Originally created 05/01/00

Owners often neglect vital insurance



Andy Jordan was about to grill hamburgers at home when his alarm company called to inform him his bike shop was on fire.

"It was a huge shock," he said. "I thought it was a joke or something."

But it was no joke.

The 1998 fire -- caused by an electrical short -- not only destroyed Mr. Jordan's 13th Street shop, but nearly put him out of business for good.

Only one thing allowed him to weather the storm during the six months it took to rebuild the shop: business interruption insurance.

This type of coverage, separate from liability and property damage policies, compensates business owners for profits they would have earned had a disaster not occurred.

It also covers operating expenses such as rent, utilities and employee payroll during the company's downtime.

Without business interruption insurance, Mr. Jordan would have had to lay-off employees and use his property damage settlement to take care of accounts payable.

"It was probably the most important thing during those months," Mr. Jordan recalled.

Most business owners already have no-limit, 12-month business interruption coverage through the standard "business owners policy," a comprehensive type of plan known as a BOP.

Most BOPs also include "extra expense" coverage, which pays costs associated with getting the insured back in business.

"Let's say a fire destroys some specialized machinery that's made in Japan," said Mike Taylor, president of Augusta-based Dawson, Taylor & Co. "To get a replacement by ship, it may take 90 days. To get it by jet, you'll pay more, but you can get it in a week. Extra expense insurance will pay the additional freight cost."

Some business owners, however, may not have either coverage if their policy was written before BOPs were popularized about 20 years ago. Back then, "package policies" allowed business owners to pick and choose their coverages and limits.

Business owners who never got the coverage, either because they considered it too expensive or because their agent neglected to offer it, could obtain it today through the more comprehensive and affordable BOP.

"There could be a few little office buildings or barber shops out there that haven't looked at their policy in 30 years," said Natasha Hendrix, an agent with Blanchard & Calhoun Insurance. "They could probably qualify."

Obtaining business interruption insurance (sometimes called "business income" insurance) is more complicated for businesses who don't qualify for BOP coverage, such as manufacturers, large wholesalers, gun stores and some restaurants, because they must buy coverage based on average annual income calculations.

Problems can occur when disaster strikes fast-growing companies that have neglected to update its business interruption policy in several years.

"A business income claim can be pretty difficult to settle sometimes," Will Weston, vice president of Palmer & Cay, said of business interruption insurance.

As with most insurance, there's lag time between when claims are made and when checks are cut. Mr. Jordan, for example, had to borrow about $100,000 before his claims were settled.

Also, the burden of proof in business interruption claims falls on the insured, making it the business owner's responsibility to:

Maintain accurate and complete records: You must be able to show income the business generated before the loss.

Keep records safe: Store hard copies or backups of electronic records off the premises. Invest in a fireproof safe.

Record financial activity during the downtime: You will want to report extra expenses that occur during the interruption, such as advertising a new location or reopening date.

"Your records are everything," Mr. Jordan said.

E-COMMERCE INTERRUPTIONS

Most companies rely on business interruption insurance to stay afloat after disasters such as fire or vandalism wreak havoc on their brick-and-mortar locations.

But when a large part of the business takes place in cyberspace, a simple network crash can decimate tens of thousands of dollars in business in hours.

The New Economy requires new kinds of insurance policies.

"Traditional insurance covers traditional perils: windstorms, floods, earthquakes, things like that" said Mike McDaniel, a risk financing specialist with Atlanta-based Hamilton Dorsey Alston Co. "None of those policies cover for the extra expense related to a network attack by hackers or by a disgruntled employee."

Mr. McDaniel's firm specializes in helping e-commerce companies obtain protection for business disasters not covered by standard property and electronic data processing policies, disasters such as those that have plagued companies such as eBay and Toys R' Us in recent months.

Such coverage has been around no more than two years, he said. But it's only been in the last several months that e-commerce companies have discovered the need for such protection.

"People were just so happy to have the technology," he said. "But now that the technology has become more broadly used and accepted, people are starting to demand higher levels of guarantee."

Reach Damon Cline at (706) 823-3486.