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Hurricanes Harvey, Irma and Jose: You Need to Protect Your Business from Natural Disasters Now



NJ Top Small Business Attorney | Peter J. Lamont

Hurricane season is in full force and Mother Nature's impact on business and the economy cannot be ignored. As those in Texas are trying to pick up the pieces after the devastation left behind by Hurricane Harvey, Floridians and many others along the U.S. East Coast are bracing for the massive and powerful Hurricane Irma. If these two storms are not bad enough, the National Hurricane Center (http://www.nhc.noaa.gov) is tracking another developing storm, Hurricane Jose which is currently a category 4 storm with sustained winds of 150 mph (as of the date of this post).

Hurricanes, tornados, floods and other Natural disasters, bring widespread destruction to all who are in their path, including small businesses. In many cases, affected small businesses can never recover and end up closing their doors forever. One reason way many small businesses are unable to recover from natural disasters is that they failed to have adequate or proper insurance coverage, or failed to fully understand the limits of their policy.

It is critical for business owners to routinely review their insurance policies to ensure that they provide adequate protection and coverage against such catastrophes and if not, attempt to maximize their coverage immediately. Having the proper insurance coverage will not prevent catastrophes like those that occurred in Texas but it can save your business and protect your income.

Evaluating Coverage

When evaluating the adequacy of your company’s insurance, business owners must first determine what type of policy is necessary and then determine how much is sufficient. While there are a great number of different and unique insurance policies and riders available to businesses, this article will focus on the two types of coverage most often triggered by weather catastrophes and natural disasters; coverage that most business owners should have. As for the amount of insurance needed, this depends on a variety of factors including but not limited to the content of the premises and the perceived risk.

Two Main Types of Coverage

1. Property Policies

Property insurance, which is often made part of a commercial general liability policy or business owner’s policy, is the most basic type of insurance that a business owner should have to protect the company’s property and the contents thereof. Property insurance will generally provide coverage for damaged office furniture and equipment, including computers and hard drives.

However, not all property insurance is created equal. Business owners must decide whether they need coverage based on the actual value of their property or the replacement value. In essence, there are two "values" to a piece of property. The first is the actual value the depreciated, current value of your property. The second value is what it would cost to replace the property if it was damaged due to severe weather or other unfortunate circumstances. If you cannot afford to replace computers, office equipment, office furniture and related items, you should opt to insure your property for its replacement value.

Of course, insuring property for its replacement value as opposed to its actual value will increase the premium. Nevertheless, there may be little benefit to insuring office equipment for its actual value due to immediate depreciation. For example, assume your property policy provides insurance for the actual value of your business’ contents. You have four high-end computers for which you paid $2,200 a piece 12 months ago. These computers are damaged as a result of a roof leak due to severe weather. When you submit your insurance claim you may be shocked to find out your high-end computers now only have a value of $500 a piece, leaving you to make up the difference. Conversely, if you insured your office property for its replacement value and the above scenario occurred, you would be reimbursed for the actual cost of buying the same or similar computers.

2. Business Interruption

Business interruption coverage is often misunderstood to be a separate policy of insurance. To the contrary, it is part of a general commercial liability or property insurance policy. In fact, it is rarely, if ever, sold as an individual policy, but is instead insurance that can be purchased as an “add-on” to an existing business policy.

The purpose of a business interruption policy is to reimburse the policyholder for lost income when its business is interrupted by loss of property due to an insured event. It is intended to return the business owner the amount of profit that it would have earned had the business not been interrupted. However, the most important point to understand is that business interruption insurance is only triggered if the interruption is a result of property damage due to a covered event. In other words, if your business does not sustain physical damage, you cannot make a claim under business interruption coverage.

While many businesses suffered property damage as a result of Hurricane Sandy, many more were forced to close for a number of days due to a loss of electricity. Many of these businesses submitted claims under their businesses interruption policy only to be denied because they did not sustain physical damage.

In general, business interruption insurance coverage is only triggered in three limited circumstances:

1. There is physical damage to the property of such magnitude that it causes the

business to shut down.

2. There is physical damage to other property caused by a loss that would be covered under the company's insurance policy and that damage totally or partially prevents customers or employees from gaining access to the business.

3. The government shuts down an area to do property damage caused by a peril covered by the company's insurance policy that prevents customers or employees from gaining access to the premises.