Disaster Survival
By Scott Brothers, CIC

The majority of businesses that shut their doors following a severe property loss never reopen them. Business income insurance is an essential part of every successful business plan.

Disasters happen. Businesses temporarily close. Revenue streams dry up. But, expenses continue. In fact, they often rise significantly! Following a major loss, there are lots of things that you can do without. Your revenue is not one of them. Have you ever thought about how long it would take to get back to normal business operations in the event of a property loss?

For example:

• The fire marshal or other similar government official will want to do a cause and origin investigation. This can take from a few days up to an average of one month.
• The debris from the loss will have to be removed. This can take another month or two depending on whether your loss is an isolated incident or a catastrophe with damage affecting many businesses in your area.
• Securing permits to repair or rebuild your building can take two to three months. (Even longer in urban settings due to density and local authority. Many of your fellow business people are also trying to get their permits following a major disaster.)
• Reconstruction of the building can take several months. On average, when only one business is involved, this can be from three to four months, but there are still people in the wake of Hurricanes Katrina and Rita waiting for contractors to get to their location to begin the process of starting over.
• Replacement of machinery and equipment can take from two to 18 months; troubleshooting and testing can take another two months.
• The EPA and other regulatory agencies can create further delays.

Would you be able to survive without revenue, pay your continuing expenses, or go without your own payroll for several months? For most of us the answer is no.

SURVIVE THE LOSS

Business Income and Extra Expense coverage increases your ability to survive a substantial loss. First let’s review some of the terms used in the simplified Business Income and Extra Expense Worksheet shown on page 48, and why they are important.

Coverage for Ordinary Payroll is designed to allow you to continue to pay your valued employees during the period of time required to rebuild. Good employees are hard to find and you can assure yourself that you will have the right people working for you after you are ready to get back in operation just like you did before the loss occurred.

For most of us, the revenue from our business is not the same during all of the months of the year. You can identify seasonal variation of revenue so you can protect against the worst case scenario. Murphy’s Law states it succinctly: If it can happen, it will happen — and at the most inopportune time.

Do you rely on other businesses in your area to supply or draw customers to your business? You can identify these dependent business income sources, and help to continue your revenue stream if one of those businesses were damaged by an insured peril, even if your business doesn’t experience a direct property loss.

You may not be aware of the additional costs associated with a loss. The Extra Expense section of the worksheet identifies expenses that may be insured. Before you begin, here are a few of the terms you will be using in the worksheet:

Net Income before Taxes is listed on your latest income statement. Don’t include other types of income listed on your income statement such as Other Income, Extraordinary Gain or Loss, or Other Income Sources that aren’t related to the primary operation of your business.

Total Operating Expenses are annual expenses you have that relate to the primary operation of your business. It includes items such as rent, lease payments on property or equipment, wages and salaries (including yours), payroll taxes, benefits, insurance premiums, property taxes, utilities, administrative expenses, depreciation, and professional services.

Ordinary Payroll Expense Deduction. In this section, you must decide whether you want to continue to pay your employees if your business is shut down and your property is destroyed. For example, during a shutdown, if you plan to continue to pay all employees, deduct nothing (enter $0). If you do not plan to pay all of your employees during a shutdown, you’ll exclude the costs of their pay here. When you enter this deduction, you can include payroll, benefits, FICA, union dues, and workers’ compensation insurance costs. Don’t include payroll for officers, executives, department managers, and others designated as key employees in your Income Statement. That compensation is not considered part of your Ordinary Payroll.

Recovery time is the number of months you believe it would take to rebuild your property and return to your current revenue level if your business property were totally destroyed.

Are you ready for a reality check? Complete the Extra Expense Worksheet shown below to get a realistic picture of whether you would be able to survive without revenue, pay your continuing expenses, or go without your own payroll for several months?

Total calculations should be based on the longest foreseeable recovery period in order to ensure adequate coverage. Remember Murphy’s Law!

EXTRA EXPENSE

If your business were to suffer an insured loss and you have Business Income insurance you can effectively protect what you would have earned if no loss had occurred. Extra Expense covers the costs related to reducing the duration and severity of the loss. If you can resume operations at a temporary location while trying to get back to normal after a loss or shorten the length of time you are out of operation, you will incur extra expenses.

Some examples of extra expenses include:

• Rent at a temporary location
• Temporary fixtures, machinery, and equipment
• Moving and hauling
• Installation of operations
• Light, heat, and power at temporary location
• Maintenance at temporary location
• Insurance at temporary location

Additional Employee expenses include:

• Transportation
• Overtime
• Travel allowances
• Incentives
• Additional Staff

Other expenses may include advertising, telephone and communications (installation and maintenance at temporary location), engineering and administrative costs, emergency facilities, net amount paid to others for services and manufacturing, additional freight and shipping costs due to temporary location or attempt to shorten period of time you are out of operation, automobile rentals, and others.

There are benchmarks that can serve as a starting point for your determinations. These benchmarks are expressed as percentages of your total annual revenue and represent an estimate of the amount of Business Income coverage you would typically need to fund a 12-month Business Income value. These benchmarks include 100 percent payroll and benefits expense. Obviously these benchmarks are only a guide; there is no substitute for taking the time to complete a Business Income worksheet.

The benchmark percentages range from 23 percent for motor vehicle dealers to 85 percent for hospitals and healthcare facilities. For auto care facilities including car washes and quick lube operations, the benchmark is set at 30 percent to 40 percent. Every business is different. Therefore, before purchasing coverage, you should discuss these issues with your financial advisor or insurance agent.

Rounding out your property insurance program with Business Income coverage reduces your exposure to unforeseen loss, and is an essential part of your business’ blueprint for survival.

Scott Brothers is president and CEO of Joplin, MO-based The Insurancenter. The Insurancenter has been insuring the car care industry since 1986, and is the largest writer of car wash insurance nationwide.