The September 11 terrorist attacks caused immense loss of life, human suffering, and property destruction, particularly at the World Trade Center in New York City. The insurance losses from injuries and property damage were very large, and many firms also faced lengthy business interruptions.
Following 9/11, businesses filed nearly 5,500 business interruption claims for more than $12 billion. For many organizations, the loss of income coupled with continuing expenses after a fire or other disaster can be even more devastating than the damage itself.
To reduce the chance that a loss permanently shuts operations down, organizations must assess their exposures accurately by asking several key questions and planning coverage carefully.
What is the most the organization could lose from a shutdown?
Commercial property policies typically define “loss of income” as the expected pre-tax profit or loss plus necessary continuing expenses. For example, if expected profit is $300,000 and necessary continuing expenses are $100,000, the potential loss of income is $400,000.
To calculate exposure to business interruption losses, refer to balance sheets, profit and loss statements, and cash flow statements; insurers also provide worksheets to assist with the calculation. See Business Income Coverage (Business Interruption Insurance) for more on measuring business income exposure.
How much insurance should be carried?
Once the organization knows the dollar amount of its exposure, it must decide how much business interruption insurance to buy. Key considerations include the expected length of the interruption and any coinsurance percentage the policy requires.
Coverage commonly begins after a waiting period (often 72 hours) and ends when business resumes at another location or when the building should be repaired with reasonable speed. If the likely interruption is around six months, a lower coinsurance requirement might be adequate; if it could last longer, higher limits and higher coinsurance percentages may be necessary.
How long will it take business to return to normal?
Even after operations resume, revenue may take longer to recover because customers who went elsewhere may be slow to return. Standard policies often extend coverage for a limited period after resumption, but some businesses need more time.
Seasonal businesses can be especially vulnerable. For example, a seaside restaurant that earns most of its profits during summer may need additional coverage even if it can re-open in the off-season, and some food businesses require specialized protection such as Business Interruption & Food Contamination Insurance for Food Service Businesses.
How much of the normal payroll expense will continue during the shutdown?
Some employees will be needed to keep essential functions running, while others may not be necessary during a shutdown. For example, accounting staff may be required to pay mandatory expenses and collect receivables, while floor staff may not be needed if the premises are closed.
Estimate continuing payroll and other fixed expenses carefully when calculating the amount of coverage to buy.
Does the business depend on other businesses for revenue?
A business can suffer losses even if its own building is undamaged. If a key customer or supplier is shut down, or if authorities close nearby streets, that loss of access can devastate revenue. Many firms affected by 9/11 later evaluated specialized policies such as Terrorism (Property and Business Interruption).
Specialized contingent business interruption coverage is available to protect against losses caused by damage to a supplier, customer, or critical facility offsite.
With some effort and planning before a loss happens, an organization can emerge from a shutdown and return to profitability. To review options and coverage limits, talk to an agent.
Frequently Asked Questions
When does business interruption coverage start?
Most policies have a waiting period (commonly 72 hours) before coverage begins, but specific terms vary by policy.
Will payroll costs be covered during a shutdown?
Policies typically cover necessary continuing payroll expenses, but you must document which payroll amounts are required to keep the business viable.
Can I get coverage if a nearby building is damaged but mine is fine?
Yes—contingent business interruption or civil authority coverage can respond when access is blocked or a supplier or customer is disabled.
How long does coverage continue after reopening?
Standard policies often provide a limited period (for example, 30 days) of extended coverage after resumption, but some businesses may need longer extensions.