Coverage Concerns

Earnings insurance

Pre-planning for catastrophes that interrupt business income

By Roy C. McCormick

Many businesses, especially those in the small to medium range, do not carry earnings insurance. Although they protect themselves against loss of their property, they often do nothing about the potential for loss of income if a shutdown from physical loss occurs.

Business property owners have long been concerned about the risk of fire, windstorm and other similar causes of property loss. Add to this the fact that the National Weather Service recently reported that half of the country is suffering from a continuing drought. Fanned by high winds, wildfires that spring up in wooded and grassy regions can quickly move into populated areas.

The threat of loss from wildfire emphasizes the need to assess limits of insurance on structures and their contents. Agents should alert any clients who have not purchased earnings (business interruption) insurance. Smaller businesses, in particular, should be targeted.

Fortunately, fire concern is now so widely publicized that many who were skeptics and rejected the coverage are likely to recognize their exposure and welcome the opportunity to buy protection. In addition, the number of smaller businesses lacking earnings insurance has been held somewhat in check through the development of the businessowners policy, which basically includes coverage for loss of earnings, due to insured hazard, on an “actual loss sustained basis.” Coverage applies for 12 consecutive months without coinsurance.

Businesses that don’t fit the eligibility profile for businessowners policies because of classification limitations or underwriting considerations can be protected under commercial policies that may include time element coverage and are adaptable to virtually all manufacturing, industrial, institutional and commercial operations. Eligibility for business income coverage is the same as that for property coverage in the programs.

Protecting business records

A shutdown can be devastating for a business. In addition to the fact that most small businesses do not have the resources to secure alternate facilities to continue operations and retain employees, the loss of business records and customer data becomes a primary area of concern. A small store may never have considered the problem of preserving records, or may have put off doing something about it. Even some larger businesses, while perhaps more familiar with the problem, haven’t put in place a really effective plan for preserving records and continuing business operations.

A current newspaper report serves to illustrate the problem. Fire occurred in a police facility used to store criminal evidence. Records burned that were important to pending investigations. Although such a facility isn’t really a business, loss of records seriously affected those directly involved.

Consider some other scenarios: loss of prescription records in a pharmacy; the loss through fire of customer account information in a department store; destruction of a building contractor’s office in a windstorm, including destruction of customer accounts receivable. These exposures can be minimized by prearranging steps that can become operational at the moment loss occurs.

When this exposure was first identified some years ago, it was often addressed by removing records such as accounts receivable to a safe or to a basement in the same building, or to the home of a department manager for overnight protection—not always the best solution. Guidelines began to change, based on the experiences of others who suffered such losses, particularly from tornadoes, wildfires and other catastrophes that covered a wide area.

First, essential business records were duplicated and stored away from the location where they were used. Later, the development of computers made it possible to transfer copies of records to a distant location, a branch office, a warehouse or rental property.

Employee readiness

Plans also must be made in advance for employees to be available when needed. They should know where to report and what their specific responsibilities will be.

A gratifying bit of news is the fact that the cost of alternate arrange-ments and other expenses to continue operations is covered by loss of income insurance. *

The author
Roy C. McCormick is a contributing editor with The Rough Notes Company.