Nobody can predict when the next hurricane will hit South Florida, but there is no reason to wait for a storm to brew to get your business ready to weather the financial consequences of a catastrophic event. Here are some suggestions to help commercial property owners, developers, and other businesses with significant property exposures create an insurance plan to protect their most important assets.
Buying The Right Insurance
The first step is making sure that you buy appropriate insurance. Get an updated business appraisal to make sure your business has adequate limits to provide full replacement cost coverage and to provide sufficient business interruption coverage. Do not rely solely on financial statements to determine asset value, since property values may have increased substantially and stated asset values may be artificially low. Inadequate coverage limits not only leave your business exposed to large losses, but also may result in co-insurance penalties on smaller claims if your replacement cost values are underreported by more than 20 percent.
Choose replacement cost coverage over actual cash value coverage, since it will pay for the full cost to rebuild without taking deductions for depreciation. It is also important to have coverage for increased materials costs caused by post-event supply shocks, as well as ordinance or law coverage that will pay for increased repair or replacement costs mandated by strict new building codes.
Business interruption coverage also is critically important, because it replaces lost profits and pays operating expenses and overhead during the period of restoration. Know whether your business interruption coverage requires a complete or only partial cessation of business to trigger coverage (the latter being preferable). Also, understand whether the business interruption coverage ends when operations can be partially resumed, even if the business cannot return to normal profitability for a longer period of time. Contingent business interruption coverage also should be included, since it will cover your loss of income caused by damage to a key supplier or customer.
Review your coverage annually with your insurance broker, and let your broker know of any substantial changes to your business that might require new or different insurance. It is too late to make changes once a storm is approaching, since insurers put a moratorium on coverage changes when a hurricane watch is declared.
Contractual Insurance Requirements
An often overlooked part of a company’s risk management plan is the interplay between the company’s insurance program and its contractual relations with customers, tenants, lenders, and contractors. Insurance requirements language in business contracts may seem mundane, but you must be diligent to make sure that your insurance fulfills those requirements, since failing to meet the requirements can create uncovered liabilities. Equally important is making sure your business has the right insurance requirements language in its contracts so that it can benefit from other parties’ insurance in the event of a loss.
For example, a landlord should require its tenants to maintain a certain level of insurance, and to name the landlord as an additional insured. This ensures that the tenants will have sufficient funds to recover from serious damage, and protects the landlord in the event that it wishes to make a claim under the tenants’ insurance. The additional insured provisions should specify that the tenants’ insurance is primary and non-contributory with the landlord’s insurance in the event of a loss that triggers both parties’ policies.
Property owners also should obtain additional insured coverage from their contractors. In the event that a storm topples a crane, turns construction materials into projectiles, or contributes to construction defects, additional insured coverage can be invaluable. Also valuable is a waiver of subrogation provision that prevents insurers from prolonging litigation.
Contractual insurance requirements language should specify the type of coverage that must be maintained, and require proof that the appropriate additional insured endorsement has been issued. Certificates of insurance are commonly used as proof of coverage, but be aware that they are not legally binding on the insurer. It is always best to have actual copies of third-party insurance policies on file to confirm the coverage and for reference in the event of a claim, since you are obligated to provide notice to the third-party carrier.
Preparing For An Insurance Claim
Proper claim preparation begins well before the loss occurs. Document the current state of your business and property with photographs and video images that catalogue personal property, fixtures, and other contents. Keep good inventory records that will help document damage to merchandise and supplies. Store copies of insurance policies, contracts, key financial records, invoices, and documentation of the property’s condition in fireproof and waterproof off-site locations, and keep back-up electronic scans and images at a different location, such as a secure web-based server that can be accessed remotely.
Your company should have a disaster recovery team comprised of key personnel who are assigned specific tasks to help the company resume operations and fulfill insurance conditions, such as providing notice of the loss, mitigating damages, handling salvage, and cooperating with the assigned adjuster. The team should include professionals from outside the company, such as attorneys, accountants, and engineers, who can be called upon to help assess the damage and preserve insurance coverage rights.
Finally, have a cash reserve or line of credit sufficient to cover your deductibles and keep your business operating for at least three months. Insurance companies are notoriously slow payers, and you should be prepared to front much of the initial recovery cost. If your company can avoid a cash crunch, it will have more leverage to negotiate a better resolution of the claim, and will be firmly positioned to weather the second storm that often follows when the insurer refuses to pay the claim in full.
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