Business Interruption is the Top Business Threat of 2015
Risk managers rank business interruption as one of the top threats facing companies this year, according to a 2015 Allianz Risk Barometer report. It is also the second most underestimated risk, which means businesses need to spend more time examining their potential business interruption risk exposure.
According to the report, companies most fear business interruption caused by fire or explosion, followed closely by the impact from natural disasters. Since more than 40 percent of businesses never reopen following a natural disaster, that concern is understandable. Business interruption insurance (BII) can help protect a business from such risk.
Recently Brown Smith Wallace was engaged by a Midwest distributor that experienced damage to one-quarter of its building from a natural disaster. The business owner didn’t file a business interruption claim because the company was able to get right back into business. The staff worked overtime and extra people were scheduled, but the sales did not meet expectations for a month after the disaster. An independent insurance consultant pointed out that this was a business interruption loss and suggested filing a claim. The consultant assisted the client with the claim presentation and the company collected $175,000. The insurance company paid for the insurance consultant’s fees, so the insurance review services were completely free to the client.
Considerations when setting up business interruption insurance
Small and large businesses have a lot in common when it comes to BII, especially when it comes to understanding what is and is not covered.
Insuring buildings or equipment is pretty straightforward — it’s a matter of determining property values and reporting them to the insurance company. Based on the perils that are specifically insured, the policy will cover loss that occurs. However, some BII considerations are less obvious.
Businesses should pay particular attention to the following:
- Is BII included in your policy? Business interruption insurance is not automatically included; it is a separate section that needs to be added to the policy.
- Is contingent BII mentioned in your policy? If a supplier or major customer suffered damage to their building, would you be covered for your loss of business? This is known as contingent BII and has to be specifically mentioned in your policy. Contingent BII frequently has lower limits — check to make sure you have proper coverage.
- What perils are covered? BII only covers perils that are on your property policy, but what about earthquake and flood losses? Also, access to your property can be denied for snow storms, tornadoes, civil authority, etc. — if you have a loss because access is denied, are you covered?
- What profits would you have lost during the period that you were out of business? Understand how to prove your loss so you know whether to agree with the insurance company before a loss happens.
- How do you value the loss in a growing or shrinking business? BII insures your loss of profits, so understanding your business’ value and how you measure it is crucial.
If your building needs to be rebuilt, will you have to pay your employees during that time? “Ordinary payroll” needs to be specifically included in your policy to cover the total amount of payroll expenses for all employees (with some exclusions), otherwise you risk losing valuable employees if you do not continue their income.
- Are extra expenses covered? Extra expense insurance reimburses your business for a reasonable amount of money that it spends to avoid shutting down during a restoration period. For example, the rent on a temporary replacement building to keep your business operating could be considered an “extra expense.”
Each business has different needs for BII; it is best to address business interruption risk and loss with an independent team of insurance and accounting experts.
Or schedule a meeting with Bill Goddard, Principal, Insurance Advisory Services.