Monday, October 01, 2012

Disaster-Recovery Insurance: Preparing for the Worst to Avoid an Expensive Mistake

Disaster Insurance for Business

“Expect the unexpected” is an old axiom that has global applications. It’s a piece of advice that falls into the same category of Murphy’s Law, the familiar, though pessimistic, adage that predicts, “Anything that can go wrong, will go wrong.”

Business owners often prepare for the worst and hope for the best. Large companies hire risk managers who predict risks and put together custom coverage plans, but small business owners must rely on their own knowledge or an agent to assist in creating plans. Even professionals can’t foresee natural disasters or other unexpected crises, which makes disaster-recovery insurance a must for small businesses with large investments in property or inventory.

A 2010 survey conducted by Travelers Insurance revealed that 94 percent of small business owners are confident that their business is protected against insurable risks; however, only 56 percent of those surveyed had disaster-recovery insurance.

Business owners without disaster-recovery insurance may not realize that their standard property insurance fails to cover disasters such as flooding, terrorism or other external circumstances that disrupt day-to-day operations. Unfortunately, this gap in coverage could have drastic consequences. According to federal statistics, 43 percent of businesses that close due to a natural disaster remain permanently closed; and 29 percent close in the following 2 years.

Natural disasters aren’t the only unpredictable risk factors. For example, would you be covered if a water main broke and flooded your building?  A business owner who has business interruption insurance will receive reimbursement for lost income in addition to necessary funds to repair damages. This business owner can retain employees while the property undergoes repairs. The employer without this type of coverage would be forced to lay off employees until repairs are completed – or to pay employees out-of-pocket.

Many small business owners purchase a standard Business Owners Policy or BOP, without researching the different areas of coverage. This may be why only 56 percent of business owners surveyed by Travelers Insurance were covered with disaster-recovery insurance. Though business owners may assume their property is protected against the unexpected, a standard BOP may be limited to maintenance and restoration. 

For small business owners who are not heavily invested in property or inventory, business interruption insurance may not be essential. However, this does not exclude the home-based business. Many independent business owners who work from home have admitted to having no extra insurance, falsely assuming that their homeowner’s insurance will be enough to protect against damages.

Most homeowner’s policies exclude business pursuits from coverage. Insurance claims filed to cover equipment, software or inventory could result in denial if an insurer were to tie the claim to a business venture. Home-based business owners who are interested in business interruption insurance should opt for a claim that includes an extra expense clause. The purpose of this clause would be to allow for the relocation of a business while the original property (the home) undergoes repairs.

Even though insurance is required to mitigate damages of the unexpected, sometimes purchasing insurance can come at a risk. A new business owner can overlook certain risks and find himself underinsured; while a business owner who chooses an unreliable agent could overspend on policies. Business owners who make self-education a priority can avoid such unnecessary and expensive mistakes.

Carol Wilson is a versatile guest blogger who primarily writes about global business trends and finance. When she's not writing for sites like, she enjoys hiking and fishing. If you have any questions or comments for Carol, please send them to

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