The large number of businesses affected by the terrorist attacks combined with the length of time it will take to repair the damages means that it may take several months before an accurate estimate on business interruption losses can be developed.
The loss figure may escalate over time if telecommunications problems persist — particularly for financial services companies — and “contingent business interruption” losses for those companies not directly affected by disaster mount.
“Business interruption claims will be among the first to be submitted and paid,” said Donald Griffin, National Association of Independent Insurers (NAII) director, business and personal lines. “Moreover, payments for many of these losses will continue for months to come. This is one of the most important ways insurers can help businesses get back on their feet after this terrible tragedy.”
Griffin indicated that while claims costs for business interruption policies are expected to be significant, NAII does not anticipate any insurer being unable to meet its financial obligations. The industry is well capitalized and the risk is adequately spread among many insurers and reinsurers, according to the NAII.
A complicated risk and a complex policy
“Business interruption insurance is very complicated and not everyone buys it,” Griffin said. “Professional firms, such as law offices, accounting firms and consulting companies, may not be as likely to buy such insurance as would a retail store or a manufacturing plant. Time frames for coverage varies from a month or two to a year or more, which will further delay a final accounting.
Individual policies will have to be examined to determine the extent of coverage and a realistic projection of the total insured loss.
“The most important element of business interruption insurance is coverage for lost profits,” Griffin said. “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.”
Payroll is also a major expense of normal operations that may be included in business interruption insurance. The coverage can be purchased for all employees or just for executive officers — again with a specific time frame spelled out in the policy.
Many small businesses purchase “businessowner” policies that include broad coverage provisions similar to a homeowners policy that automatically covers basic losses when business is interrupted.
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, again with wide variations to meet the specific needs and resources of the business, Griffin said, include co-insurance (like a deductible), the extent of payroll coverage 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/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.
Because of the wide variety of coverages available and the extended time periods that may be involved, Griffin said, the full cost of business interruption insurance resulting from the World Trade Center attacks may not be known for as long a year.