such, what’s covered
under the main property/casualty policy will determine what is and is not
covered for business interruption. For example, P/C policies typically cover
fire, but not floods or earthquakes, so if an earthquake damages the business,
your business interruption coverage won’t kick in unless you’ve obtained
additional coverage for earthquakes. Scrutinize the policy to see if it will cover crimes such
as theft or vandalism, particularly internal theft such as embezzlement. Also,
see if it will cover loss of revenues as a result of cyber terrorism, computer
viruses or disruption of business due to the loss of an Internet service
provider. Many policies won’t cover these losses. Another coverage area that some businesses will need to
examine is interruption due to losses suffered by a key third-party business,
called contingent business interruption. For example, if you depend on raw
materials from a supplier, and that supplier is put out of business because of a
fire, your business will suffer if you can’t quickly find an alternative
supplier. Or you may be equally vulnerable if your business depends on a sole or
major buyer of your product or services. Business also may be interrupted due to civil or military
authorities closing down or limiting access to your business, as happened to
many businesses in the southern part of Manhattan immediately after the
September 11 attacks. You also may be able to obtain coverage for losses due to
the interruption of utilities such as power or communication. Some policies may not provide coverage for such an event
unless there is direct physical damage to your business. And some policies
won’t cover third-party interruption—only direct damage to your property.
You’ll need to shop carefully if this is important to you and read the
language of the policy closely. Business interruption policies also require
coinsurance, and experts caution that policies frequently end up underinsured
because the business owner accepts the wrong “coinsurance factor.” How long the policy will pay for interruption expenses
varies. Typically, it will provide benefits for the time it takes to rebuild the
business and get it back on its feet, even if that extends beyond the original
length of the policy. Some policies impose a time limit, and some policies allow
extended time to be bought. Coverage for interruption by civil or military
authorities is typically limited to a few weeks at most. Also, policies
typically require a certain amount of time to pass (three days is common) before
coverage begins, so consider whether you want to reduce that elimination period
by paying an additional premium. Examine the claims process carefully. What will the
insurance company require to prove lost profits? Generally, this is based on
your financial records and should show what you would have earned had the
disaster not occurred. Will you be able to allocate losses to the different
parts of the coverage, such as lost profits and suppliers? Not every business will need interruption coverage.
Attorneys or accountants, for example, can quickly set up shop again unless
they’ve lost records. But most businesses should at least do a careful review.
According to the Insurance Information Institute, half of the 300 small
businesses affected by the 1993 attack on the World Trade Center never
recovered. May 2002— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by McGuire & Co., LLP, a local member in good standing of the FPA. |
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