Small business owners are getting some reminders this month that the forces of nature can threaten a company's survival. And that they need to be sure their businesses are well protected against a variety of disasters.
A storm in the Northeast caused flood and wind damage and left thousands of businesses without power. Meanwhile, residents of the Upper Midwest prepared for the possibility that the Red River would spill over its banks as it did last year. An earthquake in the Los Angeles area brought back memories of how vulnerable companies can be to such natural disasters.
But business owners whose cash flow is strained by the recession might decide to cut back on disaster insurance or eliminate it altogether. Faced with making their payroll or preparing for a disaster that may never happen, many owners decide to take their chances and skip the insurance.
Data from the insurance industry shows that the recession has made business owners more reluctant to buy coverage. A survey commissioned by the Council of Insurance Agents & Brokers found that commercial property and casualty insurance premiums fell nearly 6 percent in the fourth quarter from the previous three months. That's a sign of falling demand — premiums were being lowered to encourage businesses to buy.
Some owners decide to gamble on being uninsured or underinsured. Others who buy insurance after a disaster often lose their sense of urgency as time passes and another calamity doesn't occur, said Loretta Worters, a vice president at the Insurance Information Institute, an industry organization. So they cut back on their coverage.
"People kind of forget and say, 'it's not going to happen again,'" Worters said.
THE BARE BONES — MAYBE TOO BARE?
A small business should at the least consider getting the most basic coverage, known as a business owner's policy, or BOP. A BOP generally has property insurance, liability protection and business interruption insurance, which can be critical when a company is dealing with the fallout from a disaster.
But a BOP, or for that matter, a standard property and casualty policy, won't protect businesses from damage due to disasters like floods, earthquakes and landslides. A business needs to purchase coverage for those disasters separately.
Some of the bad weather covered by the BOP includes wind, rain, lightning and snow. If a hurricane tears a hole in your building's roof and rain comes in, regular insurance should cover the damage. But if water from a flood pours into your ground floor, you won't be covered without separate flood insurance.
If you run a company out of your home, be aware that a standard homeowners or renters policy may not cover damage to your business equipment. The more complex your home-based business is, the more likely you'll need a separate business policy.
It's a good idea to learn about insurance and then assess your needs before you contact a broker. You want to be sure you're not buying too little, or that you don't end up buying something you don't need.
The National Association of Insurance Commissioners, which represents state insurance officials, has a primer on small business insurance, called Insure U for Small Business, on its Web site at http://www.insureuonline.org/smallbusiness.
The Insurance Information Institute also has information on its site, http://www.iii.org.
You can learn more about flood insurance from the government Web site http://www.floodsmart.gov. Some flood insurance may also cover landslides.
Businesses in California can find out about earthquake insurance at http://www.earthquakeauthority.com.
Beyond the right kinds of insurance, Worters noted that companies need to buy the right amount of coverage. Accurate financial records need to be kept to help owners determine how much to buy. An accountant can help with crunching the numbers.
WHY BUSINESS INTERRUPTION INSURANCE MATTERS
Some owners might opt for cheaper commercial property and casualty insurance rather than the BOP, and not pay for business interruption insurance. That decision could prove fatal if disaster strikes your company — or one of your suppliers.
Business interruption insurance pays a company's operating expenses, including payroll, when it is shut down. The business interruption doesn't have to be the result of a natural disaster. A power outage that sidelines a company is also covered by a business interruption policy.
Without this insurance, many companies are forced to lay off workers, or they can go broke trying to meet debt payments with no revenue coming in.
If running your business is dependent on another company's being able to operate, you should consider contingent business interruption insurance. Let's say a supplier of a key component used in your manufacturing process can't operate because its premises were damaged in a hurricane, and you can't turn out your products until that company is back in business. Contingent business interruption insurance should cover your expenses.
"If you don't have that, your business could really suffer," Worters said.
Companies in certain industries need to get specialized insurance for some of their potential losses. For example, those in the restaurant or food service businesses, who could lose thousands of dollars of inventory in a power outage. They need polices that cover food spoilage.
Worters noted that standard insurance will cover food spoilage only if there was property damage — for example, a restaurant was hit by a hurricane. Spoilage due to a power outage alone requires special coverage.
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