When I consult with clients about their business insurance, we typically review two main categories of insurance: 1) Protection in case they injure someone else, and must compensate them, and 2) protection of your own assets in case they are damaged/destroyed.
In terms of the second category, businesses need to ensure their policies protect their assets. All businesses have assets, whether tangible or not. Whether a business’s assets are stock and physical inventory, or just people working in an organization, all businesses need to think about protecting themselves against unfortunate events.
Property Insurance - Tangible
When a business opens, it should have property insurance to replace tangible assets that can be destroyed by fire, water, or numerous other perils. Many banks even require such coverage before lending money to businesses to protect loan repayment in case of an accident or loss. Common tangible assets needed to run a business, such as inventory, computers, desks, and chairs can be very expensive to repair or replace.
When looking at tangible assets business owners should think beyond their inventory, as physical assets extend even further. Property includes the interior build out of an office or retail space, the actual walls, floors, etc. Landlords may not be bound to rebuild or fix up your office/retail space in the event of disaster or accident, so your insurance needs to cover that just in case.
Most property insurance covers loss due to a wide variety of perils including fire, smoke, vandalism, theft, and more. It can even be structured to fluctuate in value as inventory comes and goes. When that unforeseen catastrophe happens, property insurance will jump in to restore all that you lost so you can move on with your business.
Property Insurance – Intangible Loss: Business Income
The larger gap in coverage is failure to buy coverage for intangibles. It is so easy to think of fixed items that we can touch and purchase to replace, that one rarely thinks to cover or insure a business’s income.
Your business generates income. Whether you own a greeting card store or you are an attorney running your practice, every month you generate revenue to pay off expenses (rent, wages, taxes) and pay into your own personal net income. Insurance considers this monthly revenue as “property”. This revenue or income stream can be lost immediately in the event of a disaster. If there is a catastrophic event, a store might not be able to open. A professional’s office might not have computer systems up and running. Just the absence of not having a place to do business can drive your earnings to a screeching halt. This is the intangible asset many businesses do not consider, and its importance can be greater than the tangible losses.
While the value of tangible goods, including desks and computers have finite value, the loss of business income can be infinite, only limited by when a business re-opens. I’ve seen businesses survive the short-term loss of replacing their goods, only to close after the long slog of getting business back in the door after reopening. FEMA calculated, in 2018, that 25% of businesses do not reopen after a disaster (Stay in Business after a Disaster by Planning Ahead | FEMA.gov) and the ability to stave off bankruptcy while the business cannot operate is a key component.
As a business-minded person, it can be hard to imagine insurance companies paying you money while your business is closed but that really is the benefit of this often underutilized “business continuity insurance”. These policies keep your business afloat until it can regain its footing:
Business Interruption: Covers lost net income while a business is closed so that you can cover rent, lease payments, employee wages, taxes, relocation costs, and other general business expenses as if you were operating
Extended Business Interruption: Covers the intermediate phase after a business reopens, but the business’s income has not returned to pre-loss levels
Extra Expense: This coverage allows carriers to reimburse you for reasonable expenses beyond normal operating to keep your business from shutting down after an event. Sometimes, a bit of extra money to help facilitate keeping the business open (like moving next door) will save everyone lots of money down the road.
Carriers even offer coverage if your business is interrupted by supply chain losses. Contingent Business Interruption and other similar policies can insure your business if someone up the supply chain has a fire (or similar) that impacts your ability to get supplies.
Summary
When I meet with new business clients, they often haven’t thought about these long-term intangible losses. How long can your business survive without a constant inflow of cash? If the answer is “less than the time to fully rebuild the business”, then Business Interruption (Loss of Business Income) insurance is key to your financial planning.
No insurance policy is a silver bullet, so it is important to understand the costs, benefits, and exclusions of each.