By: Peter J. Lamont
New Jersey Business & Personal Law Attorney
Law Offices of Peter J. Lamont
Unfortunately, many business owners affected by Hurricane Sandy and the fire did not have adequate or proper insurance coverage, or failed to fully understand the limits of their policy. With no insurance to cover the damages sustained, many small businesses were forced to permanently shut their doors.
It is important for business owners to routinely review their insurance policies to ensure that they provide adequate protection and coverage against such catastrophes and if not, attempt to maximize their coverage immediately. Having the proper insurance coverage will not prevent catastrophes like those that occurred in Seaside but it can save your business and protect your income.
When evaluating the adequacy of your company’s insurance, business owners must first determine what type of policy is necessary and then determine how much is sufficient. While there are a great number of different and unique insurance policies and riders available to businesses, this article will focus on the two types of coverage most often triggered by weather catastrophes and natural disasters; coverage that most business owners should have. As for the amount of insurance needed, this depends on a variety of factors including but not limited to the content of the premises and the perceived risk.
Two Main Types of Coverage
1. Property Policies
Property insurance, which is often made part of a commercial general liability policy or business owner’s policy, is the most basic type of insurance that a business owner should have to protect the company’s property and the contents thereof. Property insurance will generally provide coverage for damaged office furniture and equipment, including computers and hard drives.
However, not all property insurance is created equal. Business owners must decide whether they need coverage based on the actual value of their property or the replacement value. In essence, there are two "values" to a piece of property. The first is the actual value the depreciated, current value of your property. The second value is what it would cost to replace the property if it was damaged due to severe weather or other unfortunate circumstances. If you cannot afford to replace computers, office equipment, office furniture and related items, you should opt to insure your property for its replacement value.
Of course, insuring property for its replacement value as opposed to its actual value will increase the premium. Nevertheless, there may be little benefit to insuring office equipment for its actual value due to immediate depreciation. For example, assume your property policy provides insurance for the actual value of your business’ contents. You have four high-end computers for which you paid $2,200 a piece 12 months ago. These computers are damaged as a result of a roof leak due to severe weather. When you submit your insurance claim you may be shocked to find out your high-end computers now only have a value of $500 a piece, leaving you to make up the difference. Conversely, if you insured your office property for its replacement value and the above scenario occurred, you would be reimbursed for the actual cost of buying the same or similar computers.
2. Business Interruption
Business interruption coverage is often misunderstood to be a separate policy of insurance. To the contrary, it is part of a general commercial liability or property insurance policy. In fact, it is rarely, if ever, sold as an individual policy, but is instead insurance that can be purchased as an “add-on” to an existing business policy.
The purpose of a business interruption policy is to reimburse the policyholder for lost income when its business is interrupted by loss of property due to an insured event. It is intended to return the business owner the amount of profit that it would have earned had the business not been interrupted. However, the most important point to understand is that business interruption insurance is only triggered if the interruption is a result of property damage due to a covered event. In other words, if your business does not sustain physical damage, you cannot make a claim under business interruption coverage.
While many businesses suffered property damage as a result of Hurricane Sandy, many more were forced to close for a number of days due to a loss of electricity. Many of these businesses submitted claims under their businesses interruption policy only to be denied because they did not sustain physical damage.
In general, business interruption insurance coverage is only triggered in three limited circumstances:
1. There is physical damage to the property of such magnitude that it causes the
business to shut down.
2. There is physical damage to other property caused by a loss that would be covered under
the company's insurance policy and that damage totally or partially prevents customers or
employees from gaining access to the business.
3. The government shuts down an area to do property damage caused by a peril covered
by the company's insurance policy that prevents customers or employees from gaining access to the premises.
It is important to note that even when business interruption coverage is triggered, most policies contain a waiting period of several days before the carrier will begin reimbursing lost profits. In other words, coverage is not retroactive to the day of the event.
Separately, business interruption policies provides for the loss of net income, temporary relocation expenses and ongoing expenses such as payroll that enables businesses to continue paying employees rather than laying them off. The company must be able to prove, typically by submission of financial statements, all business interruption losses. Such coverage is generally afforded until the business is back up and running but does not extend beyond 12 months.
While business interruption policies are limited in scope, it is a critical piece of insurance that most business should include in their commercial general liability policies. It can often be the difference between staying afloat or going out of business.
For example, as a result of Hurricane Sandy, a small lighting design firm near Seaside Heights was forced to shut down its office and small showroom because their building had lost electricity. The firm had property insurance, which included business interruption coverage. During the course of the power outage, pipes located in the unit above the design firm, froze and ruptured causing a significant amount of water to leak into the firm’s ceiling and destroy their office and showroom. The firm immediately contacted their insurance broker and carrier and a claim was initiated.
It took more than three months to rebuild the office and showroom. This had a major impact on the firm’s ability to earn revenue. However, because of their business interruption insurance they were reimbursed for three months of lost profit as well as having their payroll expenses covered. This allowed the firm to continue operating despite the less than ideal circumstances. Unfortunately, many other businesses that did not have business interruption coverage just could not sustain the loss of income and were forced to shut down.
It is not enough just to “have” insurance. Rather, you must have the appropriate policies and understand their limitations. If your policy does not include coverage for property damage or business interruption, it may be wise to speak with your broker and add the coverage. If you are not sure what your policy covers speak with an attorney or broker to obtain the information. The unfortunate events of Hurricane Sandy and last week’s fire should be an immediate reminder to all business owners to review their current policies and take the immediate steps to make the necessary adjustments so that when the next disaster occurs the business you worked so hard to build will not be in jeopardy.