BUSINESS INTERRUPTION INSURANCE—
DEATH PROTECTION FOR A BUSINESS

Business interruption insurance is a “must” for small businesses—
as much as it is for large enterprises

By Phil Zinkewicz

Last May, a fire in a small commercial plant in North Dakota resulted in the shutting down of operations “indefinitely,” according to a wire service report. GeoResources was not a very large facility, just two buildings and perhaps five full-time workers and six part-time workers, continued the report. There was insurance for the plant and contents, up to about $2.1 million. What there wasn’t—and this could be a determining factor as to whether the plant reopens—was business interruption insurance.

Following the horrific events of September 11, many small commercial businesses in the area surrounding the Twin Towers went out of business. It was not the direct losses that forced them under, for most had property insurance. However, they were not able to withstand the loss of income that came with shutting down for an extended period of time. In other words, too few of those commercial businesses had business interruption insurance.

It would seem that an important lesson should have been learned from that situation. One might imagine that the purchase of business interruption insurance by small commercial insureds would have increased significantly following the September 11 disaster. But, apparently, that has not been the case.

At a summer 2005 confer-ence on emergency planning sponsored by the Mission, Kansas-based SkillPath, an organization that offers business training for executives in the United States, Canada, Australia, New Zealand and the United Kingdom, the following sobering statistics were introduced:

• Seventy-two percent of U.S. companies have had business operations significantly inter-rupted because of power outage.

• Fifty-two percent of U.S. companies have had business operations significantly interrupted because of computer hardware problems.

• Forty-six percent of U.S. companies have had business operations significantly interrupted because of telecommunications failure.

• Forty-three percent of U.S. companies have had business operations significantly interrupted because of software problems.

• Thirty-four percent of U.S. companies have had business operations interrupted because of human error.

• Thirty-four percent of U.S. companies have had business operations interrupted because of lightning storms.

• Seventeen percent of U.S. companies have had business operations significantly interrupted because of floods.

• Fourteen percent of U.S. companies have had business operations significantly interrupted because of fires and/or explosions.

• Twelve percent of U.S. companies have had business operations significantly interrupted because of hurricanes.

We tend to think that interruptions to business stem from catastrophic occurrences such as the World Trade Center tragedy or serious hurricanes. But the above statistics show that the higher percentages of business operations losses come from more mundane occurrences such as power outages, breakdowns in computer hardware, and problems with software.

Despite these exposures, it appears that the small business community is not tuned in regarding the importance of business interruption insurance. A recent survey, conducted last April by Media, Pennsylvania-based International Communications Research on behalf of Trusted Choice, the consumer marketing brand for agencies that are members of the Independent Insurance Agents and Brokers of America, showed that many U.S. small business owners face a major gap in their insurance coverage in the area of business interruption insurance. This coverage pays for lost income if a firm is temporarily closed or if its income is reduced or diminished due to a covered loss. It can also pay for operating expenses that continue after business has come to a temporary halt—such as rent, salaries, and operating at a new location.

The survey of 500 owners of small businesses—defined as businesses with fewer than 100 employees and less than $1.5 million in revenue—shows that many small business owners have inadequate business interruption coverage and are confused about what protection it actually provides.

“Three out of four respondents either don’t have business interruption insurance, or don’t know what it is, or when it applies if they do have it,” says Madelyn Flannagan, Trusted Choice spokesperson. “In the aftermath of a disaster, how do these small business owners plan on operating their business without income for what could be many months? Business interruption insurance provides the resources that allow them to move, rebuild, and minimize the impact on their business.”

Flannagan continues: “A business that has to close down completely while its premises is being repaired may lose out to competitors, lose market share, lose employees, lose suppliers, lose inventory, and face other challenges. A quick resumption of operations is essential if a small business is to survive following a disastrous loss, and this can be accomplished in large part through business interruption coverage.”

Surprisingly, the survey found that more than half (54%) of small business owners did not have any business interruption insurance. What is even more surprising is that another 20% of business owners said they weren’t sure if they had the coverage or that they had never heard of the coverage. Only one out of four (26%) said they had the coverage. Among those business owners who said they don’t have business interruption insurance, 45% said they didn’t think they needed it; another 19% said it was too expensive; 16% said they didn’t know about it; and 13% said they were “unsure.”

From a financial security standpoint, business interruption coverage is key, says Flannagan. “Businessowners policies, or BOPs, cover loss of income and certain extra expenses for 12 months. BOPs often provide 60 days of coverage for ordinary payroll. BOP eligibility typically is based on the type of business, size of building, and/or amount of revenue. Eligibility varies from one insurer to another, but more than half of all commercial risks are eligible. Agents should consult with their small business customers to ensure they have the package they want to match their situation. Other industry statistics have shown that 85% of small businesses are underinsured by 40% to 50%. Of those businesses that suffer a serious loss, almost half never reopen. And, of those that do, more than one-fourth close within three years. Business interruption insurance can help protect small businesses from that fate,” says Flannagan.

Asked whether independent agents and brokers should bear some of the blame for the lack of interest in business interruption insurance, Flannagan said that, while common sense should tell insureds that business interruption is a necessary product for small businesses, the product is still a “tough sell.” Said Flannagan: “Most agents do try to sell the product, but too often a small business owner doesn’t want to incur the extra premium expense. When this happens, most agents ask their insureds to sign a statement to the effect that they were offered the coverage so that there is no danger of an E&O lawsuit later on down the line.” *