Five Questions to Determine Your Business Interruption Exposure

Business InterruptionThe September 11 terrorist attacks caused immense loss of life, human suffering and property destruction, particularly at the World Trade Center in New York City. The insurance losses from injuries and property damage were very large. However, the losses resulting from businesses in the area having to shut down for extended periods of time were huge. Businesses filed nearly 5,500 business interruption claims for more than $12 billion following 9/11. For many organizations, the loss of income coupled with continuing expenses after a fire or other disaster can be even more devastating than the damage itself. To increase the chances that a loss will not shut operations down permanently, organizations must accurately assess their exposures by asking some questions:

What is the most the organization could lose from a shutdown? 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 $300,000 and necessary continuing expenses are $100,000, the potential loss of income is $400,000. To calculate their exposure to business interruption losses, organizations should refer to their balance sheets, profit and loss statements and cash flow statements. Insurance companies also have worksheets available to assist with the calculation.

How much insurance should be carried? Once the organization knows the dollar amount of its exposure, it must decide how much business interruption insurance to buy. The key considerations are the length of time the insurance is likely to apply and the coinsurance percentage the organization must meet. Coverage usually begins 72 hours following the damage to the property and ends when business resumes at another location or when the building should be repaired with reasonable speed, whichever occurs first. If the organization decided that the coverage period would be around six months, it could buy an amount of insurance that would satisfy a 50 percent coinsurance requirement. If the interruption would last longer, higher coinsurance percentage and limits would be necessary.

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 their businesses are seasonal. For example, an oceanside restaurant in New Jersey that makes most of its profits during the summer will need additional coverage even if it can re-open in November.

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.

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.

A professional insurance agent can help a business owner answer these questions and identify insurance companies that can meet coverage needs. With some effort and planning before a loss happens, an organization can emerge from a shut down and return to profitability.

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