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Protecting Your Business From Natural Disasters
Most business owners recognize the need to insulate themselves from risks, both internal and external. But there is another class of risks that are too often overlooked and even more frequently uninsured: natural disasters. Hurricanes, flooding and earthquakes are present in nearly every corner of the continent, and every year they cause billions of dollars in related losses for hundreds of thousands of businesses.
Protect your business from natural disasters
Business owner Calloway Cook says, “The best way to protect a business from the financial risks of a natural disaster is by including natural disaster coverage in the business or product insurance. This is an important consideration because natural disasters are increasing in frequency due to climate change.”
Businesses that are unprepared when disaster strikes are often forced into bankruptcy because they aren’t able to absorb the loss. In fact, 40% of U.S. businesses do not reopen after a disaster and another 25% fail within one year, according to the Federal Emergency Management Agency (FEMA). A common reason many business owners fail is that they don’t have the right insurance in place and don’t understand their vulnerability.
In this article, we’ll share:
- Business risk assessment
- 6 natural disaster types, the insurance you need, and how to pay for uncovered damages with that disaster type.
- A review of your payment options.
Let’s get started.
A risk assessment can help you protect your business against all potential threats — in particular, those less frequent but nonetheless devastating natural disasters that strike without warning.
Employing a shotgun approach and insuring against everything is not a smart practice. A sound assessment starts with considering which natural disasters your business is vulnerable to and protecting against them. For example, carrying earthquake insurance for a Florida business is as impractical as having hurricane insurance in Idaho.
Knowing which risks are more likely to affect your business is more obvious in some cases than others. These include a heightened threat of hurricanes along the Gulf Coast or earthquakes on the West Coast.
Less frequent dangers can be even more devastating. During Hurricane Sandy, businesses all the way up the eastern seaboard, including those hundreds of miles inland, learned the hard way how vulnerable they were. The lesson — learned too late for some — was that “infrequent” is not the same as “impossible.”
There are some places in the United States that are nearly free from the risk of natural disasters. Unfortunately, they are also among the most sparsely populated regions of the country. Most areas are in danger of one or more natural disaster risks. Take a look at these maps to learn where different types of natural disasters strike most often and which ones are a threat to you.
With that in mind, let’s look at several types of disaster-related risks, how to insure your business against them, and how to pay for any gaps in coverage you may encounter.
Hurricanes are defined as storms with sustained winds of at least 74 mph and that definition becomes important in the event of a storm, as it may disqualify you from coverage or hike up your deductible. Policies that do include coverage for hurricanes only cover damages that are a direct result of the hurricane itself, aka only damage that is from either the wind or rain acting directly on your business. That distinction means that direct wind damage is covered if, for example, your roof blows off. Damage caused by windblown objects, such as a garbage can that flies through your window, are also covered. But let’s take a closer look at what’s not covered.
Damage from hurricane-associated rain is insured, as long as the damage occurs before the rain hits the ground. That means you are insured against damage from rain that enters your business through a hole in the roof or through broken windows that are a result of the wind.
However, once the torrential rain hits the ground, it’s considered floodwater, and any damage that occurs from floodwater is not covered by standard business policies. Floodwater encompasses streams and rivers that overrun their banks during a hurricane, levies and dams that are overtopped, and water driven by hurricane winds, such as tidal surges. For coverage from flooding, you’ll need a separate flood insurance policy.
Sewage backup exclusion
Another common exclusion is sewer backup, which means if the storm causes sewage from sanitary sewer lines to back up into your business through the drain pipes, the losses won’t be covered by your regular policy or flood insurance. Sewage backups often cause damage to floors, walls, furniture, electrical systems and inventory that can be quite expensive to repair. To protect your business, sewer backup insurance is recommended in hurricane-prone areas.
If your business is in a hurricane-prone location, such as along the Gulf Coast, or even in lower-risk locales like the Northeast, review your policy carefully as it’s not uncommon for insurers to specifically exclude coverage for damage from hurricanes. If you find that hurricanes are excluded from your policy, you may be able to add coverage with a policy endorsement. As with all added endorsements, this will cause your premium to increase. However, if hurricane coverage is simply not offered by your insurer, you can consider other insurers or purchase a separate standalone hurricane policy.
Most insurers that do offer coverage for hurricanes in the coastal states from Texas to Maine have a separate hurricane deductible that only applies when filing a claim as a result of a hurricane. It is higher than the normal deductible and is often a percentage of the insured value of the structure of your business.
It’s important to review your business insurance policy carefully to understand what is covered and what’s not. Then, you can decide if you need supplementary coverage for hurricanes, flooding and/or sewer backups. You definitely don’t want to be surprised after an event.
How to pay for hurricane damages to your business
The Congressional Budget Office expects annual economic losses from most types of damage caused by hurricane winds and storm-related flooding to total $9 billion for commercial businesses in 2019. Unfortunately, only about 40% of those losses are expected to be covered by insurance claim payments.
If your business incurs damage from a hurricane and you need help to cover the costs, you can turn to business loans or credit cards, depending on the severity of the damage. Loan or lines of credit can help with large expenses above $10,000. You may be able to get lower rates if you can offer collateral to lenders such as equipment or property equity. For expenses under $10,000, consider a business credit card and look for introductory offers where you can take advantage of no interest for a year or more. This will give you time to repay as much as possible without paying interest.
As we covered above, falling rain is generally covered by your business owner’s policy (BOP) or business property insurance. However, once that rain lands somewhere — whether it’s the ground, your roof, or a body of water like a lake or river — it is no longer considered rain. That water becomes floodwater and any damage caused by floodwater is not covered by business property insurance.
Unfortunately, according to the Insurance Information Institute, 90% of natural disasters involve some type of flooding. It is the most common natural disaster in the U.S. as it affects every state. Additionally, many are surprised to learn that more than 20% of flood claims happen in properties outside of high-risk flood areas.
Types of flooding
Insurance companies consider nearly all water that is outside of your place of business to be potential floodwater. That includes water and sewer mains, which are only covered when the pipes that carry them are located in your business. So if a pipe bursts and fills your basement with water, destroying equipment, you are insured. On the other hand, if a water main breaks one foot outside your business and water rushes in your front door, you are not covered.
The same principle applies to groundwater that seeps in from under your business or water that backs up through your plumbing. Each of these is considered a flood or water back-up and is excluded from your business property policy. A court ruling determined that rainwater that accumulates on a flat roof because of inadequate or blocked drains may be considered flood water — meaning it’s excluded from standard business insurance policies.
Other types of flooding that are excluded from business policies include: overflowing rivers or streams, flash floods, storm surges and tidal waves. Each of these can impact your business even if you are miles from what you believe to be the nearest flood zone. Flooding from Hurricane Sandy caused damage hundreds of miles from both the ocean and the storm’s center. Flood damage is far more prevalent than most business owners realize — until they are faced with the situation themselves.
Impacts of flooding on businesses
Flooding can cause many problems within a business including structural damage, electrical damage, sanitary hazards from standing water, sharp glass or metal debris floating out of place and more. The average commercial flood claim in the U.S. between 2011 and 2015 was $90,000. Imagine the impact that would have on your business. Plus, it can also put a huge financial strain on owners when operations are at a standstill.
The National Flood Insurance Program (NFIP), which is administered by FEMA, is the primary way to purchase flood insurance protection for your business. Visit the program’s website, where you can check your business’s address to determine your actual flood risk and obtain rates for flood insurance. It is even available for business owners renting their place of business, as long as it is located in a community that participates in the NFIP. Furthermore, if you’re in a low-risk area and can qualify, you can purchase a low-cost policy.
If you want more coverage than is available through the NFIP, there are also many private insurance companies offering Excess Flood Protection, providing high limits.
How to pay for flood damage to your business
If your business has suffered damages from flooding and didn’t have flood insurance or still needs help covering the costs even with insurance, you’ll need to pay for the recovery costs out of your pocket or borrow them from somewhere. If the flooding happened in a region affected by a declared disaster, you may be able to qualify for an SBA disaster loan. It’s a low-interest, long-term loan up to $2 million that can be used to recover damaged or destroyed real estate, inventory, machinery, equipment, inventory and other business assets.
In addition to an SBA disaster relief loan, you have a few other options. If you need a smaller amount, you could pull it from your savings or put the expenses on a business or personal credit card. For larger amounts, over $10,000, you can take out a loan or line of credit for your business. If you have yet to establish business credit, consider taking out a personal loan as an individual.
In most cases, loans and lines of credit come with better terms and higher loan amounts if you have assets you can offer up as collateral, whether it be your home, inventory, or equipment but then those items are at risk if you ever default. If you have a very strong financial and credit profile, an unsecured loan may be able to suit your needs without the need for collateral.
According to the U.S. Geological Survey (USGS), there are about 20,000 (mostly small) earthquakes each year and damage has occurred from earthquakes in all 50 states. However, just 42 states face a reasonable risk for experiencing a damaging earthquake. The Northwestern states have the highest risk, with California topping the list, while the eight states without significant hazard levels include Iowa, Kansas, Florida, Louisiana, Minnesota, Michigan, Wisconsin and North Dakota.
Other geologically stable areas such as Pennsylvania, Texas, and Oklahoma are experiencing a dramatic rise in earthquake activity. Some have attributed the increased activity to hydraulic fracturing, or “fracking,” a process used to extract natural gas. While most of the earthquakes believed to be caused by fracking are minor and do not cause significant damage, the potential risk is still real. A November 2011 quake in fault-free Prague, Oklahoma, registered at 5.6 on the Richter scale, qualifying it as a major earthquake. That was strong enough to damage some buildings.
Commercial earthquake insurance coverage
Business owner policies and business property insurance policies do not provide coverage for any damage to buildings or equipment caused by earthquakes. That’s where earthquake insurance comes in. Business earthquake policies can be purchased as an endorsement to a business insurance policy or as a separate policy altogether. It usually covers damage to a business’s building and property, such as inventory, and in some cases, lost business income.
Common exclusions include fire damage, damage to vehicles, damage to your land or flood damage caused by earthquakes, which are often covered under other policies. Earthquake insurance typically has higher deductibles which range from 2% to 20% of your business’s value. Once the deductible is paid, the coverage kicks in. Note, your place of business may have to undergo an inspection to get approved.
How to pay for uncovered damages from earthquakes
What happens if your business incurs damages from an earthquake without any insurance coverage? You may be left with expensive damage to your building and property. Additionally, your income can come to a screeching halt, only making problems worse. If you don’t have the funds on hand to get your business back in order, you can look to a business loan or line of credit to replace equipment and rehabilitate your building. If the earthquake was declared a disaster, you also may qualify for an SBA loan.
Volcanoes are one of the most destructive acts of nature and they primarily present a risk to businesses in five U.S. states: Hawaii, California, Oregon, Washington, and Alaska. A few other states, including Idaho and Nevada, also face a moderate risk from eruptions.
Volcanic eruption coverage for businesses
Most business insurance policies cover damage to your property caused by volcanic eruptions when the damage was caused by the initial lava flow, dust, ash, shock waves in the air or blasts. In most cases, you will also be protected against looting and vandalism if you have to leave your business because of the incident.
What won’t be covered is if the damage or loss is the result of any earth movement, regardless of whether the eruption caused it or not, such as a mud flow, earthquake, land tremor, or landslide. Additionally, most policies don’t cover damage to trees, shrubs, lawns, etc., the cost to remove ash, damage over time due to volcanic dust and volcanic effusion, which is volcanic water and mud caused by rapidly melting snow and ice.
How to pay for uncovered damage from a volcano
If a volcanic eruption has impacted your business, it’s important to remove the ash and dust as soon as possible to prevent further damage. Then, if you have any losses that aren’t covered, or you need help with the deductible, you could opt for a loan or line of credit. The best finance option will depend on your needs and the amount. If it’s a smaller amount from $1,000 to $10,000, a credit card may be enough to get you back on track.
However, if you need more but aren’t sure how much, a credit line is a good option. You can then access the funds when you need them but won’t pay interest until you withdraw money. If you need a larger amount, a lump-sum loan will likely be the best fit. It’s important to shop around before choosing any financing option to get the best rates and terms available to you as they can vary a great deal from one provider to the next.
Of all of the natural disasters that could potentially affect your business, tornadoes are the only ones whose effects are mostly covered.
Commercial insurance coverage for tornadoes
Business property insurance policies cover damage to property from tornadoes while comprehensive commercial auto insurance covers damage to vehicles. These storms occur most often in the Midwest and South during summer and spring and cause more localized damage than other types of natural disasters. Because private hazard insurance covers the damage from tornadoes, it is often not as damaging to the health of a business. However, it’s important to review your policy carefully to ensure you have the coverage you need.
If you do end up having to pay for damages from a tornado or need help paying for your deductible, you can turn to business loans and lines of credit.
When regions have dry weather it causes the moisture levels of the vegetation to drop which, together with strong winds, creates the perfect environment for destructive wildfires. The western United States is particularly prone to this kind of disaster and California has been hit hard in recent years. Take for example the Camp Fire that hit Northern California and destroyed 18,000 residential and commercial structures, while the Hill and Woosley Fires destroyed over 96,000 acres and 1,600 structures.
Commercial insurance coverage for wildfires
If your business ends up in the path of one of these wildfires, the good news is that a BOP is designed to cover the damage to the property, building, equipment and inventory that is caused by a fire. It also includes business interruption insurance to help cover any earnings that are lost if the company can’t operate. The limits will be outlined in the details of your policy.
If the damages you incur exceed your insurance policy or you need help paying your deductible, consider how financing can help to make ends meet. Whether it is a credit card, loan, or line of credit, there may be an option to meet your financial needs.
How to pay for damages from a natural disaster
We’ve covered how to pay for damages from each natural disaster above, and now here’s a brief overview of all of the payment options to keep on-hand.
The government offers long-term, low-interest business and farm loans through the Small Business Association (SBA) and the Farm Service Agency (FSA). The loans are available to business owners who had a property that was damaged in a declared disaster and isn’t covered by insurance. The program can also provide working capital.
If you have lost your business due to a disaster, and are not eligible to collect regular unemployment benefits, you may be eligible for disaster unemployment assistance.
Steve Cohen, president of Excelsior Growth Fund (EGF), a nonprofit lender that helped a lot of small business owners after Hurricane Sandy, says, “After natural disasters, there may be special funds earmarked to help small businesses reopen, and these loans often have low-interest rates or special payment terms. Ask your commercial banker for information. They may guide you to federal or local agencies or partners, like local Small Business Administration or community development financial institutions.”
Business interruption insurance
Business interruption insurance pays for lost income that is the result of an insured peril. That means if your business suffers physical damage from a fire and you are unable to operate you will be paid for the lost income.
Under ordinary circumstances, business interruption insurance is a straightforward proposition. Everyday threats like fire, theft, water and smoke are insured. However, when it comes to natural disasters, not having a clear understanding of what is covered can result in a costly lesson.
There are two important factors to consider when it comes to business interruption insurance. The first is: Does your policy cover the natural disasters for which you are most at risk?
For example, if your business is located near a geological fault line, will your policy pay in the event of an earthquake? Chances are that it won’t. Earthquakes are a common exclusion, so if one occurs, you may not be protected from loss of income. When you review your policies, you can request an endorsement be added.
The second factor concerns what happens when your business survives a natural disaster unscathed, but access to the business is cut off.
For example, if your business is located on higher ground in a flood-prone area, it may not be damaged during a flood — but the lower roads leading to it could become impassable, leaving you effectively unable to operate. Most business interruption policies do not cover this type of loss of revenue, even for covered perils. Optional protection for these types of scenarios can be added through an endorsement only if you are aware of the risk and make the request.
Personal loans and lines of credit
Personal loans and lines of credit grant you access to money which is secured by your credit and income. The loan or credit line comes with an annual percentage rate which determines how much you pay to borrow the money, a term which determines how long you borrow and a loan amount maximum which limits how much you can borrow. It also may come with fees, such as an origination fee that ranges from 1% to 6%.
Personal loans involve the lender giving the borrower a lump sum upfront which is repaid over a set term, often with fixed monthly payments. Lines of credit involve the lender making an amount of money available to the borrower which they can draw from for a set period of time. Once an amount is withdrawn, interest is owed on that amount. When the draw period ends, the amount must be paid or a new arrangement to repay the balance is agreed upon.
To qualify, you will have to be able to prove a steady source of income and will need to have fair or better credit. The better your credit and financial situation, the more you can borrow and the lower the interest rate. If you are lacking in the credit or income area, you may be able to offer an asset as collateral to improve your chance of approval or loan costs.
Either of these can be a good option if you can’t get approved for a high enough credit line on a credit card and/or if you can get a lower interest rate.
Business loans and lines of credit
Business loans and lines of credit are like personal loans and lines of credit except for qualification also takes into consideration your business income and credit. In most cases, lenders will also need a personal guarantor, which means an individual who co-signs the loan.
Credit cards are revolving lines of credit which can be a great way to pay for surprise expenses. They typically have low or no fees and sometimes have 0% APR introductory periods. Plus, they are usually easier to get approved for than lines of credit and loans. However, they likely will come with higher regular APRs than a loan or line of credit. You can apply for a personal or business card, and use it to finance smaller amounts, such as damages under $10,000.
Starting and building a business is not for the faint of heart. It takes a lot of time and effort to get the ball rolling, and no one wants a natural disaster to stop them in their tracks. The good news is there is coverage available that can protect you. We recommend assessing the risks your business faces and ensuring you are protected ahead of time.
Flood insurance is a good idea for most businesses no matter where you are, regular BOPs and property insurance usually cover you for fires, volcanic eruptions and tornadoes while the need for earthquake and hurricane insurance depends on where you live. If you are in a high-risk area, it’s better to protect your business’s future with coverage.
However, it’s important that you check your policy carefully to ensure you understand where you are covered and where you aren’t. And if worse comes to worst and you do find yourself needing to pay for damages or expensive deductibles, multiple financing options are available. Consider the payment options we’ve shared to see if any of them can help to get you through a tough time. Natural disasters can certainly be devastating but you don’t have to be completely vulnerable to them. Keep the info above in mind and prepare your business how you see is the best fit.