Business interruption insurance may be critical to survival


If your business was struck by an unforeseen disaster, such as a fire, burglary or massive equipment failure, would it survive?
There are three keys to surviving an interruption of business, according to Patricia Buffo, an attorney for Davis & Kuelthau, Milwaukee.
"A company needs to first assess the risks it faces, then determine if it has adequate insurance and finally identify an emergency plan," Buffo said.
According to Buffo, all businesses need to have insurance, but company owners should be aware that insurance will not cover everything.
"You cannot rely simply on insurance because the reality of the matter is that it is likely that the claims process of the insurance companies will take time, and sometimes that downtime is enough to destroy the vitality of a business," Buffo said.
"I recommend that each company should have some kind of emergency or recovery plan in sight. It can make the difference between staying in business or going out of business."
The first step to survive a disaster is to assess the amount of risk that is at stake for a business.
"Companies need to tailor a risk plan to their particular type of business," said Buffo. "Companies need to know what their lifeline services are and if they will be available. For instance, telecommunications systems, backup generators and it is always a good idea to have off-site data backup of information systems."
David Pautz, a property specialist for Marsh Inc., Milwaukee, said companies need to consult case-by-case situations to figure out how much coverage is necessary.
"The biggest thing is the ability to sit down and make a conscientious analysis of fixed expenses, such as leases, loans, taxes and so on," said Pautz. "But also, other things, like depreciation on assets. A machine depreciates in value, and when it is not operating, you are losing dollars in value even though the machine is not producing for you."
A company should meet with its outside advisors such as lawyers and accountants to aid in the self-assessment of risks, and then review the current insurance plan with a separate insurance carrier for a second opinion to confirm the current business insurance policy is adequate.
"A lot of companies have trouble with how much business insurance to buy," said Pautz. "Large corporations that have risk management professionals struggle with this as well."
According to Paul Price of Diversified Insurance, Waukesha, business interruption insurance is a common policy for companies to purchase, in addition to general business insurance. Interruption insurance will cover: the loss of income; the profits the company would have made in the time it is not operating; expenses that would continue, such as electric bills; and key payroll.
Depending on the type of business, an extended coverage policy and extra expense coverage can be important, because they provide aid after the building has reopened its doors, Price said.
Although business interruption insurance has a time frame of coverage from six months to one year, the coverage stops once the business is physically able to operate again, and coverage does not continue through the point at which the business regains profits and customers, Price said.
"A common business insurance policy in smaller businesses is called actual loss sustained," said Gary Burton, chief operating officer of Robertson Ryan & Associates, Milwaukee. "The big advantage is that you do not have to worry about how much to buy. The insurance will cover your actual losses for a period of time, typically 12 months. If you have actual loss sustained, you just have to show your total losses, and you will be reimbursed."
Burton said Robertson Ryan & Associates understands that larger companies have more people dedicated to buying insurance, and most insurance carriers want to make it easier for smaller businesses to purchase insurance.
In addition to insurance, Price said most insurance carriers want to make sure companies have an alternative plan in case of an emergency.
"The National Safety Council used to track major business losses and said something like 50% of businesses with major losses would still be bankrupt within the next two years because they really did not plan out what would happen. Some just can’t adjust fast enough," said Price. "The real key is to come up with a disaster planning process to plan how you could stay in business during that period and not lose customers."
If a business is dependent on one supplier, it is critical to talk to the supplier about a backup plan, Buffo said.
"It depends on the businesses, but some require a supplier contract," said Buffo. "You may want to sign a supply contract with a backup supplier in case something happens to the primary supplier, which will cause a loss to your business."
The Federal Emergency Management Administration (FEMA) has an emergency management manual on its Web site,, with guidelines on self-assessing risks, emergency evacuations and preparing for any type of loss, in addition to purchasing business insurance.
Buffo recommends every business owner review the Web site, which also includes types of questions business owners should ask during an insurance review.
According to Price, a business emergency plan should also include how to stay in business, possibly without customers even knowing, when the building is damaged and is shut down for repair.
The plan should identify which employees may be able to work from home and should determine if temporarily renting another building may be necessary.
"The real key is to not lose customers," said Price. "It may take 30 years to build a business, you don’t have to lose it in one day."

Jan. 9, 2004 Small Business Times, Milwaukee

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