You might be surprised, but most businesses do not fail because they neglected to properly insure their building or even their products and equipment. Sadly, too many businesses fail because they did not adequately protect their most important asset... their income stream! You may be wondering, how can I protect my income? Simple. The insurance industry refers to this coverage as business income.
To grasp the concept of business income, you need an understanding of time. Everything about this coverage hinges on estimating the time period needed to get back into business after a loss. While it is necessary to determine the correct amount of coverage and make sure you meet the appropriate coinsurance requirements, it all falls into place once a determination of a timeframe is established.
According to FEMA, there were 116,500 non-residential and commercial structure fires in the United States during 2007. That equates to a structure fire every four and a half minutes. These fires generated losses of nearly $3.1 billion in direct damage alone, not including the loss of income. Fire losses represent only a fraction of all losses that cause a business to close its doors, at least temporarily.
The insurance industry has estimated 25% of businesses who have suffered catastrophic losses will never reopen, and a significant number will close their doors within five years, never recovering from the interruption in their cash flow. The Institute for Business and Home Safety, while studying losses from major disasters such as hurricanes, floods and tornadoes, made the same conclusion that 25% of businesses who have suffered closure from a natural disaster never reopen. Many of these failures could easily have been prevented if the proper business insurance had been in place.
There are four key objectives that must be accomplished as quickly as possible when a loss occurs:
- Rebuild your building or move to a new location.
- Replace your machinery and restore to operational status.
- Replace raw stock for manufacturing operations, and replace goods available for sale for retail operations.
- Return to full operational capability.
Most businesses that never reopen do not fail because they did not have enough property coverage, but because their loss of income accompanied by ongoing expenses cripple the business, offering little chance of continued operation. At the heart of every business is the expectation of profit. Businesses rarely argue about the importance of insuring buildings and equipment. It makes perfect sense to insure the item of greatest value in your business, and that is your income stream.
If You Need Us
You are the best judge of how long it would take to get your physical house in order. Once you make that analysis, the licensed insurance agents at Hill & Hamilton can help you determine the appropriate amount of coverage and make sure you meet the required coinsurance requirements.