Many Main Street businesses could be literally playing with fire if they do not maintain adequate business insurance coverage, especially given the spate of natural disasters that have struck several areas of the United States
Given the costs, it’s somewhat understandable to save on property damage and business interruption coverage. While the price of a business owner’s policy – which is designed for small businesses in low-risk industries – varies depending on various insurance factors and optional coverages selected, a small business owner will generally pay between $500 and $3,500 per year for this type of policy, according to Pogo, which helps owners find insurance.
But pinching pennies may be foolhardy as climate change continues to impact the severity of weather-related events. As of September 11, there have been 23 confirmed weather/climate disasters in the U.S. this year, each with damages exceeding $1 billion The National Centers for Environmental Information, which was above both the long-term and five-year annual averages. These events included two floods, 18 severe storms, a tropical cyclone, a wildfire, and a winter storm.
Hurricanes don’t just happen in Florida and tornadoes don’t just touch down in Kansas, said John Hyland, head of Sentry Insurance, which provides business insurance solutions. Particularly with changing weather conditions, “natural disasters in your neighborhood are becoming more common,” he said.
Consider Friday’s flash flooding in New York as an example of this new reality.
Here’s what small businesses need to know about business insurance in the face of climate change:
Understanding Exclusions and Deductibles for Property Damage – The fine print is more important than ever.
“There is often a large discrepancy between the coverage that business owners believe they are receiving and what they are actually receiving,” said Hubert Klein, partner and practice leader of the Financial Advisory Services Group at EisnerAmper. You should press insurance agents for more specific information, such as what property damage is covered and what exclusions may apply. You should also know what your deductible is and when insurance coverage begins. It is also important to understand whether the policy covers full replacement cost and what limitations apply.
Owners must also understand the nuances of business interruption coverage, which may include waiting periods, coinsurance requirements, and prohibition provisions by civil authorities when certain areas are declared inaccessible following a disaster.
The fine print is important, Klein said. He gives the example of a company with multiple locations and coverage of around $20 million. If there is a cap of $1.5 million per location and the company sustains significant damage to multiple facilities, the company may not be adequately covered. In contrast, a policy with a flat limit might be cheaper, even if the limit is slightly lower overall, Klein said.
Do not rely on the “summary” information provided in a policy or opt for lower costs without having a thorough knowledge of the insurance coverage.
Many small businesses chase prices without understanding what they are giving up, Klein said. At renewal, they might get sticker shock and ask for a premium reduction, but they don’t always understand that there are tradeoffs for a $300 or $3,000 policy reduction, he said. He recommends owners read their policy carefully and not just rely on the cost summary or summary of coverages.
Go through likely weather scenarios and don’t expect to be able to “beat the storm.”
To ensure they are adequately covered, owners should conduct a thorough assessment of what could go wrong with their business property, be it a fire, flood, hurricane or something else. This analysis should take into account how much cash the business owner has on hand in the event of a disaster.
Owners “tend to think they can outsmart the weatherman or beat the storm,” Klein said.
Even companies that are not directly affected by disasters can face unexpected problems. After Superstorm Sandy, for example, some businesses suffered no direct damage to their facilities, but problems with utility companies left them without power for weeks, Hyland said. Companies that are properly covered for these types of events have a source of income to continue paying their employees and other expenses, he said.
Decisions related to specific coverage, endorsements and deductibles depend on the needs of a particular business, but it is important to understand the different risks, Hyland said. Even if companies decide not to purchase certain insurance, they should not be aware of the potential risk, he said.
Conduct an annual review and factor inflation into business valuation and property replacement cost estimates.
Inflation makes the cost of replacing a property more expensive and insurance coverage planned three years ago may no longer be appropriate given a changed pricing environment. Still, many companies don’t re-evaluate their insurance needs and coverage every year, Klein said.
Most business policies include inflation adjustments, but these are often not enough to keep up with real-world scenarios such as supply problems, significantly higher labor costs and longer completion times, said Nancy Germond, managing director of risk management and education at The Independent Insurance Agents and Brokers of America.
Consider whether your geographic market may need more emergency cash.
In certain regions of the country, the deductible for perils related to fire, wind and hail is higher than the deductible for other insured events, said Jen Tadin, managing director of the global small business practice at Gallagher, an insurance brokerage and risk management consultant. Particularly in riskier markets, business owners may need to have more cash on hand than, say, 30 or even 45 days, especially if higher deductibles are to be considered. “There is nothing we can do to change the fact that you have a higher deductible in Florida. But you have to plan for it,” Tadin said.