A Business Interruption Insurance Review for Independent Restaurateurs

What happens to your restaurant if the power goes out or it gets hit by a weather-related event, and has to close for several weeks, or if a car crashes through your front window or a disaster of any kind takes place and for some reason the doors remain shut?

No income flows into the establishment, employees go unpaid, no immediate profits are made, property damage is incurred, and your accounts payable are due but there is no immediate cash flow. More likely than not, your restaurant has already procured a property damage insurance policy that would provide some relief for the property damage that your business had suffered.

But what about the interruption to your operations, the lost wages, the lost accounts receivables, the lost profits? Is your business actually prepared for this type of loss and recovery? Does your business actually have business interruption coverage?

What is Business Interruption Insurance?

The common definition of "business interruption insurance" is "insurance that provides protection for the loss of profits and continuing fixed expenses resulting from a break in commercial activities due to the occurrence of a peril."

The hospitality industry is exposed to a wide and ever-emerging risk of possible interruption loss to its business. For example, Guy Scott, CEO of Aon Risk Services, says, "…apart from the traditional types of risks, such as high energy costs, threats of power failures and the risk of nondelivery of outsourced partners, which all have a direct effect on customer service, food and beverage operations and safety, hotel owners and managers need to ensure that they are aware of any emerging or overlooked risks in the industry by continuously re-evaluating their risk management strategies."

....These steps may seem time consuming at first, but they will save you a lot of money in the event you have a loss that could be covered under your business interruption policy. You do not want to be undervalued or overvalued. If you suffer a loss and are undervalued, you may recover 60 percent of the loss you need to recover and, in effect, never recover. If you are overvalued, you pay a premium upfront for something that you will never fully use..

There are various types of business interruption insurance available to businesses. Most differ in the type of claims they cover by way of the loss. Business insurance is primarily designed to replace lost income and restore the business to its pre-incident condition. The type of incident could be anything from a major catastrophe such as fire loss that destroyed the property to something much simpler, like a blown switch that put the store in the dark and shut down the point-of-sale system during a lightning strike.

Under most business interruption policies, there must be some type of physical property damage to initiate coverage. It must be at the business insured. For example, if access to the business property is restricted because of damage to a neighboring property, but there is no physical damage to the business property itself, this would not trigger the business interruption policy.

Some business interruption policies differ by the type of perils that can cause the coverage to take effect. The physical damage must have been caused by one of the perils listed in the policy. If a policy has "named perils," then the incident must be one that is caused by the specifically listed perils. If the policy is an "all perils" policy, the incident could be caused by nearly any event and the uninsured perils will be listed in the policy. Under both types of policies, the interruption of operations must be directly related to the damage that occurs.

There are additional types of business interruption coverage. They include "extra expense" coverage whereby a business could be helped with an additional expense, such as rent or lease payments, for a temporary location or the costs incurred to hasten replacement equipment. Some of the business interruption policies combine this with the loss of business income coverage. Another one is "contingent business" coverage, which extends coverage to include income losses resulting from property loss at a key supplier or vendor or customer location. A third type of coverage is called "civil authority" coverage, triggered when government denies access to a business due to another entity's property loss. Lastly, there is "service interruption" coverage to provide protection against loss due to disruption of utilities.

Some Interesting Statistics

At a conference in 2005 on emergency planning sponsored by the Mission, Kansas-based SkillPath, an organization that offers business training for executives in various countries, some sobering statistics were released:

• 72 percent of U.S. companies have had business operations significantly interrupted because of power outages.
• 56 percent of U.S. companies have had business operations significantly interrupted because of computer hardware problems.
• 46 percent of U.S. companies have had business operations significantly interrupted because of telecommunications failure.

Another survey of 500 owners of a small business - defined as a business with fewer than 100 employees and less than $1.5 million in revenue - showed that three out of four respondents either do not have business interruption insurance or do not know what it is.

The assumption that property damage will provide protection for your loss is a dangerous assumption to make. Most small businesses can purchase business interruption protection within their property damage package as part of the blended coverage, either as an endorsement to the policy or as the general package.

How Does One Determine What Coverage To Have?

First and foremost in considering the business interruption policy or endorsement, is to read and interpret the policy language. Certain items should be double-checked so that you fully understand your company needs and what the policy provides:

What is the scope of the coverage? This is usually the first provision in any insurance policy. It should detail what financial losses will be covered if your business closes because of some unforeseen incident.

Review the scope of the coverage to determine whether the policy covers only revenue loss or whether it will cover more substantial losses as well. Other things might constitute loss, such as inventory or damage to physical premises.

Determine what is considered a 'cause for loss' and what event or incident put your business out of commission. This is a contractual issue between you and the insurer and is a key point under the contract. Most policies are limited to types of property damage.

Determine if the policy includes a 'multiple causes for loss' clause. This is beneficial in situations in which your business is damaged but the damage is not easily attributable to a specific cause. For example, your business was hit by a flood but also had building code issues.

Clarify what is considered a 'covered premise' under your policy. Some businesses operate in multiple locations. Unless specified, the business interruption policy usually covers only the main building of operation.

Determine the limits of liability. Some policies will cover only the costs of inventory loss and building damage but will not cover earnings loss. Other policies may cover earnings up to a certain amount or even until you can reopen.

How Much Interruption Coverage Does My Company Need?

One of the most important aspects of the business interruption policy is the protection afforded for loss of "economic impact" during the interruption period. The difficult question is determining the amount of business interruption insurance your company may need. It is hard to predict how long your company may be closed or for what reason. Here are some suggestions for determining how to assess the amount of necessary coverage:

In the case of a natural disaster or an unexpected debilitating event such as fire, the business will be shut down for at least a year. Hopefully you will be up and running way before this, but especially in the wake of a widespread disaster, rebuilding may be more difficult than you think.

Assess the types of coverage you think you will need to keep you afloat (i.e., business income, extra income, civil authority and/or contingent business interruption coverage). You may purchase these separately or in any combination.

Review your annual financial records and obtain a generalized knowledge of your annual net profit. Your insurance company will need it but you should also have an assessment of how much profit you make (or could lose) per year. Purchase enough business income coverage to cover at least this amount of revenue.

Request an appraisal of your office building or other operating location. The amount of money it would cost to rebuild from scratch should assist in determining the amount of "extra expense" coverage needed in the policy.

Undertake a detailed inventory, not only of the product stock, but also of the equipment in the office. This can also be used to calculate how much "extra expense" coverage is needed.

And finally, have a sense of how much revenue stream would be lost if your business were unable to receive your product from its main supplier or if your main customers were unable to purchase from you. Both situations could be covered under contingent business interruption insurance coverage, provided the reason was related to damage at the associated business' property, significant to halt the business operations.

These steps may seem time consuming at first, but they will save you a lot of money if you have a loss that could be covered under your business interruption policy. You do not want to be undervalued or overvalued. If you suffer a loss and are undervalued, you may only recover 60 percent of the loss you need to recover and, in effect, never recover. If you are overvalued, you pay a premium upfront for something that you will never fully use.

How to Assess How a Business Interruption Policy Protects for Fire Loss

One of the most common areas of interruption in the hospitality industry is a loss due to fire and fire-related hazards. It can easily devastate a business, placing it into ruin both physically and financially. A restaurant that suffers a fire loss and cannot stay open means that the cooks, wait staff and owners cannot collect a paycheck. Business interruption insurance is designed to assist in this type of situation. How does one go about assessing how much is needed in case of a devastating fire loss?

Seek a contingency business interruption clause for your policy. Your agent or broker should be well-versed in how to obtain this for your property damage insurance package. If the fire causes substantial damage to the property of one of your suppliers or customers, you, too, will lose income. A contingent business clause protects you if you cannot buy or sell your product.

Assess what expenses you would need to cover. You can purchase a named peril policy that will cover building damage and rebuilding costs due to fire, but not from other causes. Additionally, you can also carry business interruption insurance that will help you pay for your and your employees' salaries during rebuilding.

Understand and clarify if your policy has a waiting period. This waiting period functions like a deductible, except that instead of paying a percentage out of your pocket, the insurance company does not cover the cost of damage incurred for a defined period after the fire. This can be critical to your recovery, for even a few hours of waiting can ruin the recovery.

Determine if you need 'extra expenses' clauses in your policy. This affords protection for the income that is lost if your business suffers damage that affects the daily operations but not enough to completely shut down operations. Typical business interruption insurance only triggers if the business is completely closed.

Do you have 'loss of rents' insurance if your business income relies on other people renting the property? Should a fire occur on the premises of one of the rental properties, this type of insurance will determine a payment amount based on the number of canceled leases.

How to Compare Business Interruption Policies When Considering a Purchase

Like any other insurance, every business owner wants the best value for the premium dollars spent, the best claim service and essentially a hassle-free experience when it comes to the claim. Below are some simple steps to consider in the comparison shopping of the various business interruption policies and carriers available on the market:

• Be aware and know the claims process for the business interruption insurance.
• Be familiar with all the language regarding the terms and conditions for assessing property damage.
• Assess whether the dollar amount of the coverage is sufficient to provide adequate coverage for salaries and rent, and if the premiums are competitive with other companies.
• Compare the potential insurer's policy regarding "extra expense" insurance. In a disaster or other event that closes your business, different policies may contain clauses that reimburse for normal operating expenses provided during the post-disaster restoration period, while others may have a waiting period.
• See the cumbersome documentation requirements regarding continuing expenses. The "extra expense" insurance alone may provide all the coverage necessary without the purchase of business interruption insurance.
• Beware of the policy that has only the minimal coverage. See if the policy contains an extended "period of indemnity" clause. A policy that only provides coverage for losses until you open your business is not a very realistic approach to assisting you effectively. Most effects of a disaster carry over beyond the time that your business reopens.
• Compare the policies for "off-premise power" coverage. See if it covers business interruption due to damage to your service providers. Do you need a co-insurance clause? Compare the costs-versus-benefit trade-off.

It is especially important for restaurant operators to keep and maintain detailed records that reveal the profits, income, flow of business, upturns, downturns, salary history, revenue projections and the like. Most business interruption losses have some measure of subjectivity in them and the more data that is maintained, the easier it becomes for the insured to demonstrate the loss to which it is entitled. Select the right coverage, the right period of time, the amount of loss to be covered and hope for no disaster to ever hit your business.

Checklist

How to Assess How a Business Interruption Policy Protects for Flood Loss

Common in some parts of the United States and other countries are floods and flood-related problems. In the Atlanta area last year a series of floods damaged several small businesses. Many are rebuilding now, but because there are so many the process is slow and the interruption is long for the establishments. Be aware that not all business interruption policies cover flood-related interruptions.

Before your business is hit by a flood, you should first assess your policy to determine how it protects the business in a disaster.

• Determine what your business interruption policy considers a flood and what causes are covered.
• See if your policy is an "all risk"policy or a "named peril" policy. Although an all-risk policy is the most common form of business interruption policy, it often has exclusions for natural disasters, including floods. A "named peril" policy protects your finances when damage is specifically named in the policy, which could be a flood if so listed.
• Purchase extra flood insurance if your business interruption insurance has the natural disaster exclusion or will only cover income loss.
• Check to see if your insurance policy has a waiting period for business income losses.
• Request an extended period of indemnity in your policy. This will allow you time to recoup income losses that continue after you reopen. In a flood zone, this is particularly important because it is unlikely that your business will begin regenerating a steady flow of patrons and revenue as soon as it reopens so you need the insurance to cover a month or so after the reopening period.

Business Interruption

Insurance Coverage Terminology

Being conversant with these terms might be useful when discussing business interruption insurance with your insurance agent.

Named perils. If the policy is one that has "named perils" then the incident must be one that is caused by the specifically listed perils.

All perils. If the policy is an "all perils" policy, it could be caused by nearly any peril and the uninsured perils will be listed in the policy. Under both types of policies, the damage that occurs must be directly related to the interruption of the operations.

Extra expense. There can be additional types of business interruption coverage. These could include "extra expense" coverage whereby a business could be helped with an additional expense, such as rent or lease payments, for a temporary location or the costs incurred to hasten replacement equipment.

Contingent business. Some of the business interruption policies combine this with the loss of business income coverage. Another one is "contingent business" coverage, which extends coverage to include income losses that are included as a result of property loss at a key supplier or vendor or customer location.

Civil authority. A third type of coverage is called "civil authority" coverage, which extends coverage if a government denies access to a business due to another entity's property loss.

Service interruption. "Service interruption" coverage provides protection against loss due to disruption of utilities.

Overview

Business Interruption Loss Insurance

By Barry K. Shuster

You've suffered a fire in your restaurant. In addition to cleaning up the mess, replacing inventory and rebuilding, you have to suspend operations. Your losses not only include physical property, but income due to lost business.

A standard commercial general liability (CGL) policy does not provide complete coverage for all business operations, however, additional and optional coverage can be purchased as endorsements to the main CGL policy. One type of additional coverage is for business interruption.

This type of insurance provides coverage to pay for loss of income as the result of a covered loss to physical property. Business interruption insurance is available for an additional premium that is based on the amount of coverage, usually the amount of annual gross receipts.

The property damage portion of CGL coverage will provide cover for the loss or damage to the property itself, and the additional coverage under the business interruption portion of the policy will pay for the loss of income based on the property damage. To make a claim under this type of coverage, three conditions must exist:

1. A necessary suspension of operations.
2. Physical damage to covered property.
3. Caused by a covered loss.

Making a claim under this type of insurance coverage demands good record keeping. Claims under business interruption coverage require a great deal of proof and are subject to quite a bit of scrutiny by the insurance company. To substantiate this type of claim, the submission of financial records that demonstrate gross income for a similar period are examined to determine the parameters of your loss.

For example, let's say you operate in a strip mall, and your fixtures and equipment are damaged due to smoke from a fire in an adjacent store. The property damage portion of your CGL policy will cover the losses to the building, equipment and inventory, while the business interruption portion will cover your lost income, if any, for having to cease operations due to the damage, if you can substantiate the loss through financial records from previous years of operations.

Be aware of the limits of this coverage. Here is an example of a loss that is not typically covered:

You own a restaurant in a location completely dependent on a two-lane road to bring in your customers. A series of snowstorms closes the road for three days and forces you and your staff to evacuate. The storms do not do any physical damage to your facility. Based on the loss of business income, your customers were unable to get to the restaurant, so you make a claim under the business interruption coverage portion of your policy.

Unfortunately, the claim would most likely be denied. While your operations were suspended, your property did not suffer any type of physical damage and you cannot make a claim for the loss of income.