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Small Business Owners Face Business-Interruption Coverage Gaps

Small Business Owners Face Coverage Gaps, Confusion Over Major Protection

Many local small business owners face a major gap in their insurance coverage, says Tim Baxley, MBA, CIC, AAI  President of the Statewide Insurance Group headquartered in Myrtle Beach, SC.

A new national survey conducted for Trusted Choice^® shows that many small business owners have inadequate business-interruption coverage, and are confused about what protection it actually provides. This gap creates concern with the beginning of 2010 hurricane season along South Carolina's coast.

Trusted Choice^® agencies are insurance and financial services firms that offer consumers a broad selection of insurance policies and financial services products, customized insurance coverages as well as advocacy support. These firms are committed to providing excellent customer service.

The real or perceived gap is in a coverage area known as “business-interruption” protection. This insurance pays for lost income should a firm be temporarily closed or should its income be reduced or diminished due to a covered loss. It also pays for operating expenses that continue after business has come to a temporary halt—such as rent, salaries and operating at another location.

“Three out of four respondents either don't have business-interruption insurance, or don't know what it is,” explains Baxley. “In the aftermath of a disaster, how will they—and their employees—survive without income for months on end? Business-interruption insurance provides the resources that allow them to move, rebuild and minimize the impact on their business.

“Running a small business without business-interruption protection, or understanding how it works, is akin to ignoring the warning signs of a fatal heart attack,” says Baxley. “You can't always predict or prevent natural disasters, fires or any other potential business-closing catastrophe, but you can be prepared in case one strikes your small business.”

The gap in business-interruption coverage or awareness has direct impact on millions of workers across the country. If their small business employer does not have business-interruption coverage its employees could find themselves jobless following a devastating loss at the workplace.

“Small Business Administration statistics show that more than 40 percent of Americans are employed by small businesses,” explains Baxley. “These workers need the security provided by business-interruption insurance. They deserve to know that if something disastrous should happen to their place of employment that they'll still receive an income.”

The Trusted Choice^® survey found many business owners are not aware of the importance of this coverage:

• More than half of small business owners surveyed (54 percent) said they don't have business-interruption coverage. Another 20 percent weren't sure or said they never heard of the coverage.
• One out of four respondents (26 percent) says they have business-interruption coverage—a number far below those in this category who should be insured under industry-standard package policies.
• Among those who said they purchased business-interruption coverage, only 38 percent said the reason was that it was included in the policy.
• Among those business owners who said they don't have business-interruption coverage, 45 percent said they didn't think they needed it; another 19 percent said it was too expensive, 16 percent said they didn't know about it, and 13 percent were unsure.
• An overwhelming majority of owners who have business-interruption see the value. Nearly nine in 10 of these entrepreneurs (86 percent) said they are “very” or “somewhat” likely to keep the coverage.

From a financial security standpoint, business-interruption coverage is a key protection package, Baxley says, noting: “Business owners must ask the question, ‘How am I covered for this exposure?' If they are not covered, they should consult their Trusted Choice^® agent immediately to get the coverage they need to protect themselves and their employees.”

Standard small-business insurance—known as business owners' policies, or BOPs—cover loss of income and extra expenses for 12 months. BOPs often provide 60 days of coverage for ordinary payroll. BOP eligibility is typically based on the type of business, size of building, and/or revenue; eligibility varies from one insurer to another, but more than half of all commercial risks are eligible, Baxley says. Business owners should consult with their Trusted Choice^® agent for the proper package for their situation.

“Other industry statistics have shown that 85 percent of small businesses are underinsured by 40 to 50 percent,” says Baxley. “Of those businesses that suffer a serious loss, almost half never reopen—and of those that do, over one-fourth close within three years. Business-interruption insurance can help protect small businesses from that fate.”

Natural disasters are a killer of many small businesses. For example, according to industry reports, some 40 percent of South Carolina small businesses closed by Hurricane Hugo in 1989 never reopened.

About the research: The omnibus survey of 500 small businesses (defined as businesses with fewer than 100 employees and less than $1.5 million in revenue) throughout the United States was conducted April 11-22 by Media, Pa.-based International Communications Research (ICR). The survey has a margin of error of ± 4.5 percentage points at a 95 percent level of confidence.