As you might have noticed in recent years, we’ve experienced a sharp increase in both the frequency and severity of various natural disasters, from hurricanes and wildfires to earthquakes and droughts. In fact, some studies found that by 2019, natural disasters were five times more common than they were in 1970 and increased economic losses by seven during that 50-year period. This should worry you not only as an individual, but also as a business owner who can’t afford to stop offering products or services for long during a natural disaster. The good news is that you can buy insurance to protect your business financially during the next storm, fire, or other devastating event caused by nature. Consider how business interruption insurance works and why you need it.
What Is Business Interruption Insurance?
Business interruption insurance, also known as business income insurance, is a type of coverage that can help businesses survive financially when a disaster requires them to suspend operations. You can’t usually buy this type of business insurance as a standalone policy, but you can pay to add it to your existing business coverage, such as a business owners insurance policy.
What Can Business Interruption Insurance Do for Your Company?
This type of business insurance coverage can protect your business in several ways. The following are a few of the main benefits to look forward to if you buy business interruption coverage:
- Continue your cash flow during a natural disaster: One of the main advantages of this coverage is that it gives you a financial backup when the worst occurs. So, when a natural disaster causes physical damage your business property, this coverage can compensate for any lost income, ongoing business expenses, and even any costs associated with temporarily relocating your business to a different location.
- Pay for ongoing expenses: Even when your business isn’t running, you still have to pay regular expenses, such as rent or mortgage payments, employee salaries, utilities, and payments on business loans. Business interruption insurance is meant to help cover these fixed costs, ensuring that your business remains financially stable during the interruption period that a natural disaster can cause.
- Facilitate recovery: When you have financial support from business interruption insurance, you can focus on recovering and rebuilding, rather than worrying about immediate financial pressures. This can significantly speed up the recovery process after a natural disaster has damaged your business in any way.
Case Studies to Consider: Lessons Learned from Recent Natural Disasters
If you’re still not sold on the need for business interruption insurance, take a look at some real-life case studies from well-known natural disasters:
You’re likely familiar with Hurricane Katrina, which devastated New Orleans and the Gulf Coast in 2005. Due to the intense winds and severe flooding, many businesses faced devastating property damage and had to close for extended periods. As you might guess, many businesses never recovered and had to permanently close. But those with business interruption insurance were able to reopen once they had made property repairs and found it safe operate again.
For instance, a restaurant located in the heart of New Orleans reported extensive flooding and property damage due to the hurricane. With business interruption insurance in place, the restaurant owner received compensation for all lost revenue and ongoing expenses during the closure. This financial support enabled them to reopen the business once the city began to recover, ensuring they didn’t face insurmountable financial obstacles like so many other businesses unfortunately did.
From 2017 to 2020, a series of wildfires ravaged California, posing major challenges for businesses in the area. Even those that did not suffer direct physical damage to their business property had to close their doors temporarily due to evacuation orders, poor air quality, and a lack of customers immediately after the fires.
For example, a small boutique in an area prone to fires had business interruption insurance as part of its insurance policy. When wildfires swept through the region, the boutique had to close for several weeks. However, thanks to their insurance coverage, they received compensation for lost income, enabling them to pay their employees and cover rent payments. This financial support played a huge role in their ability to reopen when conditions improved, ultimately safeguarding their business from the effects of the wildfires.
What Does This Mean for You?
If you live in an area where natural disasters are likely to strike, including wildfires, hurricanes, and tornados, you can learn some lessons from the case studies mentioned here. Some takeaways to consider include the importance of:
- Proactive risk management: Obtaining business interruption insurance is a proactive risk management solution that can make the difference between your business’s survival and its possible downfall due to a natural disaster. As recent incidents have shown, no business is entirely immune to such events.
- Customized business insurance coverage: When considering business interruption insurance, you should work closely with your insurance provider to tailor your coverage to your company’s specific needs. This includes determining the waiting period before the coverage kicks in, properly setting the coverage limits, and knowing what the maximum indemnity period is.
- Periodic reviews and updates: You should regularly review and update your business interruption insurance to account for changes in your operations, a recent expansion, or any other relevant factors. After all, being underinsured can be as detrimental as having no coverage at all.
- Collaboration with insurance experts: Enlisting the help of business insurance experts and risk management professionals can provide you with helpful insights. They include identifying potential risks and crafting an effective insurance strategy for your company.
In short, recent natural disasters can serve to remind you of the importance of getting business interruption insurance. It could mean the difference between survival and financial ruin when a natural disaster strikes in your city. When you understand the role of this insurance, learn from real-life case studies, and take proactive steps get adequate coverage, you will be better able to protect your business when a wildfire, tornado, or other devastating event affects your region.