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BIGGEST BUSINESS INTERRUPTION INSURANCE MISTAKES SMALL BUSINESSES MAKE (AND HOW TO AVOID THEM)

You feel like your small business is ready to tackle any obstacle, climb any mountain, or face any generic element of adversity. Nothing can drag your business down, right?

It's easy to keep the thought of disasters at bay when everything seems to be going so right. But the fact remains that every business, including yours, will eventually encounter some sort of roadblock. The question is: will you be ready to handle it? What about when a big disaster hits? Do you have a plan in place that can help you pick up the pieces and get your business running again?

If you're searching for an answer, then you might be making these five common mistakes when it comes to Business Interruption Insurance. Martin J. Green, AVP Underwriting & Operations with The Hartford's Small Commercial Technology and Life Science Practice, offers his take on business interruption misconceptions and how to avoid them.

MISTAKE #1

Mistake #1: It'll Never Happen to Me

A fire devastates a local eatery, and because it's unable to recover, it must close up shop forever. "That's too bad," you might say. "But it'll never happen to me." Sorry, friend. There's no guarantee your business will be spared from misfortune.

Your business isn't the only one you have to worry about. You could face a supply chain interruption if your supplier, distributer, or manufacturer experiences a disruption, Green cautions. Whether it's a factory in Ohio that makes your products or a facility halfway across the world that supplies your materials, if it faces an interruption, so might you.

To start preparing your business for these situations, Green recommends you consider…

  • Possible risks. Civil disruption? Windstorms? Fires? Anything can happen, and you need to be prepared for it.
  • Specialized equipment. Are your products or services dependent on a special type of equipment? Can you do business without it?
  • Your location. Is your area prone to tornadoes? Are you dependent on a nearby leader property to attract business? Can you easily conduct your business in an alternative location?

As Green points out, business owners "get busy in the here and now and they don't think about what could happen in the future." Understandable, of course, but not an effective risk-management strategy.

MISTAKE #2

Mistake #2: I'll Just Play It by Ear

Maybe you're the type of person to fly by the seat of your pants. Throw caution to the wind! But if you wait until a disaster strikes to handle your business's recovery, it may already be too late.

A smarter approach is to develop a disaster recovery plan (DRP) that outlines the procedures to follow after a business interruption. Create a plan that specifies…

  • How to notify employees and customers about the disaster.
  • Which backup supply chains to use when your primary supplier isn't available.
  • Pertinent contact information for employees, suppliers, and your insurance carrier.

Share your disaster recovery plan with employees and keep copies of your important documents in a location away from your business. Green recommends checking to see if your insurer offers loss control services like The Hartford's Risk Engineering, which provides assistance in evaluating your business's risk exposures and understanding your loss history. Loss control services may also include advice on contingency planning tailored to your industry. For additional ideas on building a DRP, check out What's Your Business Interruption Plan?

MISTAKE #3

Mistake #3: Those Records Are around Here Somewhere...

Insurers require proof of loss when you make a claim on your Business Interruption Insurance. You have to prove that your business suffered financial damage, which can be difficult without proper records. To provide a point of reference for your insurance carrier, keep detailed records of:

  • Payroll.
  • Inventory.
  • Sales.
  • Projected revenue.

Check to see what proof your policy requires and carefully document your day-to-day affairs – even while operating normally.

It may sound simple, but Green recommends that business owners "have your contingency plan written down." This allows you to have all your information in a single place while working with a claims representative. It also eliminates any confusion about contingency plan agreements you have with others.

If you plan on using someone else's equipment or storage during a business interruption, for example, get the agreement in writing. When you actually need that equipment, there’s no last-minute negotiating of the terms of use.

MISTAKE #4

Mistake #4: What Do You Mean Floods Aren't Covered?

Imagine you're the owner of a quaint café nestled along the river that runs through town. A rainy afternoon becomes an unrelenting downpour pushing river levels higher and higher until your café is under water. The flood waters recede, but your troubles are just beginning, even though you have a Business Income endorsement.

That's because most standard Commercial Property Insurance policies exclude coverage for flood damage. The same goes for hurricane and earthquake damage, unless you have a specific endorsement naming these events as part of your Property Insurance coverage.

The problem? Your Business Interruption policy can only address disruptions caused by covered Property Insurance claims. Pay careful attention to the wording of your Property and Business Interruption Insurance policies, and talk to your insurance agent to determine what is and isn't covered.

For more on Business Income coverage, read What Business Interruption Insurance Can and Can't Cover.

Mistake #5: Business Income Insurance? Never Heard of It.

You haven't heard of Business Interruption Insurance? Well, you're not alone. Green says business income protection is often overlooked.

An Insurance Journal article[1] details the findings of a 2005 survey that revealed some surprising statistics:

  • 54 percent of small-business owners don't have Business Interruption coverage.
  • 20 percent of small-business owners have never heard of the coverage.
  • 45 percent said they didn't think they needed it.

Business Income Insurance may help you pay for continuing expenses (e.g., employee wages, rent, and loans) when a covered Property event forces your business to close down temporarily. This policy may mean the difference between survival and closing your business's doors permanently.

To learn more, watch our video tutorial What Is Business Interruption Insurance?

 

 


[1] Insurance Journal, 2005. “Small Business Owners Face Gaps, Confusion Over Insurance Problem.” http://www.insurancejournal.com/magazines/features/2005/07/04/150331.htm