It's all relative when it comes to large losses.
A "large loss" is defined in terms of the dollar amount of the claim and its total effect on the damaged business. A large loss can happen to a small business. The destruction of property, halt of operations and shut-off of revenue can spell the end of the business if it's not properly protected.
Thankfully, there’s insurance that can get a company back up and running after a large loss. But full coverage isn’t a given. Your valuations need to be done right, and your insurance limits need to be accurate. You may also need additional protections, including coverage like building ordinance or law and business income insurance.
- Building ordinance or law helps pay to rebuild to code.
- Business income with extra expense coverage helps pay for you to relocate while your building is restored.
We’ll look at some of the key issues businesses face when they experience a large loss. Awareness of these concerns can help you build a more comprehensive set of insurance protections.
Know what's covered
Weather claims make up some of the most common and costliest commercial insurance claims, and severe weather events can cause large losses for companies of all sizes. Even if your buildings survive, your inventory may be completely ruined, or you may be shuttered for an extended period while utilities, roads and suppliers recover.
Each of these losses requires its own kind of insurance, which is not automatically included in your commercial property policy. Policy endorsements such as ingress/egress coverage, contingent business income, supply chain insurance and civil authority clauses can help, so talk to your insurance professional about these income protections.
Most commercial property insurance policies are written on an “all-risk” basis, which means they provide full coverage for all perils and types of property damage unless specifically excluded. Floods and earthquakes are usually excluded, and in some areas of the country, windstorms are subject to separate treatment.
In addition to disasters such as fires and severe weather, businesses are at risk for large losses from vandalism and theft, collapses and sinkholes, and equipment damage. Coverage for damage resulting from political violence is also a trending concern for business owners.
When a building’s interior gets wet, mold often grows, even after the structure is dry. That can cause a host of financial problems since mold is often limited under commercial property insurance. If the mold is extensive enough, you could be in for a massive remodel of your premises, including flooring, walls and fabrics. That’s an important concern because of policy limits, so ask your insurance professional how much coverage is available for mold growth.
Fires often cause hidden damages that can result in substantial losses to businesses. While burned areas are obvious, smoke and pollutants from burned materials on your premises can leave odors, residues and toxins that must be removed before the building can be reoccupied. Some of these incidents require hazmat treatment, especially for construction, painting, and medical and laboratory losses. Even though the event may have been controlled and the structures may have been saved, the cleanup costs could be exorbitant. Make sure your insurance policy is written with relevant hazardous materials in mind.
In the worst-case scenarios, more than just property is destroyed. Lives are lost. Workers' compensation typically covers employees who are injured or killed in a natural disaster at work. If you self-insure or are in a state that doesn’t require workers' compensation insurance for your employees, you need to consider how you would deal with such a catastrophe.
Cyberattacks can also create large losses
Physical damage to commercial property can lead to a large loss, but so can a devastating cyberattack that leaves everything looking quite normal. According to a report by CNBC, cyberattacks cost businesses of all sizes $200,000 on average. That cost can be calamitous for small businesses, which are the targets of 43% of online attacks. Unfortunately, only 14% of small businesses say they are prepared to defend themselves in the event of a cyberattack.
Cyber insurance has really come of age. Though it is still a complex coverage, insurance experts in the field can provide excellent advice on both insurance policies and loss prevention. Remember that you may suffer not only massive financial liability for a data breach but also a complete shutdown of your business due to locked networks or data.
Less payout than you expected
Before a disaster hits, check your policies and ask your agent or broker what the coverage would be if you had a large loss. Here are a few of the most common and problematic surprises policyholders are hit with.
In many commercial property policies, the policyholder is subject to a coinsurance clause. Coinsurance specifies the percentage of the value of the insured property the policyholder is financially responsible for. If the amount of insurance you purchased is too low (or hasn’t kept up with the increasing value of your property), you could be denied a substantial amount of payment from your insurer for a large loss.
Based on today’s environmental laws, debris removal is more than just employing a bulldozer and roll-on/roll-off dumpster. There may be hazmat remediation needed as well as specialty landfills. Debris removal is typically a percentage of the overall amount paid for your direct physical loss, but in a large loss, that may be insufficient. It is possible to increase this coverage by endorsement.
Upgraded building codes
Sometimes a large loss destroys only part of a building, but the entire building (the rebuilt and the surviving parts) must be rewired, repiped or otherwise upgraded to modern building codes. The cost of doing so in the damaged portion may be covered, but the cost of code compliance in the surviving portion might not be. For this, you would need “ordinance or law” coverage.
These restrict the amount of coverage for certain events. They are sometimes listed as a dollar amount but sometimes stated as a percentage of a covered loss.
In some cases, your deductible can vary based on the peril that causes the loss. This is quite common in coastal regions, but there can be hail deductibles and others nationwide, so check those details.
Run a large-loss drill to test your exposure
As part of your risk management protocols, your company should run a large-loss exercise to see how your insurance would respond. That drill could include checking your limits and sublimits, your coinsurance and deductibles, your projected downtime and business income losses, whether your valuations are up to date, and what you will have to produce for your insurer to expedite your claim. You would also want to include your responsibilities to lenders, vendors, employees, and other partners and stakeholders.
Blue Ridge Risk Partners is a top 75 independent insurance agency in the United States. With 22 offices and counting throughout Maryland, Pennsylvania, and West Virginia and access to hundreds of carriers, we are able to meet your unique insurance needs.