One Sunday in May 2011, a massive tornado tore through Joplin, Missouri. With winds surpassing 200 miles per hour, it killed 161 people, injured 1,150 more, destroyed approximately 2,000 buildings, and caused $2.8 billion in property damage. Insurance companies paid $2.2 billion to affected homeowners and businesses. The business owners found that the right insurance coverage can make the difference between surviving and closing forever. Other business owners who want to protect themselves from disaster should consider these tips:
- Keep business records updated, duplicated, and organized. The insurance company will need them to determine property values and lost income. The more accurate and current they are, the better able the company will be to offer a fair settlement. Having quick access to the records will also speed up the settlement process. Store duplicate copies in multiple locations, including electronic copies in the cloud.
- Know what your policy does and does not cover. Review the policy language describing property and losses that are not covered and language that limits coverage for certain property or losses. Standard property policies do not cover losses caused by floods, earthquakes, or mechanical breakdowns. They cover theft of certain target items, such as jewelry and furs, for limited amounts. If your business needs more coverage, talk to your agent.
- Know what it would cost to replace buildings and personal property. Property insurance policies settle claims on two different bases – either replacement cost or “actual cash value,” which is replacement cost minus depreciation. Replacement cost policies cost more because they provide more insurance. If the Joplin tornado destroyed a 40 year-old building that would cost $2,000,000 to rebuild, the replacement cost policy would pay $2,000,000 (minus the deductible), while the actual cash value policy would pay much less.
- Know what the waiting period is for business income losses. Standard business income policies do not cover losses for the first 72 hours after the property damage occurs. This period of time may be when the bulk of the income losses occur. If this is the case for your business, see if the insurance company will offer a dollar-based deductible instead.
- Evaluate whether your business needs an “extended period of indemnity” for business income losses. Some types of businesses, such as restaurants, may take a long time to resume business volume at pre-loss levels after a shutdown. The extended period of indemnity option provides 60, 90, 180 or more days to get the business back to where it was.
- Know whether your business income coverage applies to extra expenses. Some policies may cover the cost of minimizing or avoiding a shutdown after damage occurs. For example, if the business can continue operations by relocating to temporary premises with higher rents, extra expense coverage would apply to the difference in the rents.
- Understand the policy’s coinsurance clause. Under this clause, the insurance company calculates the replacement cost of the property at the time of the loss and compares it to the amount of insurance the business purchased. If the amount purchased is less than the replacement value, the insurance will cover only a fraction of the loss. For example, if a particular building is insured for half of its replacement cost, the insurance will pay half the cost of any losses to it.
Business insurance policies are complex contracts. Business owners should consult with professional insurance agents who can answer questions and offer guidance on the right types and levels of coverage. Should a storm as damaging as the one that hit Joplin strike your area, the right insurance will help you stay in business.