How small businesses can better protect themselves

10/3/2018 (Permalink)

Even the best-run small businesses face the risk that external factors beyond their control, like a natural disaster, could derail operations.

A recent joint survey conducted by Insureon and Manta revealed that approximately 60% of small business owners don’t have either a formal disaster recovery plan or business interruption insurance, both of which could help them bounce back if an unforeseen event like Hurricane Florence forces their business to temporarily close.

Natural disasters are unpredictable such as the recent wildfires in California are unpredictable. Out-of-control fires in Yosemite threatened the livelihood of small business owners in the hospitality industry, with one innkeeper estimating a loss of at least $20,000. Other local businesses, such as guided tour and day trip operators, faced the possibility of serious financial losses and the need to dip into savings to cover operating expenses.

While a disaster recovery plan won’t completely insulate small businesses from problems caused by Mother Nature, a well-thought-out strategy can help minimize the impact. In addition to purchasing commercial property insurance to help pay for repairs to damaged property, business owners should also consider buying a business interruption insurance policy. Not only can it help expedite recovery from a disaster, it can also minimize a business’ financial losses.

Developing a comprehensive disaster recovery plan

In the event of a natural disaster, small businesses may be forced to temporarily close. Unfortunately, not all businesses are equipped to survive a prolonged shutdown. According to the survey, 31 percent of owners don’t know if their companies would be able to resume operations if they had to close for longer than one month, with an additional 13 percent confident that they would definitely not be able to reopen. However, only 39 percent of small business owners surveyed said they have a formal disaster recovery plan in place.

Disaster recovery plans can help business owners act fast to protect their company’s infrastructure and get the business back up and running as quickly as possible. Some information to consider including in a recovery plan includes:

• A list of key contacts, such as the insurance company, utility companies, suppliers and financial institutions
• A detailed plan of what steps employees should take in the event of an emergency
• A communication plan for notifying customers and vendors of the closure
• Documents and resources that are critical to the business’ operations

To keep everyone in the loop, employers may want to review disaster recovery plans with employees during on-boarding, and hold annual emergency response drills.

Why add business interruption insurance?

Companies face more than just physical damage from natural disasters; they also experience financial losses from being forced to halt operations for a period of time.

While property insurance can pay to repair building damage caused by a wildfire, business interruption insurance covers the potential income lost during a temporary closure. These payout amounts are usually based on income and expense records, so business owners should carefully store copies of these documents in a safe, off-site location.

Business interruption insurance can vary from policy to policy, but typically provides coverage for the following three things:

1. Profits an owner would have earned if the business was not forced to close
2. Normal operating expenses, including employee wages, taxes and loan payments
3. Temporary relocation expenses, such as moving and rent costs

Business interruption insurance usually will not cover costs related to utilities, income that isn’t properly documented and losses caused by a partial closure.

Some policies might not protect against every natural disaster. For example, if events like wildfires are not covered by a proprietor’s property insurance policy, their business interruption policy won’t cover expenses related to wildfires either. For total protection, proprietors should verify with their insurance carriers that their policies cover common natural events that are specific to their geographical vicinity.

Above all, small businesses can best prepare by taking a proactive approach to disaster recovery planning. In the absence of a plan or adequate insurance, small business owners are putting themselves at risk for significant financial losses that could force some to permanently close. With the right combination of preparedness and comprehensive insurance, business owners can ensure they are ready for anything Mother Nature throws their way.