For many business owners this year, the hypotheticals seem all too real:
What if your street were flooded or destroyed, shutting off access to your doors? What if you lost power or potable water? What if your supplier, halfway across the country, was wiped out by a storm?
How long could you afford to keep your business closed? How much would it cost you to resume operations – by leasing a temporary plant, buying materials elsewhere? How long could you pay your employees before your cash ran out?
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The worst stories, of course, have come from New Orleans, but it doesn’t take utter chaos for a business to be hard-hit: Look at Acushnet Co., a golf ball maker in New Bedford that had to lay off more than 200 workers after Hurricane Rita cut off supplies of a specialty plastic it needed.
Across the region, insurance agents say they’re getting calls from clients – some already facing losses, others seeking to protect themselves. Amid all the calamity, business owners are discovering a coverage type that’s long been available, but that few talk about.
Think of it as “disability insurance” for your business, said David White, a partner at Butler & Messier Insurance, in Pawtucket, and head of commercial insurance there. If your business is disabled in some way, this will replace at least part of its lost income.
In its most simple form, business interruption insurance is a form of property coverage: If your building and equipment are insured against fire, for example, it will cover income lost if a fire forces you to shut down, or if a key piece of machinery burns and you can’t operate.
The good news for most small businesses, said White and other agents, is that the policies they tend to have – known as “business owners’ policies” or BOPs – usually come with that coverage built in, at least for a limited time period.
Manufacturers and larger businesses, however, tend to have “package” policies specially put together for them, White and others said, and depending on how thorough their agent was, they may or may not have any coverage, or enough coverage.
“Believe it or not, that line item is one of the cheapest line items on a property policy,” White said. “But what we find, often, is clients aren’t asking for it, and they aren’t being offered it, because when they see another $250 on the bill, they don’t want to go for it.”
Even more crucial, White and others said, is what’s insured: Coverage for a building won’t extend to what happens off-premises – say, a power outage due to a knocked-down utility pole, or a landslide that destroyed the road – and any exclusions apply to business income as well.
A loss is only covered “as long as it’s based on a peril insured,” said William K. Austin, a partner at Austin & Stanovich Risk Managers. Even if you were forcibly evacuated by the police and you’re covered for actions from a civil authority, if they evacuated you because there’s a flood in your area, the flood exclusion in your policy would apply.
As for the dilemma the Acushnet Co. faced – that requires yet another type of coverage, “contingent business income,” which can cover two sets of circumstances, said Austin: the loss of a crucial customer (say, if 90 percent of your business was supplying trinkets to casinos in Biloxi), or more commonly, the loss of a major supplier or contractor for your business.
That, in turn, can be tricky as well, said White. In a global economy, companies may have their supply chains and business processes spread out around the world, and even relatively small manufacturers routinely outsource part of their production. But for many carriers, insuring a risk in China or Indonesia is just not feasible, White said – and a worldwide carrier such as Lloyd’s of London, for example, might demand very high premiums.
Butler & Messier has numerous clients in the jewelry industry, White said, and he finds it “extremely difficult” to secure international contingent coverage for them. For some “very large” manufacturers, companies with about $100 million in annual sales, the best he could find was policies with a $250,000 limit, he said. Many clients just don’t get insurance for those risks, and instead he advises them to make good contingency plans.
“Some things just aren’t insurable or aren’t affordable,” especially for smaller businesses, said Richard Padula, executive vice president of Glover Padula Insurance, a subsidiary of GenCorp Insurance, in East Greenwich.
But that’s not necessarily a bad thing, Austin said. He encourages clients to try to minimize their exposures before insuring for what they can’t control – and in the case of suppliers and outsourcing, a more effective approach, he said, is to create some “redundancy” by finding a second source for the same item or service.
What is crucial, however, is to take the time to assess the actual risks, Austin said: Who are your key suppliers, and what risks do they face? How quickly could you replace them if you needed to? What extra costs would that entail?
The same concepts, of course, have to be applied to your own operation, Austin said.
“What happens sometimes is people underestimate the true catastrophes that could happen to their businesses,” Austin said. The Sept. 11 attacks and the recent hurricanes have raised public awareness, he said, but people still tend to think small, not realizing that a major event could shut them down not for days or weeks, but for months.
Insurance agents have a standard worksheet to estimate the coverage a business needs. It covers annual net sales, minus the cost of goods sold, along with payroll, fixed costs – rents, loan payments, etc. – as are potential extra costs for resuming business.
“It’s a very enlightening worksheet,” White said. “You quickly realize that you need a lot more coverage than you think you do. Everyone thinks, ‘I can be up and running again in a matter of two weeks, and it doesn’t work that way in the real world.”
Because each company’s needs are different, the cost of business income insurance can vary dramatically. If it’s part of BOP coverage, “it’s probably a few pennies on the rate,” said John Kurkulonis Jr., division vice president of underwriting at the Protector Group in Worcester. If it’s sold separately, it can be “nickels and dimes on the rate.”
One way to reduce the cost, said Padula, is to limit the payroll coverage – do you really want to keep paying all your workers if you’re closed for six months or a year, or just your most prized employees?
Adding a deductible – for one to five days, say – “works really well” to reduce rates, Kurkulonis said. And all agreed that the key is to insure for losses you really couldn’t bear, not for minor business disruptions.
“I say, look at the big picture, versus the small things,” Kurkulonis said. One of his clients, for example, is a horseshoe manufacturer and requires a specialized type of steel. The chances of his supplier being wiped out might be slim, but the effects would be devastating. At the other end of the spectrum, the risk of having a transformer vandalized might be high, but the potential impact is probably too small to bother insuring for it.
“How long is it going to take you to replace that transformer? A couple of days?” he said.
Given all the pitfalls and complexities, Kurkulonis said it’s crucial to use a seasoned commercial insurance agent, because many “don’t understand” this coverage. And all agreed on the importance of providing detailed, accurate information and reading all the fine print.
In the aftermath of this month’s heavy rains, Kurkulonis said, he has many clients who’ve suffered flooding and business closures, and their insurance will make all the difference.
“One has 8 feet of water, but they had flood coverage and business interruption coverage – they’ll be fine,” he said. “I’ve had other people call and they never bought the flood, never bought the business income. And they’re going to be hurting. They’re probably not going to stay in business, and it’s unfortunate.”
