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Owners often overlook need for business interruption coverage

Although most small business owners know they need property and casualty insurance for their premises, many don’t realize they need specialized insurance coverage to limit their losses from a disaster.

Perhaps the biggest omission owners make when buying a commercial policy is business interruption insurance, according to Loretta Worters, vice president for communications of the Insurance Information Institute, a New York-based trade group. “They fail to think about what would happen if their business couldn’t open again,” she said.

Worters noted that business interruption insurance should be part of a company’s business plan, and the blueprint needed for any kind of loan or financing. Even the many owners who fund their companies themselves should buy this type of insurance — or they could see their hard work and dreams become a casualty of a fire, flood, earthquake or storm, she added.

Business interruption insurance covers profits that are lost and expenses that continue to be incurred when a company is forced to shut down by a disaster, or even by an event such as an extended power outage. Policies typically have a 48-hour waiting period before coverage starts, but, depending on how much coverage a business buys, interruptions up to 360 days can be covered.

Among the expenses that business interruption insurance covers are salaries, rent and electricity — costs that businesses still need to pay although they may not be able to operate.

How much business interruption insurance a company should buy is, of course, an individual decision, Worters said, but it should be considered along with a disaster recovery plan. If businesses are certain they could quickly relocate operations to another site and keep working, they might not want to buy the maximum amount available. However, disasters like the Sept. 11, 2001, terror attacks and Hurricane Katrina have shown that the unthinkable can happen — companies can be uprooted and put out of commission for months. Without business interruption insurance, many have failed, she said.

“The biggest hazard of all is being shut down,” said Carol Chastang, a spokeswoman for the Small Business Administration. “Business interruption insurance is absolutely vital.”

A type of coverage related to business interruption insurance and also often overlooked is extra expense insurance, which reimburses a business for costs related to having to shut operations down, including expenses such as moving costs, new equipment and supplies.

Companies also can buy contingent business insurance to prote themselves from the fallout from a disaster that befalls a critical supplier — for example, a company that custom manufactures a part that the business depends on to produce its own goods.

“If it [a disaster] shuts down a business and it affects business, it helps to defray the costs,” Worters said.

Damage from flooding is not covered by a typical commercial package; it must be purchased separately. The same goes for earthquake insurance.

There are even more specialized kinds of disaster insurance that companies should consider, including “boiler and machinery” insurance, which covers damage to premises caused by a sudden and accidental equipment breakdown.

Companies in specific industries should consider purchasing policies tailored to their line of work. For example, food purveyors should have food spoilage insurance to cover their losses from a power failure, she added.

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