Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Between the pandemic and civil unrest, the past year has been tough for our communities, workers and businesses. Thousands of companies have faced closures and restrictions, or experienced disruption and destruction. For businesses experiencing loss of income, or fearing further disruptions, what does interruption insurance have to offer? The answer depends on what risks a business faces, what kind of coverage they buy, and whether purchasing coverage makes economic sense.
“Business interruption insurance” is commonly referred to as “business income coverage,” because it provides income to a business in the event income is lost as a result of a disaster. Business income coverage is offered by almost all property and casualty insurance companies, and it is usually written in conjunction with the property insurance coverage provided to a business owner. The simple formula for business income coverage is net income plus continuing expenses – business expenses that do not stop simply because the business is not in operation, including rent, loan payments, taxes and even employee wages.
Many business interruption policies include additional coverage for extra expenses, such as advertising costs to inform customers of the interruption, or the cost to rent temporary locations to run partial operations. A critical aspect of coverage is what percentage of business income is covered, as that is determined by the language of the policy. Another vital consideration is duration of coverage. This usually runs from the date of loss to the end of the interruption of the business, which is commonly defined as the date the damaged property has been repaired or replaced. The standard business interruption policy provides an additional 30 days of payments beyond the repair or replacement date, but additional coverage may be offered by some insurance companies — up to 360 days of extended period of indemnity. Typical deductibles, or waiting periods, are 48 to 72 hours. This is the amount of time the business must be interrupted before coverage will apply.
Business interruption coverage is generally restricted to physical loss or damage to the property covered under the policy. Virus- or COVID-19-related claims have largely been denied by insurance carriers under the premise that the presence or threat of the existence of the virus did not constitute a physical loss or damage. Many cases are being litigated in various jurisdictions. To date, the denials of coverage have largely stood. Business interruption policies can specifically exclude pandemic coverage — though pandemic coverage can be purchased separately.
Nearly 40% of businesses fail to reopen following a natural disaster, according to estimates by the Federal Emergency Management Agency (FEMA). And nearly 20% of businesses suffer some kind of disruption every year, with one in four of these failing to reopen. Standard property policies provide coverage for numerous perils including fire, wind or hail, theft, burst pipes, vandalism, strikes and riots. However, additional exposures to loss may require additional coverage endorsements that need to be purchased. These include flood and earthquake coverage, depending on where a business is located.
Another risk to consider is utilities. Is the business reliant on overhead powerlines in its manufacturing operation? If so, additional riders would need to be purchased to cover this peril. What about mechanical breakdown? This is a peril that is a standard exclusion on a property policy. Manufacturing firms that rely on specialized equipment are especially exposed to losses in this area.
It’s critical for every business to think through a plan that considers risk and identifies best practices for managing that risk. Insurance is an important part of this, but equally important is proactively managing for risk, such as having alternative ways to conduct business, if possible, when a business facility is damaged or destroyed. Examples include e-commerce or takeout and delivery; serving a market through unaffected facilities; and being able to switch to a work-from-home mode. For manufacturers, it may mean having contingency plans in place to outsource production.
Finally, some businesses may want to consider pandemic coverage. We all hope the pandemic’s impact will lessen under the influence of mass vaccinations, but experts like the University of Minnesota’s Dr. Michael Osterholm warn that the variants may continue to wreak havoc on us. Pandemic coverage is expensive, but can make sense for businesses at heightened risk — such as chicken or hog producers. For most businesses, gaining pandemic coverage may await action by Congress to create a risk-sharing approach — like the one developed for terrorism attacks after September that combines risk sharing by policy holders, the insurance industry, and the federal government. Considering the wide-ranging impact and cost of the pandemic, and the ongoing and future risks to businesses, this may be the best, and most timely way to provide relief.
