Japan Disaster Is a Reminder That Businesses Need To Get the Right Type and Amount of Coverage
NEW YORK, March 30, 2011 /PRNewswire-USNewswire/ -- Although U.S.-based businesses have not been physically affected by the events in Japan, they may still be financially affected if they are subject to losses due to interdependencies with Japanese suppliers, according to the Insurance Information Institute (I.I.I.).
Damage to Japanese manufacturing facilities, roads, railroads and ports are already resulting in unfulfilled supplies of products and component parts. This could leave some American companies scrambling to find alternate suppliers, some of whom could charge higher prices. A prolonged nuclear crisis, electricity shortages or temporary shutdowns of manufacturing plants in Japan have the potential to impact hundreds of businesses in the U.S. that use Japanese made auto parts, computer chips, consumer electronics and other goods.
"U.S. manufacturing plants could grind to a halt if essential supplies are not delivered on time, which could be devastating for American businesses," said Loretta Worters, vice president with the I.I.I. "But insurance may be available to prevent financial catastrophe. Businesses need to talk with their commercial insurance agent or broker about the coverages that are right for them."
Business owners who depend heavily on suppliers should have Contingent Business Interruption (CBI) insurance and Contingent Extra Expense coverage. CBI often covers losses that occur far away from the physical location of the business owner's properties. CBI and contingent extra expense coverage reimburse lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. Business owners can get protection against a set list of suppliers or purchase blanket coverage protecting any supplier's shutdown. Some companies do not offer blanket worldwide unnamed cover so insureds should check with their insurer, the I.I.I. cautioned.
CBI insurance, also known as Contingent Business Income insurance or Dependent Properties insurance, is usually triggered by physical damage to a customer's or supplier's property or to property on which the insured company depends to attract customers. Contingent Business Interruption excludes flood and earthquake. Those coverages must be added and typically carry a sublimit and specific deductibles.
"The loss at a Japanese location would have to specify earthquake as a covered peril in the insured's policy in order for there to be CBI coverage," explained Worters. "If the loss is from a fire, which is a covered peril, and the business had CBI, they would be covered for fire," she said. "Loss from radioactive contamination or voluntary shutdown is excluded in a policy."
What If a Similar Disaster Happened In the U.S.?
While Contingent Business Interruption insurance is important for a business that depends on suppliers, businesses also need to remember the need for Business Interruption insurance. A business that has to close down completely while its premises are being repaired may lose out to competitors. A quick resumption of business after a disaster is essential.
Business Interruption insurance compensates you for lost income if your company has to vacate the premises due to disaster-related damage that is covered under your property insurance policy. Business Interruption insurance covers the profits you would have earned, based on your financial records, had the disaster not occurred. The policy also covers operating expenses, like electricity, that continue even though business activities have come to a temporary halt.
Make sure the policy limits are sufficient to cover your company for more than a few days. After a major disaster, it can take more time than many people anticipate to get the business back on track. There is generally a 48-hour waiting period before Business Interruption coverage kicks in.
Extra Expense insurance is also important as it reimburses your company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period. Usually extra expenses will be paid if they help to decrease business interruption costs. In some instances, extra expense insurance alone may provide sufficient coverage, without the purchase of Business Interruption insurance.
Earthquakes and floods are not covered under a standard businessowners policy (BOP). These coverages must be purchased separately in order for both Business Interruption and Contingent Business Interruption insurance to apply.
How to Choose a Commercial Insurance Agent or Broker
Determine how your insurance broker approaches your business. If your broker does not understand every aspect of your business he or she is probably not providing a complete risk management solution. One question that few business owners ever ask their insurance broker is to see the submissions they are sending out to the insurance companies. These descriptions, which are written and developed by your broker, are the main source used by insurance company underwriters in order to determine your quotes and can ultimately affect the price of your policy. There should be a comprehensive description of your business on the form; if this is not included, it could signal a lack of knowledge on the part of your broker. Also consider the following:
- Make sure that the broker understands your business liability and property coverage needs as well as your business operations.
- Find out what professional qualifications the broker has. This is a yardstick by which you can assess their commercial insurance know-how.
- Ask to see the broker's CV to find out their level of experience and expertise. Look to see the broker's number of years in the field, additional qualifications or certifications. Find out how often your broker attends seminars and workshops, an indication of how current your broker is on insurance coverage issues.
"Insist on detailed written proposals," said Worters. "This may sound like an obvious point, but it's a precaution some business owners fail to insist upon. Such a proposal should detail not just cost but coverages, limits and the payrolls, sales, rates and classifications that affect coverage and price," she said. "And make it clear that you don't just want the agent to quote your coverage off your old policies -- you want their input regarding alternatives, improvements and corrections to your old policies. You agent should also take into consideration any business improvements such as new machinery, equipment or inventory."
THE I.I.I. IS A NONPROFIT, COMMUNICATIONS ORGANIZATION SUPPORTED BY THE INSURANCE INDUSTRY.
SOURCE Insurance Information Institute