Business lessons from a disaster - business interruption insurance

Nation's Business, May, 1993 by William D. Harrel, John S. DeMott

If ever there was a case for business-interruption insurance, it was made pointedly when an explosion rocked New York's World Trade Center, sending it into darkness for weeks and forcing nearly 350 small and large companies to do business elsewhere in makeshift quarters.

Herb Abbe knows. Owner of H. Abbe International, a travel agency and freight forwarder on the 28th floor of Two World Trade, he relocated his two computers and 11 employees to the nearby offices of accommodating lawyers, who happened to be clients. Abbe worked from there for a month before getting the go-ahead to move back to his old office.

Abbe says his insurance broker had never offered him business-interruption insurance. The disruption has cost him about $70,000 in lost business and moving expenses, says Abbe. "It's going to have to be taken out of retained earnings." In addition, he had to lay off four employees.

Even with the scars of the disruptive experience, Abbe isn't sure if he'll buy business-interruption coverage. "It wasn't offered to me when I started 15 years ago. I don't know what the premiums are. If they were expensive before, they'll probably be more expensive in the future. Right now, there are more important things. We have to do the best we can under trying circumstances."

Despite his losses, Abbe isn't angry: "You know, New York gets a bad press, a bad rap. I happen to like New York. This is the price we pay for living in a democracy. We want to be open. We want to have conveniences, like public parking in the building. You know? Sooner or later, you knew that terrorism was going to come to this country."

In addition to leaving six persons dead and injuring about 1,000 others, one of America's worst man-made disasters resulted in at least $510 million worth of property damage and loss of business, says the Property Claim Services Division of the American Insurance Services Group.

The World Trade Center's insurance lessons for business owners are:

* Be sure to ask your insurance agent about business-interruption coverage. It pays what you would have earned, based on your records, had the interruption not happened. A good agent should suggest it and require that your rejection of it be in writing.

* Be sure that your business-interruption insurance covers your company for more than just a few days. A week's worth of protection in the World Trade Center disaster wouldn't have been enough; most tenants were shut out for at least a month. Says Loretta Worters of the Insurance Information Institute: "A lot of small businesses say, 'I can't imagine not being able to get back to work in a week.' They're going to have a problem."

* Depending on your kind of business, consider buying "extra expense" insurance to pay for temporary relocation of people and machinery so you can get back in business fast, says Lawrence Drake, managing director of Marsh & McLennan, an insurance broker that itself has 800 employees in the World Trade Center.

While extra-expense coverage adds to the cost of ordinary business-interruption insurance, the dollars spent for relocating can be greater than revenue lost from interrupted business.

Says Drake: "This is what's really critical. If you have clients, you can't afford to be out of business at all, or someone will take them over. It can be a very substantial expense--especially if everyone else is doing the same thing."

The thing to remember is that the right type and degree of business-interruption insurance can keep your business alive if disaster destroys your company or if thieves walk off with your equipment.

Joe Riney Jr. was protected. His turn-of-the-century mattress manufacturing and retail company on East Market Street in Louisville, Ky., sustained heavy fire damage in April 1989.

Though its plant closed for a year for repairs that cost over $200,000, the business itself kept going.

In addition to covering reconstruction costs, insurance helped Riney relocate manufacturing to a leased facility until the old building was restored. Production resumed in three weeks, and the company's retail operations were consolidated in its other store.

"We probably would have survived without insurance, but we would have been in debt for a long time," says Riney, the third generation of his family to run the business.

Clearly, it's important to shop for an insurance policy designed to get you up and running as soon as possible. But what kind of policy should you buy? Here are some points you should consider:

Type Of Coverage

Most businesses have to be concerned about covering two major types of risks: property loss and liability for injuries. Large companies typically purchase separate policies for each, but small and midsize companies frequently buy packaged policies that cover both types of exposure.

The most popular such package is the Business Owners Policy, or BOP. This type of policy is designed specifically for small offices, retail stores, apartment houses, and certain types of small service businesses, according to Sean Mooney, senior vice president of the Insurance Information Institute and author of Insure Your Business (Insurance Information Institute Press, 1992).