If you own or manage a business, you know the unexpected can happen anywhere, anytime. When you least expect it, business interruption can deal a crippling blow to your ability to serve your customers and cover your overhead.

Recently, we've seen the unfortunate results of business interruption. As 2014 wound to a close, one of the year's biggest news stories involved the protests in Ferguson, Missouri. The community teetered on the brink of chaos on several occasions, and the news images broadcast from the region were troubling.

It will take a long time for the people of Ferguson to recover, but for one group of citizens—local business owners—that day may never come. Commercial enterprises of all kinds were looted, dozens were damaged by fire, and the operations of many more were impaired by the unrest. Some were forced to close.

According to the Small Business Administration, as much as 60 percent of businesses never reopen their doors following a disaster. One reason is that these enterprises are frequently underinsured; they may not carry or they have inadequate business interruption coverage. When devastation hits, they are literally cut off from resources needed to recover operations.

Business interruption insurance was originally established for the manufacturing sector but has evolved into an essential risk transfer tool for all industries. It goes well beyond property insurance, which only covers physical damage to the facility. Business interruption provides resources that support actual recovery following a direct loss and can help get a company back on its feet faster.

Coverage is typically composed of two parts – business income and extra expense. Business income coverage insures net income that would have been earned. "Would" is the key word here because unlike a physical damage loss, business income is based on assumptions of what would have happened if there was no loss. Business income covers operating expenses that continue even after a loss, such as payroll. This is also a tremendous incentive for key employees to stay employed with the business following a disaster, rather than seeking employment elsewhere.

The second component of business interruption—extra expense—covers potential costs beyond normal operating expenses. These include any expense that helps avoid or minimize business downtime, allowing operations to continue. Extra expense examples include renting office space at a temporary location, paying relocation fees, and the cost to equip and operate the replacement or temporary location.

Another component of business interruption insurance to consider is civil authority, which covers a loss of operations resulting from a government-mandated closure of commercial premises that directly causes loss of revenue. An example is an ordered evacuation ahead of a hurricane, which occurred in New York, New Jersey, and other states when Superstorm Sandy hit in late 2012, and went on to devastate commercial properties in the eastern U.S. and elsewhere. However, many standard business interruption policies do not apply to acts of civil authority.

Planning for a disaster requires forethought and determining the exact coverages your enterprise needs can be complex. It also requires imagining the unimaginable. It is important for a business to develop a viable contingency plan. The process should include loss scenario planning and a business impact analysis, which predicts the consequences of operational disruption and gathers information needed to design recovery strategies. Advance documentation of individual and corporate roles and responsibilities in response to a catastrophic event, as well as the appropriate business interruption coverage are critical to recovering and maintaining your operations quickly. And if the worst happens, the right planning and insurance are the bridge to putting things right again.

While you might not want to consider pessimistic scenarios, taking a cold, hard look at the possibilities can mean the survival of your business when disaster strikes.

Special Reports /

Business interruption: How not to stay down when you’re out

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