No part of the country is immune from disaster. Whether your construction company operates near water or in a desert, in the city or the suburbs, a natural calamity could stop you in your tracks and even put you out of business. For this reason, it’s a good idea for every contractor to at least consider business interruption insurance.
Get to know it
Business interruption coverage is a bit like disability insurance for your company. A standard health insurance policy covers your medical expenses, but many people also opt for disability coverage to replace their lost income while they’re unable to work.
Similarly, basic business insurance policies cover damage to structures and equipment, but provide little if any protection against loss of income or extra expenses during a period when work on one or more projects is suspended. Without that income, few construction companies have the cash reserves they would need to pay salaries and other fixed expenses until work resumes. Business interruption insurance can fill the gap.
Ask good questions
The scope of business interruption coverage varies dramatically from policy to policy. Here are some questions to consider as you evaluate your options:
How does the policy define “lost business income”? For reimbursement purposes, is income calculated using the cash or accrual method? Does it depend on the insured’s accounting method? Does the policy cover all fixed expenses, including salaries, during an interruption? Also, must your business (or a job) shut down completely or does the policy cover partial interruptions?
What’s the recovery period? Policies generally provide coverage for the time it reasonably takes to restore property to its original condition. But some policies extend the recovery period, providing coverage until the company reaches its preloss level of business.
Are contingent business interruptions covered? Is coverage limited to your facilities or equipment, or does the policy cover “contingent” interruptions — that is, losses resulting from property damage suffered by a customer or supplier? If so, are contingent losses subject to lower limits?
Is denial of access covered? In other words, does the policy cover losses attributable not to property damage, but to the authorities’ denial of access to the property for safety or security reasons?
What about extra expenses? Does the policy reimburse extra expenses, such as renting a storage facility or operating out of a temporary location during a business interruption?
To ensure a favorable settlement in the event you need to make a claim, be sure to keep thorough, accurate, up-to-date financial records. You’ll need solid documentation to establish the income your business would have earned during the interruption period and to substantiate any extra expenses you incur during the interruption.
It’s often advisable to have a forensic accountant or other expert assist you in documenting and pursuing your claim. Regardless of how detailed a policy’s language, there’s almost always room for interpretation. An expert can help demonstrate that a certain interpretation of “business income” or other policy terms more accurately reflects your loss.
An expert can also analyze industry trends, market developments and company-specific factors that support an argument that your income would have increased during the recovery period but for the interruption.
Weigh costs vs. benefits
To determine whether business interruption insurance is right for you, assess your company’s specific disaster risks and estimate each one’s impact on your cash flow and profits. Armed with this information, you can decide whether a policy’s potential benefits justify the cost.