Insurance 101: When Property Policy Isn’t Enough

August 30th, 2017 by Drew Vass, Executive Editor

As Hurricane Harvey continues to lash southeast Texas with record-setting rain, it’s important for fenestration-related companies to consider what lessons can be drawn from this wide-ranging catastrophe.

(Photo by NOAA/NASA GOES Project)

For example, at least one in four businesses that are forced to close due to unexpected events such as natural and human-caused disasters never reopen, according to a report by the Institute for Business and Home Safety (IBHS). Because of that, door and window companies should be prepared for the unexpected, especially considering many are small businesses that can have a harder time recovering from a disaster.

Most entrepreneurs have invested in property insurance, but what about insurance that covers lost revenue and other business expenses should your shop close suddenly due to a disaster?

These types of coverages are often overlooked, says Neal Zonfrelli, product manager for commercial property at Liberty Mutual Insurance. Yet, they could be what keeps you in business following a catastrophe.

Plan for the Worst-Case Scenario

The time it takes for a business to recover from a disaster, whether it’s closed for a few days or for a few months, can be detrimental to its survival, says the IBHS.

Enter business-interruption insurance. While property insurance covers the expenses of a building and its contents, business-interruption insurance provides coverage for lost revenue and other expenses during the company’s closure and recovery.

Interruption insurance encompasses all aspects of a business’s post-disaster restoration, including coverage for prolonged power outages and ongoing business expenses. It even gives owners the option to keep their employees on payroll.

“Don’t assume your business will snap back to its previous revenue level as soon as you reopen. While you are closed to customers, they will go elsewhere, and they may take their time finding their way back to you again,” reads the IBHS report. “And as your revenues decrease, you will have both ongoing and new expenses. That combination can be impossible to handle without [business-interruption] and extra-expense coverage.”

However, there are limitations to this type of coverage. Interruption insurance works in conjunction with the insured’s primary policy. In order to receive lost income and other expenses, the primary insurance policy must include coverage from however the damage was sustained.

For example, if a company has flood insurance but not tornado insurance, and a tornado ravages the building, business interruption won’t reimburse lost profit since tornado coverage wasn’t a part of the company’s primary policy.

Flood insurance  — or a lack thereof — could be a problem for Houston as it recovers from Hurricane Harvey.

CoreLogic, a provider of property information and other data for businesses, recently conducted a study that found 52 percent of all properties in Houston that are at a high or moderate risk of flooding aren’t located  in areas that have been designated as flood zones by the federal government. Because of that, businesses and residences in those areas may not have flood insurance, because it’s not required in “special flood hazard area” zones.

One reason building owners elect not to include this type of coverage is because it’s expensive. According to Trusted Choice, a company that represents independent insurance agents, policies range anywhere from $750 to $10,000, depending on the size, location and industry of the business.

It may be costly, but it could be well worth the investment since the rate of natural disasters is increasing. CNN reports that North America experienced 160 natural disasters in 2016—the highest in a given year since 1980.

Depending on a business’s geographical location, some areas are more prone to certain natural disasters like the Gulf Coast is to hurricanes and the Midwest is to tornadoes, but no matter a business’s geographical location, interruption insurance could be the company’s saving grace when disaster strikes.

When It’s Out of Your Control

There are also other circumstances that could hinder a business’s profitability, such as an unexpected closure at a company’s primary supplier or at its primary customer base.

Contingent business interruption helps protect a company should a catastrophe prevent its main supplier or manufacturer from providing its products.

“Companies purchase this type of insurance as an extension to their standard property insurance. Coverage is usually triggered by physical damage to customers’ or suppliers’ property …,” according to the International Risk Management Institute (IRMI). “The type of physical damage must be the same as insured under the controlling policy.”

Contingent business insurance isn’t as common as other types of business income coverages, but it could be worth discussing with an insurance provider.

For example, if flooding were to strike at a vinyl extruder’s plant, and a window fabricator couldn’t receive lineals and thus couldn’t assemble windows, contingent business interruption insurance would protect lost income.

This could end up being a problem along areas of the Gulf Coast affected by Harvey. Vinyl production is closely linked to the production of oil and gas, because the basic petrochemical industry makes ethylene. Ethylene and chlorine are combined to produce an intermediate product, ethylene dichloride, that is eventually transformed into vinyl chloride, the key building block of polyvinyl chloride or PVC.

“As many of you may know, there are many manufacturing facilities, including PVC facilities, in the path of Tropical Storm Harvey,” said a statement from the Vinyl Institute in Washington, D.C. “Our thoughts and prayers are with the employees, their families, and first responders, in Texas and in Southwest Louisiana as the storm moves eastward.”

Take Your Time

A national property insurance expert says businesses eager to rebuild after Hurricane Harvey should be diligent and patient when it comes to settling insurance claims. Otherwise, they might not get the maximum amount from insurers.

“Among the most valuable tools property owners have is resisting the temptation to accept the first settlement offer from an insurer for damage claims,” said Michael C. Perlmuter, president of the Alex N. Sill Company, which represents policyholders in insurance claim settlements. “Insurers and their representatives often rush to get checks to eager property owners for full settlement of their claims. These same policy holders who thought they were receiving all to which they were entitled from the hurricane wind and flood damage are stunned when finding the insurer underpaid what actually was due.”

DWM editor Trey Barrineau contributed to this report.

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