Being an insurance agent gives us a front row seat in seeing the havoc that natural disasters cause to small businesses. What puts us on the edge of our seats is not knowing who has chosen to fully insure their business.
We live in Louisiana and have had our fair share of hurricanes and floods.
It is typical for most small business owners to have general liability insurance and property insurance.
But after Hurricane Katrina many small businesses were shut down in New Orleans for over a year. And more recently in Baton Rouge, The Great Flood of 2016 had a similar impact on businesses.
In a small business, even if you have insurance to cover your property damage, the lack of cash flow from being shut down for months can end up shutting the business down permanently.
Think about it.
You can lose all of your employees once you can’t pay them anymore. Depending on the type of business you have you may go into default on long-term contracts. And, of course, most small business owners can’t go 18 months without any income themselves.
The result. Many small businesses never re-open.
They have to give up their dream and their livelihood and go find work.
However, there is a different ending for some.
For the few small business owners that knew about business interruption insurance….
For the even fewer who were willing to invest in business interruption insurance…
The story isn’t over.
These business owners were able to receive a portion of their business income during the time the business was shut down.
What Exactly is Business Interruption Insurance?
This is a summary from an article published by Marsh, a global leader in insurance broking and risk management:
The policy will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.
In order to better understand business interruption insurance let’s explore the three terms highlighted above:
- Actual loss sustained: Business income coverage covers the actual loss sustained by the insured as a result of direct physical loss or damage to the insured’s property by a peril not otherwise excluded from the policy.The insurer is only obligated to pay if the insured actually sustained an interruption of business leading to a business income loss. If the insured does sustain a business income loss, the extent of the insurer’s obligation is limited to the dollar amount of loss actually sustained, but not to exceed the applicable policy limit.
- Business income: Usually, the carrier is liable for the reduction in net income that results from suspension of operations—whether wholly or partially—due to a physical loss at the insured’s premises. This following commonly used definition of business income is intended to clarify what sums can be included when calculating the amount of loss.”Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll.”
- Period of restoration: Insurers are liable for the loss of business income only during the period of restoration, which is often defined as the length of time required to rebuild, repair, or replace the damaged or destroyed property. The period of restoration begins when the physical loss or damage occurs; it ends when the property should, with reasonable speed, be repaired or replaced. Expiration of the policy does not end the period of restoration. As long as the physical loss occurs during the policy period, the business income coverage will provide coverage for the duration of the period of restoration, even if the policy expires before the period of restoration ends.
There is a lot to learn about Business Interruption Insurance, but also a lot to gain. Contact us and we will be glad to share information and costs of this important protection with you.
With hurricane season upon us, it is a prime time to learn more now!