Filed Under:Agent Broker, E&S/Specialty Business

Small Business, Big Protection

A changing climate means weather-related business interruptions will steadily increase, making business interruption insurance essential for even the smallest businesses. Learn about the unique needs of microbusinesses and how to protect them when natural disasters strike.

Inundations of claims following events like Superstorm Sandy have left insurance providers scrambling for ways to manage claims and owners of micro businesses wishing they’d invested in better coverage—and so-called “superstorms” are not likely to go away any time soon. Earlier this year, NASA released a report indicating that global climate change can be expected to cause weather events of increasing intensity and frequency in the coming years, bringing with them more disruptive damage. With even microbusinesses (those with 10 employees or less) relying increasingly on global supply chains, the opportunity for costly business interruptions around the world is greater than ever.

A 2012 Allianz Global Corporate and Credit study found that in the last decade, roughly 30 percent of business interruption-related losses were covered by insurance. Only about two thirds of small businesses carry business interruption insurance, making this group highly vulnerable to the financial devastation that outside events can bring.

It also means that agents and brokers who serve small and micro enterprises expose themselves to professional liability lawsuits when they fail to inform their clients about the interruption coverage options available. Educating microbusiness clients about the risks they face given the “new normal” of climate conditions and global trade is an essential task for any agent or broker with microbusiness clients.

Unique Exposures

Even those micro enterprises that carry business interruption insurance may be underinsured, despite the fact that this type of coverage can make the difference between solvency and bankruptcy in the event of a disaster. Agents and brokers can increase the likelihood that these clients will invest in adequate coverage by providing educational materials that focus on their unique exposures. These include:

1. Uncertainty about their coverage needs

Many microbusiness owners don’t know where to begin when seeking a business interruption endorsement, which can overwhelm them into inaction. As their link to the realm of insurance, agents should outline the potential losses their clients might incur, including:

  • Lost sales
  • Lost rent or lease payments
  • Employee wages
  • Taxes
  • Loan payments
  • Utilities.

The first step in calculating business interruption insurance needs is determining which of these expenses will continue if a business is forced to stop operating. Most microbusinesses want to continue paying employee wages so they don’t lose their trained workforce in an unexpected closure. But if an interruption occurs because of a power outage to a business’s premises, the costs of utilities won’t continue during the interruption period. For this reason, many business interruption policies exclude coverage for utility payments.

Another common question among microbusiness owners who rent their premises is whether their business interruption needs are linked to the property insurance carried by their landlord. In most cases, the answer is no: Commercial lease agreements typically require renters to carry their own insurance, and often explicitly exclude them from any insurance carried by the property owner. In some cases, lease agreements require lessees to continue paying rent even if the premises become unusable, making business interruption insurance a near necessity to ensure adequate funds.

2. Uncertainty about how much or what kind of coverage to purchase

The finer points of business interruption insurance are generally not common knowledge among microbusiness owners, who are often subject matter experts but novices in the “business” side of operations. This means that even those who are aware that interruption coverage exists may not know what to look for in an endorsement. In discussions with microbusiness clients, agents and brokers should be sure to address key exclusions and deductible issues that affect this demographic most profoundly:

  • Extra expense riders: In a standard business interruption endorsement, benefits that pay for rent and related costs only cover the costs of a business’s current premises. If the business is forced to relocate to a more expensive location, it will have to make up the difference in leasing costs out of pocket. Extra expense riders allow for some wiggle room in this area, eliminating a possible source of financial strain.
  • Contingent business interruption (CBI) coverage: This is a key protection for businesses that rely heavily on partners or suppliers to conduct their commerce. CBI pays out if and when a covered event hits a business’ suppliers or partners and prevents normal operations even though the covered business itself remains intact. However, CBI often comes with coverage limits lower than the endorsement’s total limit, so agents should make sure their clients are aware of the limits of coverage they can expect to receive.
  • Utility coverage: Coverage for electricity and other utilities during a business interruption is excluded from the typical business interruption endorsement. Businesses concerned about these expenses, however, can add a utility rider to their endorsement.
  • Civil authority and ingress/egress coverage: During Superstorm Sandy, governors in affected states issued mandatory evacuation orders as a preventative measure against damage and injury. The result was that some businesses were forced to close their doors even though the hurricane ultimately didn’t cause any physical damage to their property. In other scenarios, blocked-off areas might prevent a business owner and customers from accessing a storefront, again preventing commerce without actually causing any damage. Microbusinesses have the option of choosing business interruption insurance that covers both of these perils, which can cause significant financial loss, especially if they occur during a peak operating season.

In addition to these exclusions and additions, brokers should warn their microbusiness clients about the time deductibles that are often included in business interruption policies. Many policies come with a 72-hour time deductible, meaning that business owners need to have a business continuity plan to take them through the first 3 days of any interruption, as well as the period between submission of claims and receipt of benefits.

3. Uncertainty about the claims-submissions process

Once owners invest in business interruption insurance, they can be lulled into a false sense of security, thinking they’ll be guaranteed benefits if and when an incident prevents them from operating normally. In reality, business owners need to be vigilant about record keeping to collect on their policies in the event of a disaster; but many owners of microbusinesses don’t realize what this vigilance entails.

Agents and brokers can help ensure that their clients receive the coverage they need and avoid unnecessary and time-consuming claim denials by educating them about the requirements of the claims submission process.

First, emphasize the importance of documentation. Small businesses in particular should meticulously document their incomes, especially if they’re experiencing growth. Without records that demonstrate expansion, business owners may only be able to collect benefits based on their previous year’s income.

Second, encourage business owners to store their records digitally and in hard copy somewhere off-site. If a natural disaster destroys the business premises, records of income and other expenses remain intact and can be accessed easily for claims submission purposes.

Third, reinforce the importance of contacting the agent or insurance company immediately following an event that will trigger a claim. Communication is key to ensuring adequate claims payment, and should include:

  • Contacting the insurance company immediately and with ongoing updates about the claim event
  • Preserving damaged goods or equipment parts for inspection by insurance representatives
  • Soliciting multiple repair or replacement quotes before choosing a provider.

Another key element of interruption policies unfamiliar to many owners of microbusinesses is that many include per-incident coverage limits. Agents and brokers should help small business owners understand these limits and assess whether they’re likely to need additional coverage based on their expenses.

Finally, agents and brokers should communicate that, because business interruption insurance exists only as an endorsement to a business owner’s existing policies, it only covers losses connected to the larger policy. In other words, a business interruption endorsement added to property insurance only covers losses a business incurs because of property damage.

For example, following Superstorm Sandy, a Fairview, N.J.-based mochi factory owner lost thousands of dollars’ worth of product when his freezer stopped operating because of power outages caused by the storm. Had the owner had a business interruption endorsement in force, benefits would have covered the revenue he lost because he was unable to sell his damaged product.

Navigating the Endorsement

In addition to the nuts-and-bolts issues pertinent to microbusinesses interested in business interruption insurance, agents and brokers should be aware of peripheral issues that often affect micro businesses whose operations are shut down.

Foremost among these is understanding how business interruption benefits function in the U.S. Most policies issued here work on a gross earnings form, which means that businesses can collect benefits only until their companies are once again operational, regardless of whether or not their revenue has been restored to pre-damage levels.

Because this can leave serious income gaps for some businesses, policyholders have the option to purchase a rider that extends coverage until the time that the company’s revenue is restored to pre-loss levels. Alternately, businesses can extend their coverage for a set period of time (often between 6 and 12 months) to accommodate reduced revenue during the period when a business is repaired but not yet fully operational.

A secondary concern that’s often overlooked is that of permitting provisional business operations. Following Sandy, the New York Post reported on a camera shop owner whose store was flooded. While waiting for his property to be repaired, the owner attempted to sell merchandise out of crates in front of his storefront, but faced legal complications because he didn’t have the proper permits to do so. Most microbusiness owners don’t consider disaster recovery in such detail, which leads to complications when disasters inevitably occur.

The Importance of Disaster Plans

While business interruption insurance is a crucial part of disaster preparedness for microbusinesses, it is only one prong of comprehensive disaster preparedness. Agents and brokers can boost the likelihood that their clients will survive a disaster by encouraging them to develop a business disaster plan that includes:

  • Provisions for having cash on hand for initial losses
  • Employee education and communication plans for before, during, and after an event to ensure that everyone knows what to do if and when disaster strikes
  • Backup, off-site and hard copy storage of financial and business records, including revenue documentation, customer and employee information, billing information and accounts receivable
  • A plan for temporary relocation that outlines key considerations (such as essential equipment or features temporary business premises must have)
  • Alternate supplier chains a business can tap into in the event of an incident that affects a major supplier.

In a world of increasingly volatile weather systems and interconnected global economies, disaster readiness is an essential part of every microbusiness’s risk management portfolio. By going beyond the sales and serving as a trusted educational resource for micro-business clients, agents and brokers can increase their value and improve the financial health of their clients’ enterprises.

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