There are two primary causes of a business stoppage or slow down:
Business Interruption Insurance
- Damage due to wind or flood or both, fire or explosion or supply chain failures.
- Cybersecurity attacks that cause financial loss, damage to the firm’s reputation, and possibly legal and regulatory consequences.
Business interruption insurance deals with lost profits and “excess expenses” incurred during the period of restoration.
After a weather disruption, a common cause of lost profits is a supply chain problem, i.e. a vendor cannot provide critically needed parts or services.
It is estimated that about 35%-40% of businesses have a Business Owner Policy. Conversely, up to 65% do not have this coverage.
About 25% of businesses fail to reopen after a disaster strikes, according to the Federal Emergency Management Agency (FEMA).
I am a Certified Valuation Analyst and an IRS qualified appraiser of businesses. I have been trained and tested on how to determine the financial cost to recover from a business interruption.
A Business Owner’s Insurance policy may include general liability, commercial property/business property coverage and business interruption insurance.
Business interruption insurance covers the loss of net income due to the closure of the business or a slow down during the period of restoration. These policies may cover rent or lease payments, relocation costs, employee wages, taxes, and loan payments. These are “extra expenses” that otherwise would be incurred. The policy may cover the purchase of new equipment if repairs are lengthy and the math indicates that replacement is less expensive than repairs.
Net income is Owner’s Discretionary Earnings. This is not the same as corporate, taxable income.
Business interruption does not typically cover damages or losses from flooding, earthquakes, and mudslides, although business owners can purchase additional coverage for these specific perils. Exclusions from coverage include losses unrelated to property damage, such as lost revenues due to viral outbreaks or pandemics.
Some policies include “civil authority” provisions, which provide coverage if a government entity prohibits access to the business, forcing a temporary closure.
It is common for a policy to include a 72-hour (three day) waiting period before coverage begins.
Parties to a claim resolution may include the business owner, a Certified Valuation Analyst, a public adjustor and the insurance company and its claim processing team.
Some claims are disputed by the insurance company, which may lead to litigation.
If you have Business Owners Insurance and are experiencing a business stoppage or slow-down that will last more than three days, it is a good idea to contact your insurance agent and discuss a possible claim.
Disclaimers: I have no affiliation with any insurance company. I do not sell insurance in any form. I am not an attorney. Nothing in this material is legal advice. I have been an agent member of Business Brokers of Florida since 2003. I do not engage in the business brokerage or mergers and acquisitions businesses. My sole business is business valuation.
