Business interruption – tricks, tips, & traps

Pizzeria owners face a number of exposures to loss that are addressed by good solid business insurance policies. But unless you pay attention to some of the less obvious contingencies, you just may be sitting on a time bomb!

Let's start out with the basics. You buy commercial property insurance to protect you from financial loss if your property is damaged (subject of course to the policy terms). But what happens after the claim is paid. After the contractors are engaged and the reconstruction work is scheduled. Well, the short answer may be – nothing.

The next thing you need is Business Interruption insurance. Fortunately, this is included in many of the Business Owner Policies sold to pizzeria owners (CAUTION! If you have a Commercial Package Policy – you must ask for this coverage). Once we've established that you have Business Interruption insurance, we can look at what triggers the coverage. Normally, if a claim is covered for your Business Property, it triggers coverage under the Business Interruption section of your policy. Simply put – if it's not covered by your Business Property insurance its usually not covered by your Business Interruption Insurance. So if you look at your Business Property Insurance you can pretty much figure out what will trigger a Business Interruption claim.

Let's take the next step – You see, the coverage for your Business Property is usually limited to your premises. So, if your Business Property on your premises is covered that should tell us that Business Interruption coverage has the same limitation – and it does! If you have a Business Property loss that damages your 'stuff' on your premises and it causes a loss of Business Income (an interruption) this is the subject of Business Interruption coverage.

So far so good. For the sake of this discussion let's assume that we are talking about a simple clearly defined cause of loss, like a fire. Let's check it out: Fire – Covered by your commercial property insurance? Ok – go to the next step. Did it happen on your premises? Ok – go to the next step. Did it interrupt your business? Ok – go to the next step.

The fire on your premises covered by your Commercial Property insurance would trigger a Business Interruption claim. This is the simple one. Let's take a look at a not so simple one: "What if the same claim happened but the loss was NOT on your premises?"

Here's the set up: Your shop is located in a strip mall with a supermarket as the 'anchor.' The supermarket is now the location of the fire. Your shop, at the other end of the strip, is left untouched, but that 'anchor' store is now history. What would that do to your business? A) Would your flow of business go down? B) Would your business income be interrupted? C) Would you lose a large part of your sales? Yes. Would your Business Interruption coverage pay for the loss? A) Yes B) Yes C) Yes D) Probably Not. The answer is D.

Another example: Your shop is located downtown on the main avenue. The local center of business is the county government complex that employs hundreds of people and draws thousands of visitors each day. If that government center is damaged (let's stick with the fire example) and the traffic stops. What would that do to your business? Probably the same thing and the same questions and answers apply. Get the idea? You can have a serious, debilitating loss to your business income caused by something not on your premises and wind up looking at an empty store saying, "What Happened?".

A perfectly sound Business Owners Policy will not address this contingency exposure unless you do something about it before a claim. You can and must protect yourself, now. Here's the way you solve this problem. You get little known coverage addition named "Contingent Business Interruption." This coverage is used to insure against the drop-off of revenue that arises out of the loss or damage to a non-owned and scheduled property. You must list the location to be covered by this coverage extension. A painfully acute example of this was the destruction of the World Trade Center. Literally thousands of small businesses are now gone, not because they were directly damaged in the Trade Center catastrophe, but because they depended on the Trade Center and its tenants for their daily business.

Some other things to worry about

Ok, so now we know that if we buy Business Interruption insurance and a loss happens on your premises and its covered by your Commercial Property Insurance that will usually trigger a Business Interruption claim. But wait, Your Commercial Property Insurance is not all-inclusive, it just can't be. One of the bigger 'holes' in this is 'Equipment Breakdown.' Damage to your compressors, electrical equipment, communication equipment, computers etc. is normally not covered by Commercial Property insurance. So guess what? If your compressors are fried, if your electrical panels are toasted, if your phone system is shorted out and your Commercial Property insurance does not cover it, the Business Interruption Coverage won't cover it either! So, you simply must add coverage for 'Equipment Breakdown' to your policies. Easy to do? YES! Low in cost – YES! Commonly done? Not really.

Some other worthwhile low cost little known extensions:

Off-premises utility failure
Extends Business Interruption to cover the loss of power or water to your premises even though the damage happened some where else – like the truck that takes out the utility pole two blocks away and shuts you down.

Off-premises communication failure
Extends Business Interruption to cover the loss of communications (telephones) to your premises even though the damage happened some where else – like the truck that takes out the phone pole two blocks away and leaves you mute.

Leasehold Interest Protection
Technically not a business interruption loss, but you may find that you can't find similar space at the same cost as your premises that were destroyed by fire. The difference between the cost of your present lease and what similar quarters would cost is the insurable interest. This coverage is used to protect you from financial loss due to termination of favorable lease agreements.

You really should take good hard look at your Business Interruption exposures and coverage now and make some smart choices. Here's what I think you should do:

Call your independent insurance agent. Go over a quick checklist and see if you have these coverages and have a candid discussion about your exposures. Find out what it would cost to add any or all of the things mentioned above.

Make some smart choices

Always remember, in the end, it's your business, your life and your family. Pay attention, ask the questions and make the choices.

If you are unclear on any of these things, or if your agent doesn't seem to be able to help, you can contact me directly at 201-945-3100 SPECIAL OFFER: Contact me at info@pizzasure.com and reference PMQ and I'll send you a copy of a special report: "How Business Interruption Claims Are Settled – The Upsetting Truth" FREE by return e-mail.