Small Business Owners Face Gaps, Confusion over Insurance Problem

June 20, 2005

Many U.S. small business owners face a major gap in their insurance coverage or do not fully understand coverage they have, a new national survey conducted by Trusted Choice® finds.

Trusted Choice® agencies are insurance and financial services firms that offer consumers a broad selection of insurance policies and financial services products, customized insurance coverages as well as advocacy support. These firms are committed to providing excellent customer service.

The gap and misunderstanding is in a coverage area known as “business-interruption protection.” This insurance pays for lost income if a firm is temporarily closed or its income reduced or diminished due to a covered loss. It also can pay for operating expenses that continue after business has come to a temporary halt–such as rent, salaries and operating at a new location.

“This survey shows that many small business owners have inadequate business-interruption coverage, and are confused about what protection it actually provides,” said Trusted Choice® spokesperson Madelyn Flannagan. “Three out of four respondents either don’t have business-interruption insurance, or don’t know what it is or when it applies, if they do have it. In the aftermath of a disaster, how do they–and their employees–plan on operating the business without income for what could be many months? Business-interruption insurance provides the resources that allow them to move, rebuild and minimize the impact on their business.”

Running a small business without business-interruption protection, or understanding how it works, is akin to ignoring the warning signs of a fatal heart attack.

The survey focuses on an underinsured but significant portion of the small business market. Agents and brokers can round out commercial accounts by raising awareness of business-interruption insurance, and explaining its value to business owners, Flannagan said. “Agents can take the opportunity at renewal and with new policyholders to explain the value of business-interruption insurance. This coverage not only protects against catastrophes, but gives employees, banks, vendors and customers more confidence in a firm’s stability.

“Running a small business without business-interruption protection, or understanding how it works, is akin to ignoring the warning signs of a fatal heart attack,” said Flannagan. “You can’t always predict or prevent natural disasters, fires or any other potential business-closing catastrophe, but you can be prepared in case one strikes your small business.

“A business that has to close down completely while its premises are being repaired may lose out to competitors, lose market share, lose employees, lose suppliers, lose inventory, and face other challenges,” Flannagan explained. “A quick resumption of operations is essential if a small business is to survive following a disastrous loss and this can be accomplished in large part through business-interruption coverage.”

The Trusted Choice® survey found many business owners are not aware of the importance of this coverage:

More than half of small business owners surveyed (54 percent) said they don’t have business-interruption coverage. Another 20 percent weren’t sure or said they never heard of the coverage.

One out of four respondents (26 percent) said they have business-interruption coverage–a number far below those in this category who should be insured under industry-standard package policies.

Among those who said they purchased business-interruption coverage, only 38 percent said the reason was that it was included in the policy.

Among those business owners who said they don’t have business-interruption coverage, 45 percent said they didn’t think they needed it; another 19 percent said it was too expensive, 16 percent said they didn’t know about it, and 13 percent were unsure.

An overwhelming majority of owners who have business-interruption see the value. Nearly nine in 10 of these entrepreneurs (86 percent) said they are “very” or “somewhat” likely to keep the coverage.

From a financial security standpoint, business-interruption coverage is a key protection package, Flannagan said, noting: “Business owners must ask the question, ‘How am I covered for this exposure?’ If they are not covered, they should consult their Trusted Choice® agent immediately to discuss the coverage they need to protect their business.”

Standard small-business insurance–known as business owners’ policies, or BOPs–cover loss of income and certain extra expenses for 12 months, Flannagan said. BOPs often provide 60 days of coverage for ordinary payroll. BOP eligibility typically is based on the type of business, size of building, and/or amount of revenue; and eligibility varies from one insurer to another, but more than half of all commercial risks are eligible, Flannagan said. Agents should consult with their small-business customers to ensure they have the package they want to match their situation, she advises.

“Other industry statistics have shown that 85 percent of small businesses are underinsured by 40 to 50 percent,” said Flannagan. “Of those businesses that suffer a serious loss, almost half never reopen–and of those that do, more than one-fourth close within three years. Business-interruption insurance can help protect small businesses from that fate.”

Natural disasters are a permanent killer of many small businesses, Flannagan said. For example, according to industry reports, some 40 percent of South Carolina small businesses closed by Hurricane Hugo in 1989 never reopened.

About the research: The omnibus survey of 500 small businesses (defined as businesses with fewer than 100 employees and less than $1.5 million in revenue) throughout the United States was conducted April 11-22 by Media, Pa.-based International Communi-cations Research (ICR). The survey has a margin of error of ± 4.5 percentage points at a 95 percent level of confidence.

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Insurance Journal West June 20, 2005
June 20, 2005
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