In the aftermath of a catastrophic event, a business may find the greatest disaster is yet to come – if it cannot replace the sales and profits it loses from an unexpected interruption in business.
The best way to avoid the second hit, insurance professionals said, is with a form of coverage known as business interruption insurance.
“The coverage will pay for additional expenses that the business does not normally incur but are necessary in order to maintain operations and get them back to full operation as soon as possible,” said John Eltringham, commercial insurance adviser at HMK Insurance in Hanover Township, Northampton County. “This could include increased cost of rent at a new facility.”
Eltringham said the coverage is often included in existing policies for small to medium-sized companies. For larger businesses, the coverage would need to be added as an endorsement to their property insurance policies.
No matter its size, no business should be without the coverage, insurance professionals said.
Eltringham said that he has “worked with many clients who have sustained large property losses and this line of coverage was crucial for them to remain in operation after the loss.”
The coverage – also known as business income and extra expense insurance – should pay for operating costs, payroll, taxes and other expenses incurred following a disaster. It typically lasts for a year after the disaster.
Jim O’Malia, a senior account executive at EHD Insurance in Spring Township, Berks County, “highly advises everyone to get business interruption insurance no matter what the industry.”
Fires are among the more common disasters that trigger business interruption coverage. But it has other uses.
The insurance could come in handy, for example, for a manufacturer that suffers an equipment breakdown.
“It … is not always used for a worst-case scenario,” O’Malia said.
Good records, however, are necessary for companies filing claims.
Business interruption covers expected profits, which must be determined using existing business records, as well as loss of income, employee salaries and ongoing expenses such as rent payments, tax bills and insurance premiums.
“The hard thing is being able to quantify the need of a business,” said Rob Schmidt, vice president of East Penn Insurance Group in South Whitehall Township. “You need to learn about the business and work with an insurance professional and your CPA.”
Companies also may need help figuring out how much coverage they need and what they should be paying, said Jim Honochick, president of Lehigh and Yutz Merkle agencies with offices in Bethlehem and Stroudsburg.
“A small business like small shops, mom-and-pop stores and other small merchants may only pay $1,000 a year for this coverage,” he said. “But a larger company will pay more, obviously.”
He said landlords especially should have the insurance in case they lose rent.
While the coverage will get a business over the hump, it can take time for normal operations to resume.
If that is a concern, it might be worth considering coverage called extended business income, which “can pay the residual loss of income for a period of time after you reopen to give your business time to ramp back up to full speed,” said William Ross, owner and managing member of Ross Insurance in Lancaster, which has customers in Berks County and the Lehigh Valley.
“Without the right business insurance, a disaster that should be a temporary hardship may wind up putting you out of business completely, so review your policy closely and be sure that you have the coverage that you need,” Ross added.