Most businesses carry insurance coverage for disasters like fires or accidents, but industry insiders said one vital aspect of protecting a company that owners often pay little attention to is business interruption insurance.
"To me, it's as important as any other insurance a company will buy," said John J. Witkowski, a partner at accounting firm WeiserMazars LLP, who advises all his clients to purchase the coverage. "I've seen it used multiple times where it has really helped save companies that otherwise would have been out of luck."
This "first party" insurance, covering the policyholder, is most appropriate for businesses that have physical locations or facilities that need to be operated at all times, Witkowski said.
Manufacturers, doctors, lawyers, retailers and warehouse companies usually are those with the most urgent need for interruption insurance, since a fire, power outage or natural disaster could shut down operations and take weeks or months for to get back up to speed, Witkowski said, particularly when damage to special equipment is considered. But companies whose business typically is conducted off site — such as consultants or sales firms — typically don't need such coverage.
Companies need to understand the vulnerabilities and risks of their businesses, and educate themselves about what coverage is available and at what price, said Gregory D. Miller, co-managing director of law firm Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman P.C., who represents insurance carriers as part of his practice.
"There's a very good probability that after completing that process and going through that type of investigation, many small and midsize business owners will find that it makes economic sense to purchase those types of coverages," Miller said.
Most large corporations have done the due diligence and have the insurance coverage they need, professionals said.
Anthony Gargano, a Madison-based Northeast managing director and regional business development officer at Wells Fargo Insurance, said most business interruption insurance covers various areas of an operation, but there are many nuances to insurance products.
Companies that cannot function or provide their products or services to their customers after an interruption in their operations can submit claims for lost income or profits caused by covered disaster-related damage, Gargano said. Coverage can also pay for fixed expenses like rent or mortgages, utilities or ongoing contracts that still need to be paid regardless of the fact that a business temporarily can't open its doors, he said.
And businesses also risk losing highly trained employees, key people and even top managers when operations shut down for extended periods of time, Gargano said.
"Part of the coverage will allow you to continue to pay your employees until your business is up and running again," Gargano said.
Another aspect of the insurance protects against loss or damage suffered by suppliers and customers. Contingent business interruption insurance comes into play when customers can't buy or pay for products because they're closed, or suppliers suffer a loss and can't provide inputs needed for an insured company to make its own product, Gargano said.
The time from when the physical loss occurs until the repair is completed or operations can get back online is known as the "period of liability" or the "period of interruption," which can be anywhere from 30 days to a year in most circumstances, and deductibles are counted in time, many times 72 hours for the qualifying event.
Some policies cover an "extended period of interruption," during which the business is up and running after the disaster, but sales revenue and customers have not returned to pre-crisis levels, Gargano said.
"It generally takes people a lot longer than they think it's going to take to get up and running again," during which time "their competitors have been trying to steal their market share," Gargano said.
Blake Giannisis, senior vice president in the national property practice at Wells Fargo Insurance Services USA Inc., emphasized the importance of properly calculating what level of coverage is needed.
"If it's a less-sophisticated firm, they should certainly rely on the existence of an accounting firm in conjunction with their own internal resources," Giannisis said.
Accountants play a roll because insurers use detailed financial records and estimates to determine which expenses and costs are covered, how much revenue will be missed, what profits are lost and what payments the insured will get, Witkowski, the accountant, said.
Witkowski cited an example of a manufacturing company using five production lines to make five different products. If only one line goes down, the company will need to break out the costs specific to that line.
"You can't have just one income statement that shows all of the five lines and say this is one fifth of that," Witkowski said. "It's doesn't work that way. You have to have segmented reporting in your P&L if you want to maximize your return."
Gargano said as businesses grow, they must be mindful of the changes in their cost and profit structures.
"Where businesses end up in trouble is they don't review this on annual basis to make sure that it keeps up with their business — and if they have a major loss and they haven't looked at this for 10 years, it could mean the end of their business," Gargano said.
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