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


It is understandable that some businesses will choose to forgo property damage coverage and business interruption insurance due to the high 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. According to the National Centers for Environmental Information (NCEI), as of September 11, the U.S. had experienced 23 weather/climate catastrophe events with losses totaling more than $1 billion. This was higher than the five-year average and the long-term average. The events included two flood events, 18 severe weather events, one tropical storm event, one wildfire and one winter storm. John Hyland of Sentry Insurance, which provides business insurance solutions, says that hurricanes and tornadoes do not only occur in Florida or Kansas. Consider Friday’s flash floods in New York as an example of this new reality.

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. It is important to ask for more information from insurance agents, such as what types of property damage are covered and any exclusions. It is important to know the deductible and when coverage begins. The policy should also clearly state whether it covers the entire cost of replacement and any limitations. Klein says that the fine print is important. Klein gives the example of an enterprise with multiple locations that has coverage of approximately $20 million. Klein said that a policy with a blanket limit, even if it is slightly lower overall, might be more favorable. 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’ infoor opt for lower cost without a thorough understanding of coverages.

Many small businesses chase prices without understanding what they are giving up, Klein said. Klein said that many small businesses get sticker shock at renewal time and request a reduction in premium. However, they do not always realize the trade-offs involved with a $300 or $3,000 reduction. He advises policyholders to read their policies carefully and not just rely on the summary of cost or summary of coverages.

Always run through possible weather scenarios. Don’t expect to “beat the storm”. Owners should do a thorough assessment of the potential risks to their property. This could include fire, flooding, hurricanes, or anything 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 not directly affected by disasters may face unexpected problems. Hyland explained that some businesses were not directly affected by Superstorm Sandy but still lost power for several weeks due to utility company problems. 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. Klein says that many companies do not re-evaluate the insurance coverage and needs of their business every year.

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. In riskier markets business owners might need to have more cash than 30 or 45 days. We can’t alter the fact that Florida has a higher deductible. Tadin added that you should plan ahead.