Every year, after nearly every natural disaster, thousands of small businesses face a true acid test: Can their business survive an interruption? Hurricanes Andrew, Katrina and Sandy and the tornados that struck Joplin, Missouri in 2010 didn’t just affect structures: They knocked thousands of small and medium-sized businesses out of commission for days, weeks and sometimes months.
These business owners were caught in a double whammy: First, they lost out on the revenues from sales and operations at affected locations. Second, they still had ongoing expenses to pay. If your business were to be hit by a disaster, do you have the cash on hand to continue making the following payments:
- Your own salary as an owner-employee
- Salaries of key people whom you can’t afford to lose
- Salaries and hourly wages of workers helping with clean-up and recovery
- Insurance premiums on company vehicles
- Payroll taxes
- Fringe benefits
- Health insurance premiums
- Lease payments on critical equipment
- Marketing and advertising expenses – many of which are done on a forward contract?
- Temporary office and warehouse space
- Deductibles from other insurance coverage
If revenues from operations came to a halt, and you had to add up all these expenses and keep things going, how long could your business run? Would you be faced with the loss of key salespeople and staff? Would valuable institutional memory be forced to go to other employers because you can’t pay them for an extended period of time?
You may be at an elevated risk of severe economic harm from business interruption if the following conditions apply:
- You have substantial business overhead in general
- You rely on leased equipment or vehicles to operate, or if you have financed equipment subject to repossession if you don’t apply.
- You rely on vendor financing.
- You have key employees that are not easily replaceable
- You have one location, or if you have multiple locations within the same geographic area
- You cannot operate without electric power and generator power is not realistic or cost-effective for you.
- You rely on being able to purchase gasoline or diesel locally.
- You rely on your income from the business to get through each month.
- You will have to rent computers, vehicles or capital equipment on a temporary basis to continue to function.
- You are locked into forward purchasing contracts for materials, inventory or advertising
- You rely on income from e-commerce operations that would vanish in the event of a sustained power outage.
An insurance professional with experience in business interruption insurance and business overhead insurance can help you tailor your coverage to account for considerations specific to your industry. For example, some industries are seasonal: Damages from an unexpected shutdown in operations during tourist season or at some other critical time would be much more damaging than shutdowns at other times during the year. Your coverage should take this into account.
What About Non-Disaster-Related Shutdowns?
Not every business shutdown is due to a natural disaster. Sometimes you may have a shutdown due to the illness or disability of a key employee. Depending on the circumstances, you may need to wait things out until a partner/owner or key employee is able to return to work. In other circumstances, you will need to recruit and train up a replacement. In some instances, business could come to a near halt until this is accomplished.
Ordinary key-person coverage should provide some point-blank protection, for example, to pay the costs of recruiting and training a new key salesperson, executive or other vital individual. But you may need additional coverage, called business overhead insurance, to keep your business’s key functions running while you deal with your personnel changes, or buy time for your key individual to recover from the illness or injury that took him or her out of action.