Running a business is fraught with challenges that must be addressed on a daily basis, ranging from personnel and payroll to competition and cash flow. Most business owners recognize the need to insulate themselves from risks, both internal and external. After all, hazards abound, whether they’re the result of honest errors on the part of the business or third-party negligence. Each of these risks are usually protected against by insurance, such as business property coverage or errors and omissions insurance.
But there is another class of risks that are too often overlooked and even more frequently uninsured: natural disasters. Hurricanes, flooding, and earthquakes are sources of potential catastrophe. They 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.
Businesses that are unprepared when disaster strikes are often forced into bankruptcy because they are unable to absorb the loss. A common reason many business owners don’t have the right insurance in place is that they don’t understand their vulnerability.
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 heightened threat of hurricanes in the Southeast and along the Gulf Coast, or well-known risks like West Coast earthquakes.
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 natural disaster. Unfortunately, they are also among the most sparsely populated regions of the county. Most every place else is in danger from one or more natural disaster risks. They include some surprises, such as the danger of a major 5.0 or higher earthquake in the Charleston, S.C., area. In 1886 Charleston experienced one of the strongest quakes in U.S. history, and the area averages 10 tremblers a year.
Here are several types of disaster-related risks, and how to insure your business against them.
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 you are most at risk from?
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.
Of all of the natural disasters, hurricanes are the most misunderstood when it comes to what insurance covers. That’s because some, but not all, of the damage caused by hurricanes is protected by your business property insurance.
It’s important to understand that a hurricane is a large cyclonic storm with winds in excess of 74 mph that is usually accompanied by heavy rain. The reason you should understand the definition is that some business property policies specifically exclude hurricanes. This is more common in hurricane-prone states such as Florida. The exclusion means that any damage that occurs during a hurricane is not insured.
While this is a common practice along the Gulf Coast, it can happen in lower-risk locales like the Northeast. Policies in non-coastal states that may still be at some risk may also have the exclusion. If you find hurricanes are excluded from your policy, you should be able to add coverage with a policy endorsement. As with all added endorsements, this will cause your premium to increase.
There are times when a hurricane endorsement is not an option with your insurance company. You can then consider other insurers or purchase a separate, standalone hurricane policy.
Policies that do include coverage for hurricanes only cover damages that are a direct result of the hurricane itself. That means only damage that is from either the wind or rain acting directly on your business. That distinction means direct wind damage is covered if, for example, your roof blows off. Damage caused by wind blown objects such as a garbage can that flies through your window are also 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, as far as your policy is concerned, not all damage caused by a hurricane is considered hurricane damage. Once the torrential rain hits the ground, it’s considered flood water, and any damage that occurs from flood water is not covered by standard business policies.
The same goes for streams and rivers that overrun their banks during a hurricane, or levies and dams that are overtopped. Water driven by hurricane winds, such as tidal surges, are not covered, even though the water is from the rain and the wind that pushes it is from the hurricane. They are all considered floods, and are almost always excluded from business property insurance.
Falling rain is generally covered by your business owner’s policy (BOP) or business property insurance. Once that rain lands somewhere, however — whether it’s the ground, your roof, or a body of water like a lake or river — it is no longer considered rain. Any damage that is caused by rain after it lands is not covered by business property insurance.
In fact, insurance companies consider nearly all water that is outside of your place of business to be potential flood water. That includes water and sewer mains, which are only covered when the pipes that carry them are located in your business.
As a rule, once water enters your place of business through a pipe you are insured against damage caused by it. With the exception of falling rain, nearly any other way that water causes damage to your business is considered a flood and is excluded.
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 ground water 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 recent court ruling determined that rain water 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 uninsured damages from flood water.
The Federal Flood Insurance Program, which is administered by FEMA, is the only 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.
According to the U.S. Geological Survey (USGS), there are about 20,000 earthquakes each year affecting 42 states. Half of all U.S. earthquakes happen in California, where more than 80 percent of businesses don’t have earthquake insurance protection.
While California has more earthquakes than any other state, more than 10,000 earthquakes occur across 41 other states every year. In addition to the dangers posed to five states along the Pacific Ring of Fire, at least nine other states are at risk from a major earthquake. The New Madrid fault, which affects a large swath in the Midwest, along with the Charlotte, S.C., fault, are often unmentioned when business owners discuss earthquake risk.
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, Okla., registered at 5.6 on the Richter scale, qualifying it as a major earthquake. That was strong enough to damage some buildings.
BOP and business property insurance policies do not provide protection for damage to buildings and equipment caused by earthquakes. Businesses located in fault zones can add coverage to their existing policies with an earthquake endorsement. Premium increases for the endorsement are based on the risk.
Not all insurers in high-risk states like California offer the policy endorsement. The California Earthquake Authority offers an endorsement which can be added by either contacting the authority or your agent. The endorsement covers structural and property damage resulting from the shaking caused by an earthquake.
Volcanoes present a risk in five states: Hawaii, California, Oregon, Washington, and Alaska. Several other states, including Idaho and Nevada, have a somewhat lower risk of volcanic eruption. Business owner’s policies and business property insurance cover damage that is caused by volcanic explosion, lava, and ash; they do not cover damage by earthquakes associated with the eruption.
Standard policies do not cover mudflows and flash floods caused by rapidly melting snow and ice. These events, along with burst dams and tsunamis, are considered flooding. Landslides that are the result of movement of the earth caused by tremors from an eruption require a separate earthquake endorsement to afford protection.
Of all of the natural disasters that could potentially affect your business, tornadoes are the only ones whose effects are fully covered by a BOP or a business property insurance policy.