In recent years, the number of devastating weather events has increased dramatically. In 2011 alone, Hurricane Irene caused more than $5 million in uninsured disaster-related expenses for Connecticut residents and business owners, and experts predict that severe weather patterns may likely continue. Then, there was that major snow on Halloween that left hundreds of thousands without power for nearly a week, paralyzing many home and business owners across the state.
It’s not only significant weather events that can constitute a disaster. After a disaster, underinsurance can be the second catastrophe for business owners. Without the right insurance coverage in place and a risk management plan, business owners may face the significant risk of closing for good after sustaining a disaster-related loss. So, what are the important points that business owners need to think about? Let’s take a closer look at the key questions business owners should consider asking before another Halloween snowstorm hits.
What should I discuss with my insurance agent to make sure I have the coverage I need?
Most business owners may know to request a commercial multi-peril policy, which covers property and general liability. This is certainly an important foundation for any insurance plan, but it’s important to realize this is simply a good starting point. Owners should take time to sit with their insurance agent to describe the nature of their business including how they operate, what they own and if they lease or rent. This discussion will allow an agent to better identify appropriate limits for all essential coverages, which include property, general liability, and business income as well as additional policies.
What’s the difference between replacement cost and market value?
The cost to rebuild a structure is generally not the same as the market value price. The market value includes the cost of the land, which will still be there, even if the building is destroyed. Market value is also influenced by other factors such as the location. Market value is not a reliable indicator of the amount of insurance you need because it doesn’t take into account the amount of money needed to rebuild the structure as it stands today.
Why are some businesses not insured to appropriate limits?
Business owners who own their own buildings are at the greatest risk of underinsurance. Construction costs have increased significantly in the U.S. in recent years. As an example, between the second quarter of 2010 and the third quarter of 2011, copper piping rose almost 27 percent, steel rebar increased almost 16 percent and lumber increased nearly 12 percent.
Unless a business owner works within the construction industry, underestimating rebuilding costs is common. A typical mistake is insuring against the current real estate value of the property. With prices still down significantly across most of the country, owners may be putting themselves in a precarious position if a disaster occurs and they find themselves only insured for a fraction of the cost to rebuild.
Additionally, busy owners may undervalue items like desks, computers or other office equipment if they don’t take the time to actually add up the cost to replace those items and make sure they have the right amount of insurance to cover the expense.
Once my insurance is in place, what else can I do to help prepare my company for a disaster?
No doubt the right levels and types of insurance are essential when it comes time to rebuild following a crisis, but insurance coverage alone won’t keep a business running after a disaster. Unfortunately, Travelers found that only half of small business owners surveyed at the U.S. Chamber Small Business Summit have a written business continuity plan or other disaster recovery document. Taking time to develop (or revise) a Business Continuity Plan can feel daunting for already over-burdened business owners, but the value in doing so more than makes up for the initial time commitment. The plan can include everything from important phone numbers of service providers to locations of backup data. A plan should include these five steps:
• Conduct a threat assessment;
• Identify and review important business functions;
• Perform a business impact analysis;
• Develop a prevention and mitigation strategy; and finally
• Implement and maintain the plan.
These plans can provide the roadmap to handle a crisis, but they are only impactful when communicated and practiced.
When disasters happen — and Connecticut business owners have certainly experienced a few — those who have prepared by implementing risk management policies and managed their insurance coverages will likely be in the best position to survive.
Judy Coblentz is chief underwriting officer with Travelers Small Commercial Accounts.
