Consider this scenario: A business next to your commercial building catches fire, which spreads to your business location. And while the fire department extinguishes the blaze before it destroys your building, it's clear you won't be able to work there for some time, perhaps months. Making matters worse, the fire has damaged most of your merchandise staged for shipment. How will you replace your earnings while you await new products and relocate your office, even if it's only to your home?
Whether it's a fire, a tornado or some other disaster, you never know when an unexpected situation could occur, so it's always a good idea to take steps to protect your business. According to the Insurance Institute for Business & Home Safety, at least 25 percent of businesses that close due to a disaster do not reopen—but your business doesn't have to be one of them. Purchasing business interruption coverage as part of your business insurance policy is one way you can help protect your business in case of a disaster or other loss. This type of coverage can help replace your lost or reduced income or profits after a covered loss, so your company can get back on its feet again. Here are a few things to know:
Business interruption insurance helps protect from your lost earnings in the event you cannot operate your business after a covered loss or if the loss causes a reduction in your earnings. This means if you lose income as a result of the loss, you can typically recoup those losses minus the expenses you would have paid anyway. So, if your merchandise was destroyed by a fire just before you shipped it out to customers, business interruption coverage may help you to get some of the related lost income back.
This type of coverage may also help you pay any extra expenses to keep your business running because of the loss. For instance, in the above example, if you relocate your business temporarily because of the fire, your business interruption insurance would probably not pay for all utilities at your new location, but it would likely pay the difference if your utility costs went up as a result of having to temporarily move.
Your pre-loss earnings are the basis for reimbursement under business interruption coverage. Lost earnings are typically defined as revenues minus ongoing expenses.
Different businesses have different needs when it comes to coverage choices. For example, a small manufacturer may require different coverage than a retail operation. If you have any questions when choosing your coverage, a conversation with an insurance agent may help. But, here are a few things to start thinking about:
- How likely is it that a covered loss will occur? For example, if you live on the Gulf Coast, hurricane frequency is one consideration.
- How long would it take to get your business up and running after a serious event?
- If you rent, how well protected is your building?
- Are sprinkler systems up to date and functional?
- Is comparable commercial space readily available in your area, or would it take weeks to find a suitable location?
- What about after a regional disaster? If you live in a disaster-prone area, you will compete with other displaced business owners for a spot and this may take time, potentially increasing your business losses.
You may also want to think about the likely period of time you expect to need to restore your business after a loss. This "restoration period" determines how much profit you might lose and can vary greatly depending on the severity of the loss your business experiences. For example, a small fire may require only a 30-day restoration period, while a major regional event like a tornado may require months.
Thinking about buying a business insurance policy with business interruption coverage? Contact an Allstate agent today to explore your options.