Superstorm Sandy caused $19 billion in insured property losses when it hit the northeast in 2012. Most of that was direct damage to buildings and contents. However, approximately 30 percent of the commercial claims from Sandy were for business interruption. Often, the loss of income coupled with continuing expenses after a fire or other disaster can be even more devastating than the damage itself. To increase the chances that they will survive business interruptions, organizations should assess their exposures by asking some questions:

What is the most the organization could lose from a shutdown?  Commercial property insurance policies define “loss of income” as the sum of the expected pre-tax profit or loss and necessary continuing expenses. For example, if the expected profit is $300,000 and necessary continuing expenses are $100,000, the potential loss of income is $400,000. Organizations should use their financial statements and tools provided by their insurance companies to calculate their exposure to business interruption losses.

Business Interruption coverage is also known as Business Income & Extra Expense coverage.  How much insurance should the organization buy?  It depends on how long the insurance is likely to apply and the coinsurance percentage shown in the policy’s information page. Coverage usually begins 72 hours after the property is damaged. It ends when business resumes at another location or when the building should be repaired with reasonable speed, whichever comes first. If the organization will need coverage for around six months, it could buy an amount of insurance to satisfy a 50 percent coinsurance requirement. A longer coverage period would require a higher coinsurance percentage and limits.

How long will it take business to return to normal?  Customers who had gone elsewhere during the shutdown may be slow to return. The standard insurance policy extends coverage for 30 days after operations resume, but some businesses may need more time than that, especially if their businesses are seasonal. For example, an oceanside restaurant in New Jersey that makes most of its profits during the summer will need additional coverage even if it can re-open in November.

How much of the normal payroll expense will continue during the shutdown?  The organization will need the continuing services of some employees while it attempts to re-open, but other employees may not be necessary. For example, accounting staff will be needed to pay mandatory expenses such as property taxes and collect receivables earned before the shutdown. Employees who stock shelves will not be needed if there are no shelves to stock.

Who does the business depend on for revenue?A business can suffer a loss even if its own building is untouched. A loss that shuts down a key customer or supplier or damage to nearby property that causes authorities to close off access to the street can devastate a business’s bottom line. Special insurance coverage is available to protect against this possibility.

We are here to help answer these questions and identify insurance companies that can meet coverage needs. Many companies can offer coverage on an Actual Loss Sustained basis for 12 Months, which can really be helpful and simplify things.  With some effort and planning before a loss happens, an organization can emerge from a shut down and return to profitability.