N.Y., Northeast Small Businesses Face Need for Disaster Insurance

April 27, 2007

Many small business owners in New York and the Northeast are still trying to recover from floods caused by as much as eight inches of rain earlier this month.

Those who had flood insurance can recoup some of their losses, but those who never purchased such coverage are now dealing with the fact that a disaster doesn’t have to be a hurricane, tornado or earthquake to cause cataclysmic damage to a company.

Insurance industry analysts and people who advise small businesses say many companies find themselves under-insured when disasters happen. Many don’t have the specialized policies that would cover disasters or they have coverage that falls short in dollar terms of what they need. Or they find they didn’t read the fine print about what was and wasn’t covered when they bought insurance.

Being under-insured for a disaster is a common problem for businesses, especially younger ones, said Cathy Weatherford, executive vice president with the National Association of Insurance Commissioners, an organization of regulatory officials from the 50 states, the District of Columbia and five U.S. territories.

Cost is a factor when owners decide not to purchase specialized disaster insurance; the premiums and deductibles tend to be high because damage tends to be heavy and insurance company payouts in turn are large. Small business owners without a lot of spare cash often decide to take their chances, and hope that disaster never strikes.

Equally problematic, Weatherford said, is the attitude of “this can’t happen to me” that many business owners have.

“Not until you become a victim or you come very close to losing everything do you decide this is something essential for you that you cannot do without,” she said.

Flood insurance tends to get the most headlines, particularly since Hurricane Katrina inundated New Orleans in 2005. But there is other specialized disaster coverage such as earthquake insurance that many businesses in California buy, and landslide insurance, policies that businesses in the Puget Sound area of the Northwest should consider.

But a disaster isn’t limited to a catastrophe wrought by Mother Nature – a fire that destroys a business can be just as disastrous. So a small business needs to consider whether it’s adequately insured for any and all possibilities.

A big difference between disaster insurance such as flood or landslide coverage and, say, fire coverage, is that disaster insurance isn’t included in a standard business or commercial insurance package. It must be purchased separately. And beware: Many lenders will require you to buy flood insurance for a property, and the Small Business Administration won’t disburse disaster loan money if you were flooded and didn’t have flood insurance.

Physical damage is only part of the problem. According to the NAIC, only about 35 percent of small businesses have business interruption insurance, which covers lost profits and operating expenses, such as salaries, that must still be paid even when a company can’t operate.

Glenn Pomerantz, director of the business interruption and insurance claims services practice with the accounting firm BDO Seidman in New York, said another issue for small business owners is a lack of knowledge of the insurance process. They don’t know enough about deductibles, for example, and what is or isn’t covered under the insurance they already have.

“If you haven’t been through a major catastrophic loss before, you really don’t know how” an insurance adjuster is likely to assess the damage and what the insurer will pay, he said.

“They are surprised at how their insurance company reacts,” Pomerantz said, noting that small businesses can be sorely disappointed when they find out that a high percentage of their losses aren’t covered.

One thing small business owners can do is to read the policy they buy carefully, and to understand how much they’re likely to pay for a deductible, and if they’re responsible for a co-insurance payment. For example, their policy might provide that the insurance company will pay 80 percent of the amount after the deductible, leaving the company responsible for the remaining 20 percent.

Mark Thaw, a partner with the Florida-based accounting firm Morrison, Brown, Argiz & Farra, noted that no insurance covers all of a company’s losses. “You have to absorb some loss yourself,” he said, adding, “the purpose (of insurance) is to make you get over the hump” after a disaster.

Thaw said many small business owners also get a shock when they discover they hadn’t bought enough insurance to cover the value of their property, and so their insurers in turn reduce what they pay out.

But insurance shouldn’t be the only consideration when a small business thinks about reducing the losses suffered in a disaster _ companies need to think about ways of mitigating the damage by planning well in advance for how they get themselves up and running after a catastrophe.

Disaster mitigation planning is “as important as the insurance,” Thaw said. “Without the plan, you’re nowhere.”

Such planning includes knowing where and how you’ll get your company up and running again, where you’ll get supplies from a vendor, how you’ll get in touch with clients and customers. Without those plans in place, Thaw said, you’ll suffer further losses.

“You need to keep them to a minimum and survive,” he said.

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