ADVANCED LINES OF CREDIT

Many businesses mistakenly assume that loans or lines of credit will be available through the Small Business Administration, FEMA, or their local Emergency Management Office during a disaster. Yet, the sad truth is that not every business impacted will qualify.

Additionally, even if you are one of the lucky ones to meet the minimum requirements, the amounts available may not be sufficient to cover your cash flow needs. Then there’s the issue that the loans may not be ready right when you need the money because of the length of time it takes to process and approve your application.

It’s also not uncommon for the facilities and equipment used as collateral to be damaged or destroyed in a disaster situation. If this happens to you, you may not comply with the covenants for those loans. The end result is extreme difficulty when it comes to obtaining commercial financing in an emergency situation.

Remember also that banks don’t like to lend money when you really need it! So, if you plan to use a line of credit to protect your cash flow, make sure it’s in place long before a disaster appears on the horizon.

SELF-INSURANCE

Although not technically “insurance” because this term generally refers to a contract where an insurer agrees to pay the insured for a covered loss (in other words, an outside party bears the financial responsibility for your loss in the event that one occurs), self-insurance basically means that you’re assuming your own risk.

Self-insurance is basically a risk management approach that requires that you decide how much out-of-pocket loss you are willing to bear. Additionally, some companies decide to self-insure for certain types of losses, expecting that they aren’t likely to happen.

A prime example of self-insurance is the deductible on your insurance policies. Your deductible represents the amount of financial costs you’re willing to absorb in the event of a loss. It’s the same principle. It just depends on the amount of tolerable deductible or length of time (waiting period) you are willing to accept.

Alternatively, some companies choose to set aside funds as if they are paying insurance premiums, so they’ll have cash available in the event of a loss. These reserve funds serve to protect their operating cash flow if a disaster strikes.

Though these decisions are intentional, sometimes companies self-insure unintentionally. Unintentional self-insurance occurs when organizations aren’t aware that there are exceptions to their coverage and it isn’t until after the fact that they discover that the loss won’t be covered after all. Of course, this only adds to the stress of the disaster!

Self-insurance is really only an appropriate option when you are able to reasonably predict the amount and timing of losses and have available reserves or other sources of funding in place to cover them. In any case, putting aside money in a cash reserve account to offset liquidity needs in an emergency makes sense.

COMMERCIAL INSURANCE

Although commercial insurance is certainly not the least expensive way to finance disaster-related losses, it does play several important roles in addressing cash flow challenges after tragedy strikes.

First, it assists in risk management by transferring the risk of loss away from you and onto an outside party. Obviously, this is good because you won’t bear the entire cost of a disaster on your own.

Second, and probably most important, insurance can mitigate disaster-related cash flow impact by providing funds to repair or replace damaged property and equipment, to cover fixed costs during recovery (such as rent, utilities, and even payroll), to pay any additional costs of disaster recovery while trying to return to normal operations, or to replace lost revenue.

Although having insurance certainly doesn’t ensure an organization’s survival during disaster situations, it at least removes a portion of its financial obstacles by providing an infusion of cash when it’s needed most. And in cases where a business has been completely wiped out and restarting isn’t a viable option, insurance might at least allow the owner or owners to walk away with some equity.

A third intangible benefit of insurance during a disaster is having someone to rely on to help you through the recovery process. Both your insurance agent or broker and your insurance company have a wide variety of expertise and resources available to them that can help you prepare in advance, cope during a disaster, and get back to normal operations sooner.

PROPERTY INSURANCE

Property insurance is the type of coverage that protects an organization from losses due to damage, total destruction, or theft of facilities and contents. Although the exact coverage varies by policy, this particular insurance typically doesn’t cover earthquakes, floods, landslides, and terrorism.

For purposes of property insurance, business property often includes:

• Buildings and outbuildings (sheds, garages, and other structures not attached to the main facility)
• Sign, fences, and displays
• Equipment
• Furniture and fixtures
• Inventory and supplies
• Computers and other electronic equipment
• Phone systems
• Artwork and antiques

Again, depending on the policy, it may also include coverage for equipment breakdown, cleanup and removal of debris, or water damage.

Property can be insured for current cash value or replacement cost. Cash value reimburses you for the current value of the property or cost less depreciation, whereas replacement cost reimburses you for the cost to repair, replace, or rebuild the item at current prices.

Property insurance policies also come in two basic forms. An All-Risk Policy covers a wide range of losses typically faced by most businesses, except those specifically exempted in the policy. A Peril-Specific Policy covers only the risks specifically listed in the policy and are usually purchased for a specific need.

There are a couple of key tips and considerations to keep in mind with property insurance:

• You want to have a reasonably current assessment of your property’s value
• Keep photos of (and copies of receipts for) valuable equipment, furniture, and artwork at an off-site location
• Have antiques and artwork appraised on a regular basis
• If you lease your facility, read your lease carefully to determine who is to provide property coverage on the building

AUTOMOBILE INSURANCE

Business auto insurance is similar to personal auto insurance, except that it’s for vehicles owned by the business. This type of insurance covers costs to repair workplace damaged vehicles, also providing payments to third parties resulting from bodily injury or property damage for which the company is liable.

Many automobile policies include uninsured or underinsured motorist protection. This provides coverage for the insured if involved in an accident caused by an uninsured motorist.

LIABILITY INSURANCE

The third common type of insurance is liability insurance, and this coverage is designed to protect a business from potential or actual lawsuits. There are many forms of liability insurance.

• General Liability. General liability insurance protects you from claims due to accidents, injuries, and negligence. It typically covers payments resulting from bodily injury or harm, medical expenses, property damage, libel and slander, false or misleading advertising, the cost of defending lawsuits, and settlement awards.
• Product Liability. Product liability insurance protects companies that manufacture wholesale distributor and retail products, protecting them against losses resulting from defective products that cause injury or bodily harm.
• Professional Liability. Also known as errors and omissions insurance, professional liability insurance is for businesses that provide services, and it protects against malpractice, errors, and negligence. This insurance also provides legal defense costs.
• Directors and Officers Liability. Directors and officers liability insurance (sometimes referred to as D&O) protects past, present, and future directors and officers for damages arising out of alleged or actual wrongful acts. This includes actual or alleged errors, omissions, misstatements, misleading statements, or breaches of duty. Sometimes the coverage extends to employees.
• General. A general liability policy provides coverage for compensatory damages (current and potential financial losses suffered by the injured party), general damages (nonmonetary losses suffered by the injured parties, such as pain and suffering), and punitive damages (additional penalties). It typically doesn’t protect an organization against claims related to employment practices or operating a business vehicle.
• Business Owners Policy. A business owners policy, or BOP, rolls multiple types of insurance into one policy. The benefit of this is that there’s usually a discount for including multiple types of coverage. And, though it typically includes property insurance and liability protection, it may also include business interruption and automobile insurance.
• Employment Practices. Employment practices is a type of liability insurance that covers damages that the employer is liable for if a violation of employee rights occurs. Coverage includes situations related to sexual harassment, wrongful termination of employees, failure to employ or promote, and race and gender lawsuits. It provides legal defense coverage, as well as paying any resulting judgment.
• Workers’ Compensation. Workers’ compensation insurance provides coverage for medical care and a portion of lost wages for employees who are injured as a result of employment, regardless of who was at fault, and the agencies awarding benefits are often quite liberal. If an employee dies as a result of injuries sustained while working, the coverage provides compensation to his or her family. In addition, employers may also be subject to lawsuits from employees claiming that the employer did not take adequate steps to protect their employees during or after the disaster, which is where this insurance may come in.
• Umbrella Policies. An umbrella policy is a type of liability insurance providing coverage over and above your organization’s other liability coverage. Umbrella policies are designed to protect against excessive losses, usually when a judgment from general liability or auto liability exceeds the policy limits. An umbrella policy may also apply to professional liability insurance or employment practices liability insurance.

DEDUCTIBLES

Deductibles are the amount of the damages you’re responsible for paying before the insurance policy kicks in. Understand what these are and when they may change. (It’s common for companies to carry a higher deductible on property policies for wind or hurricane damage because, though you can pay for a lower deductible, any damage sustained is usually quite extensive, thus expensive.)

As an example, let’s say that your facility is insured for $500,000 and your normal deductible is 2 percent. After severe thunderstorms, you call your agent and claim a $15,000 loss. That’s when your insurance agent advises you that there is a 5 percent wind deductible, so your loss doesn’t exceed your policy deductible of $25,000.

HOME-BASED BUSINESS ISSUES

It’s important to note that there are many misconceptions when it comes to ensuring a home business. For instance, many business owners make the mistake of believing that their homeowners’ policy will cover both property and operations of their business.

However, most homeowners’ policies have very low limits of coverage for business equipment and offer no liability protection. Therefore, if you operate a business out of your home, it’s crucial that you discuss with your insurance agent or broker any additional coverage you may need.

PROXIMATE CAUSE

Although some risks may be excluded by your policy (such as floods after an earthquake), it’s important to understand the concept of “proximate cause,” because, in some cases, damage that appears to come from one cause may actually have come from another.

For instance, imagine that you own a restaurant and, as a result of a hurricane, you lose power and suffer flooding, spoiling your food inventory. The carrier initially denies the claim on the grounds that flood is an excluded risk. However, it’s determined that the power loss occurred before the waters reached flood stage and that the spoilage would have occurred even if the flood had not. In this case, the carrier has to cover the loss.

FLOOD

Whether or not you are in a 100-year flood plain, you still run the risk of rising waters. In fact, 25 percent of all flood claims come from low to moderate risk areas.¹

FEMA (Federal Emergency Management Agency) defines a flood as a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area, or of two or more properties (at least one of which is yours) resulting from a(n):

• Overflow of inland or tidal waters;
• Unusual and rapid accumulation or runoff of surface waters from any source;
• Mudflow; and/or
• Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion of undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.²

Flood insurance is provided by FEMA and may be accessed by all insurance agents. It’s also available nationwide, and not just in flood-prone areas.

Rates for flood insurance are standardized, which means that they’re the same, regardless of the carrier. There is a 30-day waiting period for filing claims after signing up (except when flood insurance is obtained on a new mortgage) and claims must be filed within 30 days of a flood occurrence.

EARTHQUAKE

Earthquake coverage is not included in standard commercial property coverage, even though they’ve occurred in all 50 states. Many aren’t severe, with the greatest amount of damage coming from sprinkler systems set off by tremors.

Like with flood insurance, earthquake insurance is also available nationwide, not just in earthquake-prone areas. However, unlike flood insurance, there is no single carrier and the rates vary. If you’re in California, insurance is available through the California Earthquake Authority.

INFORMATION TECHNOLOGY

Information technology insurance is an optional rider providing coverage for business-related hardware, software, and data loss. Some policies extend coverage for hacking, denial of service attacks, and cyberfraud, while others include hard drive crashes, lightning strikes, and off-premises power interruptions.

Review your coverage for limits and make sure it restores lost data. Also, be aware that hardware losses are most often paid on depreciated value rather than on replacement cost and, when it comes to theft, many carriers restrict laptop theft to the United States only.

BUSINESS INCOME

Business income or business interruption insurance protects the income stream of a business as opposed to its property. The goal is to make the business “whole” after a disaster, providing coverage for lost revenue as well as covering any ongoing and additional expenses.

It’s important to note that this particular coverage only protects you from risks covered by your commercial property insurance, and the loss must arise from a “covered cause.” In other words, if your commercial property policy has exclusions for flood or earthquake, business interruption insurance also has exclusions for flood or earthquake. So be aware of the types of events you might face and determine whether to cover them as a separate endorsement under your business income policy.

Business interruption policies may be subject to a deductible and a waiting period, and the organization is typically required to restart operations as quickly as possible, either at the insured location or at an alternate location.

Claims typically require extensive documentation, such as income loss and expense calculations prepared and submitted by a CPA. For this reason, prior to a disaster, it’s important to check with your CPA and ask whether his or her records are safeguarded so they’ll be available after a disaster.

If you have a business owners package policy, business interruption insurance is often included. However, you may want to increase the limits of the standard coverage.

There are several types of optional business income insurance you can purchase. These include extended business income, contingent business interruption, and additional endorsements.

Extended business income coverage makes up the difference in lost revenue until business returns to normal revenue levels or for a certain specified period of time. For example, if a restaurant is destroyed by fire, once it reopens, it will take time for its normal customer base to return. Extended business income coverage can help fill this revenue gap.

Contingent business interruption coverage, also known as defendant property coverage, can be helpful for organizations highly dependent on one crucial supplier or a specific customer base as this insurance provides coverage for losses resulting from a third party’s inability to complete a business transaction.

In order to apply, the third party must be unable to complete the transaction due to a covered loss. For example, if a plumbing parts supplier is dependent on Kohler for 40 percent of its inventory and the Kohler manufacturing facility is damaged by fire, which means that Kohler cannot deliver the inventory contingent, business interruption insurance would cover the supplier’s lost revenue.

There are additional endorsements available for business interruption coverage, such as loss of utilities or loss of Internet access. If your business is highly vulnerable to any particular loss, you should discuss your options regarding business interruption endorsement.

Some key questions to ask your insurance agent or broker when buying interruption coverage include:

• What causes of loss are included?
• What is the waiting period before payments for lost income and extra expense begin?
• Is there a specific payment schedule?
• How long will the payments continue?
• Is there a time limit for returning to normal operations?
• What information and documentation will be required to submit a claim?

EXTENDED PERIOD OF INDEMNITY

Another concept you’ll want to familiarize yourself with is your extended period of indemnity. This is the specified amount of time the policy will cover your income loss after any repairs have been completed.

For example, let’s say your restaurant was damaged by fire and, after 10 months, you finally reopen. Your business income insurance technically ends at this time, but it will take several months for your customers to return and for you to return to prior operating capacity. The extended period of indemnity tells you whether you can claim any help for this period of time.