Small Business

How to buy insurance for a business so financial disaster doesn’t strike

Businessman in flooded office, barefeetde reading the newspaper, shoes at table
Henrik Sorensen | Digitalvision | Getty Images

Many Main Street businesses could be playing with fire — literally — by not maintaining appropriate levels of business insurance coverage, especially given the spate of natural disasters affecting multiple areas of the U.S.

Skimping on property damage and business interruption coverage is understandable to some extent, given the cost. While the price of a business owner’s policy — designed for small businesses in low-risk industries — varies based on a variety of underwriting factors and optional coverages selected, generally speaking, a small business owner might pay somewhere between $500 and $3,500 per year for this type of policy, according to Pogo, which helps owners find insurance.

But pinching pennies can be foolhardy as climate change continues to impact the severity of weather-related events. As of Sept. 11, there had been 23 confirmed weather/climate disaster events this year with losses exceeding $1 billion each in the U.S., according to The National Centers for Environmental Information, which was above both the long-term and five-year annual averages. These events included two flooding events, 18 severe storm events, one tropical cyclone event, one wildfire event, and one winter storm event. 

Hurricanes don’t just happen in Florida and tornadoes don’t just touch down in Kansas, said John Hyland, who leads the Sentry Insurance unit that providers business insurance solutions. Especially with weather patterns changing, a natural disaster is “coming to your neighborhood more and more often,” he said. 

Consider Friday’s flash floods in New York as an example of this new reality.

Here’s what small businesses need to know about business insurance amid climate change:

Understand property damage exclusions and deductibles — the fine print matters more than ever.

There’s often a big disconnect between coverage business owners think they are getting and what they actually are getting, said Hubert Klein, partner and practice leader for the Financial Advisory Services Group at EisnerAmper. They should press for greater detail with insurance agents and know, for instance, what property damage is covered and what exclusions may apply. They should also know what their deductible is and when coverage kicks in. It’s also important to understand whether the policy covers the full cost of replacement cost and what limitations apply.

Owners also have to understand the nuances of business interruption coverage, which can include waiting periods, co-insurance requirements and provisions for civil authority bans, when certain areas are declared inaccessible after a disaster. 

The fine print matters, Klein said. He offers the example of a business with multiple locations and roughly $20 million of coverage. If there’s a $1.5 million per-location limit and the business suffers extensive damage to multiple facilities, the business may not be adequately covered. By contrast, a policy that has a blanket limit might be more favorable, even with a slightly lower limit overall, Klein said.

Don’t rely on a policy’s ‘summary’ info or opt for lower cost without a thorough understanding of coverages.

Many small businesses chase prices without understanding what they are giving up, Klein said. At renewal time, they may get sticker shock and ask for a premium reduction, but they don’t always understand there are trade-offs for a $300 or $3,000 policy reduction, he said. He recommends owners read their policy carefully, not relying solely on the summary of costs or summary of coverages. 

Run through likely weather scenarios and don’t expect to ‘beat the storm.’

To ensure they are appropriately covered, owners should perform a thorough evaluation of what could go wrong with respect to their business property, whether that’s 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 businesses that aren’t directly affected by disasters can face unexpected issues. In the aftermath of Superstorm Sandy, for example, some businesses didn’t have direct damage to their facilities, but utility company issues left them without power for weeks, Hyland said. Businesses that were properly covered for this type of occurrence had a source of revenue to continue paying their employees and the other expenses, he said.

Decisions related to specific coverage, endorsements and deductibles will vary based on a particular business’s needs, but it’s important to understand the various exposures, Hyland said. Even if businesses decide not to purchase particular coverages, they shouldn’t be oblivious to the potential exposure, he said.

Conduct an annual review and include inflation in business valuation and property replacement cost estimates.

Inflation makes the cost of replacing property more expensive, and the coverage you planned for three years ago may no longer be appropriate given a changed price environment. Yet many businesses don’t re-evaluate their insurance needs and coverage yearly, Klein said. 

Most business policies build in inflation-adjustments, but they often aren’t enough to keep up with real-world scenarios such as supply issues, significantly higher labor costs and longer completion times, said Nancy Germond, executive director of risk management and education at The Independent Insurance Agents & Brokers of America.

Check if more emergency cash might be required in your geographic market.

In certain areas of the country, the deductible for perils related to fire, wind and hail are higher than deductibles for other covered events, said Jen Tadin, managing director of the global small business practice at Gallagher, an insurance brokerage and risk management consultant. Especially in riskier markets, business owners may have to keep more cash on hand than say 30 or even 45 days, especially when there are higher deductibles to consider. “We can’t change the fact that in Florida, you’ll have a higher deductible. But you have to plan for it,” Tadin said.

Consider a separate flood insurance policy. 

Small business owners don’t think they’ll suffer significant water damage or they may assume they have more coverage for water damage than is available in most standard business policies, Tadin said. Indeed, there are heavy exclusions that can make it difficult to collect in the case of a flood. That’s why having a separate flood policy or endorsement can be important. Businesses looking for flood insurance can check to see if The National Flood Insurance Program could be appropriate, or consider flood insurance through a private carrier. 

Online insurance is convenient but may fall short of identifying all of your needs.

While it’s easy to buy coverage online, there can be value in working with a professional who is familiar with the intricacies of business insurance, your industry and your particular business. You wouldn’t have heart surgery without doing some background work — the same should apply when you’re choosing an agent or company to work with, Hyland said.

The Independent Insurance Agents & Brokers of America offers a resource for owners to find potential agents. They can plug in their zip code and other filters to find a professional who meets their criteria. Find someone who focuses on your industry and who understands “your pain points and special coverage you might need,” Germond said.

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