Business Insurance: A 12-Point Checklist
In the weeks since the September 11 tragedies, some formerly mundane business considerations have suddenly become glaring priorities. Adequate business insurance, possibly one of the most complex--yet often overlooked--issues could tip the balance between your company' s survival or demise.
We spoke with the insurance experts to find out some of the key mistakes that small business CEOs make--and the things that all business owners should be aware of when it comes to insuring their company. Here' s our list of 12 things to keep in mind.
1. Do Your Homework--Before You Need to Make a Claim
Get your records updated, duplicated, and organized--and keep them that way. Maintain detailed records of all your business transactions, not just your insurance policy. In the unfortunate circumstance that you should ever have to make a claim to recover losses due to an interruption of business (especially a claim for loss of income or extra expenses incurred due to business interruption), the faster you can get detailed information into the hands of your insurer, the faster you' ll get your claim paid.
"Do your homework ahead of time," says Joy Gander, a consultant with Wisconsin-based employee benefits and risk management consulting firm T.E. Brennan Company. "Know the costs of attaining and moving into a second site. Keep duplicate records [ of equipment inventories and other essentials] off site, and make sure they' re current." The lomger it takes you to gather the information that your insurance carrier requires, the longer it will take them to confirm the information and process your claim. And the longer it takes to get that claim check in hand, the more stretched you' ll be trying to keep your business afloat. It can be difficult for small business to find the time and resources to think ahead, to get and stay organized. But, as Gander, a 15-year veteran of the risk management consulting industry, explains, "you' ll sure wish you' d spent that time if you ever have a significant loss."
2. Valuation of Property
If you experience property damage, how will you be compensated? Property insurance usually falls into one of two categories on this front: replacement cost valuation (the cost of replacing the property at current market value), or depreciated settlements (the cost of replacing the property, minus depreciation). Most of the experts we spoke with agreed that replacement cost value is, in most cases, the best way to go.
Which brings us to the issue of valuation. "It is critical to ensure that your building and its contents are properly valued," says Gander. "A lot of people use financial statements to value their property. But this can often lead to very incorrect valuations." In other words, what your property was valued at five or ten years ago is probably less than what it would cost to replace it today. And financial statements do not always reflect that change. So make sure your property is properly valued, based on current replacement costs.
3. Waiting Periods
Examine your policy for any "waiting period" that applies to business income losses. According to Barron Wall, the Managing Associate of Insurance Consulting Associates in Mahwah, NJ, such waiting periods are fairly common, and can last from 8 hours to 7 days -- or more. That means that any losses incurred during the period of time directly following an event will not be covered. "Many policyholders who suffer their greatest income loss and expenses during the first hours and days following a disaster subsequently realize... that their policies will not cover the losses incurred because of this 'waiting period' provision which operates as an unquantified deductible," Wall says. "Business owners should try their hardest to eliminate any waiting period provision for any type of business income coverage, and instead have a known 'dollar' deductible based on their own level of risk tolerance." If you have a dollar deductible instead of a waiting period, you won' t be covered for the first losses up to that amount, but will immediately be covered in full for any amount above the deductible.
Whether you should go with a deductible or waiting period depends on your business. "Some businesses can handle one day, and others can' t," says Wall. "For example, a paging service for doctors can' t wait. If doctors can' t get their pages, they' ll switch to another service right away. On the other hand, many other businesses aren' t affected as dramatically if business is down for a day."
4. Extended Period of Indemnity
Look to see if your business interruption insurance includes an extended period of indemnity. If it doesn' t, consider trying to add it in. Sometimes, policies cover losses incurred only up to the point that you can reopen your doors for business. But that' s not always where losses end. And if you don' t have an extended period of indemnity clause, you can' t make those claims. "Often in the case of a catastrophic event, like the events of September 11, revenues for businesses are reduced over an extended period of time," says Gander. "Just because a business opens again doesn' t mean revenues will immediately jump back to normal." Look at how few people are getting back on airplanes, for example. Or consider the plight of restaurants in close proximity to the World Trade Center that are open for business, but don' t have many customers because of the terrorist attacks. "If you have an extended period of indemnity clause that covers, say, 60 to 90 days, you' ll be covered for losses you continue to incur for that amount of time after the original claim," Gander suggests.
5. Exclusions and Limitations
This area is especially tricky. Look closely at what any policy does not include. All insurance policies are rife with limitations and exclusions. Decide what' s necessary to add in, and pay more for it if you think it's crucial. The last thing you want is to think your policy covers your business needs completely, only to discover that the fine print excluded the specific type of damage or loss you just experienced. For example, all-risk property insurance. Michael Rodman, a principal consultant with and 30-year veteran at J. H. Albert International Insurance Advisors, Inc. based in Needham Heights, Mass., says that frequent exclusions in these types of policies include the loss of cash or securities, losses resulting from employee dishonesty, boiler explosion (see boiler & machinery insurance, below), some computer equipment, and forgery. And this is by no means an exhaustive list. Read your policy closely, and go over it with an insurance advisor or consultant if need be. You' ll be glad you did.
