How to Protect Your Business When It's "Interrupted"
Insurance options allow a business to determine how to cover damages or loss in a disaster.

By Cyd Alloway

A fire erupts, destroying the strip shopping center you own. A tornado roars across the city, taking your business' roof with it and leaving behind extensive water damage. A computer hacker releases a virus in your computer system, damaging your system and effectively shutting down your ability to accept merchandise orders over the Internet.

Any of these scenarios can result in an inability to conduct your business for three, six or 12 months. You're comfortable your insurance is going to cover damage to your building and your computer system, but what about all of that lost income? And how can you afford to keep valued employees when you have no income?

Business Interruption Coverage
Business interruption coverage (sometimes called business income or time element coverage) is designed to protect you from such losses and help you stay in business when your operations must be suspended due to a covered cause of loss to your property. Coverage provides for:

• Continuing operating expenses
• Loss of net profits
• Expenses to retain key employees (i.e., wages) while you are not operational

Many small businesses qualify for insurance under a business owners' policy. Most business owners' policies provide business interruption coverage on an actual loss sustained basis, meaning you need not declare a specific limit of coverage as you would for a building or your business personal property. The limit is the amount of loss you sustain, subject to the terms of the insurance policy.

Businesses that do not qualify for a business owners' policy must complete a business interruption worksheet that not only assists in developing the appropriate limit to carry, but also documents for the insurance company how that limit was determined.

In determining a limit, you also should consider factors that could impact or lengthen the rebuilding time, such as bidding and permits, architect and engineering plans and seasonal issues. Should a major tornado strike the Kansas City area, it could take considerably longer to rebuild property because contractors would be deluged with work.

Extra Expense Coverage
In addition, coverage is included for extra expense, which includes expenses incurred by you to avoid or minimize suspension of your business. These expenses can include rent for a temporary location to store your goods or from which to operate your business, extra advertising costs to advise your customers of your move, or overtime to employees to assist in the transition after a loss.

Expenses are those you would not have incurred had you not had a property loss.

Coverage also can be extended to your computer systems to cover extra expense to restore lost data or revenues lost due to your system sustaining damage. You should check with your insurance broker/agent because policies are not as consistent on coverages provided for computer systems, especially for virus damage.

Industry-Specific Needs
Business interruption coverage can be tailored to meet an individual business' specific needs, often at a premium savings. For instance, a business that uses relatively unskilled labor and for which finding replacement labor would not be difficult when business resumes may elect to exclude coverage for continuing payrolls. By the same token, the only real loss of income for the owner of a strip shopping center or apartment building may be the loss of the rental income; therefore, purchasing only rental value (or loss of rents) coverage may be the most practical and cost-effective insurance solution.

It is also important to consider how long it will take to restore your business' net profit to the level prior to your loss. Called the extended period of indemnity, this clause in the property policy is triggered once your building or premises is restored and you are again operational.

However, even though you are operational, your customer base may not return immediately. Manufacturers may take several months to regain customers who had to go elsewhere for goods while the business was down. Restaurants also could take a long time to regain former sales as the public finds other establishments to frequent. Property policies vary as to the length of time that extended period of indemnity applies: some could be as little as 30 days, while others could be 180 days.

Other potential extensions of coverage available as part of business interruption include civil authority, business interruption from dependent properties and utility interruption. For any business, time spent with your insurance agent/broker is valuable in effectively managing your business and the risk involved with that business.

Cyd S. Alloway, CIC, is commercial insurance department manager at Haake Companies. You can reach her at (913) 529 3230 or .