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INSURANCE

9.4.98  
Will Your Business Get Blown Away?
It might if you don't read the fine print on your catastrophe coverage

It's almost a yearly ritual on North Carolina's Outer Banks. As hurricane winds start to howl, shopkeepers, hotel operators, and other small-business owners screw plywood on the windows, evacuate, and wait to see what damage their insurance won't cover this time.

Take Al Crisp, who paid $20,000 this year for what he thought was comprehensive commercial property coverage for his used recreation-vehicle business in Chocowinity, N.C., 75 miles from the coast. After fleeing Hurricane Bonnie last week, he returned to find his spare parts inventory three feet under water. Crisp says he'll lose about two months of sales -- devastating to a seasonal business like his. But he won't get a penny for the business interruption. Why? The fine print on his policy -- like most -- lets his insurer off the hook when the cause is a flood.

Crisp is hardly unique. With Hurricane Earl and a host of other big storms soaking the country, plenty of other small businesses may soon discover they aren't adequately insured either. Small wonder. Policies tend to be Byzantine documents full of subtle qualifiers and exemptions that can leave gaping holes in coverage. Worse, you may not even find the right mix of policies from a single company.

Crisp's woes are case in point. His business has been ravaged three times in the last two years by hurricanes, but he says he still can't figure out how to close the gaps in his coverage. "We thought we had covered it, but we found out today that we did not," Crisp says woefully. (Nonetheless, Crisp's insurance company, Nationwide Insurance, says it has paid Crisp 10 times more in claims than he's paid in premiums in the last five years.)

Generally speaking, small-business owners at least need coverage for commercial property, liability, and loss of income. However, that won't cover you for real disasters, such as hurricanes. Basic flood insurance is available only through the U.S. government's National Flood Insurance Program. And even that is no model of transparency. For example, flood insurance won't protect you against flooding from rain -- which gets tricky if it happens to rain during your particular hurricane. Nor will it cover business interruption due to flooding; you'd need yet another policy to pay your staff and routine bills until you're back in business. That's what Crisp might have needed.

PIECEMEAL PROTECTION. "The test for the agent is: Can you piece together all of the coverage for the various kinds of damage?" says Fletcher Willey, president of J. Fletcher Willey Agency in Nags Head, N.C.

These days, insurance companies typically offer small businesses the following packages:

  • Business owner's or package policies. These offer the basics listed above for as little as $300 a year. But they tend to leave out workers compensation, automobiles used by the business, some thefts, and professional liability. Most important, this policy won't cover you if the cause of your damage of business loss is a flood.
  • In-home business policies. Most home-business owners think they're covered by their regular homeowner's policy. They are, but only up to $2,500, so insurance companies are adding policies specifically designed for them. Essentially, this is a business owner's policy attached as a rider to a homeowner's policy, which can cost between $250 and $750 annually. But it's available in only 28 states, and again, it doesn't cover flood damage.
  • Wind storm coverage. This is necessary in most coastal areas, but is included only in most inland policies. It covers wind and hail damage, and it does cover water damage from rain -- but not damage from flooding waterways. Cost: $400 to $500 a year based on the type of commercial building.
  • Flood insurance. By now, you've probably figured out that most business policies exclude any kind of coverage for flood damage. Entrepreneurs have to purchase this from the National Flood Insurance Program, administered by the Federal Emergency Management Assn. For about $300 a year, it will cover up to $500,000 in damage to commercial structures caused by rising water or tidal surges. It does not cover for flooding caused by rain. Among the caveats: There's a 30-day waiting period after you've paid your premium before the insurance becomes effective, so don't wait until the next hurricane warnings are on the evening news. And it may not cover the contents of the building; you'll have to buy a separate policy. If the property is worth more than $500,000, entrepreneurs can buy additional flood insurance from private insurance companies, but this tends to be very expensive.

With that in mind, even inland dwellers should consider warnings of hurricanes brewing now as a vivid reminder to update their coverage. That's because your insurance needs change with your business. What's more, the minutiae of insurance policies vary by region and type of risk. The premiums in Springfield, Ill., are 35% to 50% lower than those in hurricane-prone Nags Head on the North Carolina coast, for instance. Insurance policies in coastal North Carolina also leave hurricane wind damage coverage to a state pool, and other coastal states have patchworks of public and private coverage.

For Tess S. Judge, a part-owner of three properties in Nags Head, hurricanes are easier to manage than her business insurance policy. "I have learned to sit down and review the policies constantly," she says. Judge has a combination of commercial property, general liability, flood, excess flood, and wind insurance. Her package of policies with several companies even specifies separate coverage for each one of the property signs.

Hurricane Bonnie spared her this summer, but her premiums for wind insurance have increased 40% in the last five years. She has no option but to pay them. "In this neck of the woods, you had better make sure you are adequately insured," she says.

In some cases, a professional agent is your best source of information. But keep in mind that some professionals want to sell a specific product, especially if they're "captive agents" who work for one particular big company. In fact, there aren't many truly knowledgeable independent sources of information, say the National Flood Insurance Program and the Small Business Administration. So your main option is to be thorough and vigilant. Don't be embarrassed to bombard your agent with questions about exemptions.

The most important thing, says Sharon Emek, chief executive of Metro Partners Inc., a New York-based insurance company, is to make sure you have business income and extra-expense insurance, which protect against lost income after a disaster. "You can't insure the loss of your customers, but you can insure the loss of your income. If your customers go somewhere else, you have to work to get them back," she says. Small-business owners also need a disaster plan that includes backing up all office information, from computer files to lists of customer and employee names and addresses, and keep it at home. If you work at home, consider putting this data in a bank vault or, better yet, use an online backup service such as @backup or Atrieva (see related story).

"Most people hate insurance. They have to buy it, but they think it is expensive, and they wish they didn't need it," says Emek. But like Al Crisp, they buy it anyway because it beats the soggy alternative.

By Jeremy Quittner in New York
jeremy_quittner@businessweek.com


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