Disaster preparedness encompasses everything from the construction company’s role in proper infrastructure design, inspection and construction to the company’s plans to protect against the impact of a disaster on the business.
The key to successful preparation is planning. It is far better to plan for disaster that never happens then to have no plan when the unthinkable occurs. Disaster preparedness is similar to liability prevention. To limit exposure to litigation, contractors should allot time and money to preventative measures. It is always more expensive send a lawsuit then it is to take steps to prevent one. The same holds true with disaster preparedness.
Contractors can prepare for disasters that might impact their business through proper procurement and evaluation of their insurance coverage.
Annual Coverage Review
Contractors are well aware of the importance of having insurance. The question they should be asking themselves is how often do they review their insurance policies to ensure the policies provide adequate protection and coverage against catastrophes?
It is recommended that an annual review of coverage be performed. The annual review should be a regular part of the company’s operating procedures. It makes sense to review coverage with the management team, attorney and insurance agent.
Evaluating Company Needs and Coverage
When evaluating the adequacy of coverage, contractors must first determine what type of policy is necessary and then determine how much is sufficient. While there are a great number of different and unique insurance policies and riders available to contractors, the two types of coverage most often triggered by natural disasters and other catastrophes are property and business interruption.
Real and Personal Property Insurance
Property insurance, which is often made part of the commercial general liability policy, is the most basic type of insurance the contractor should have to protect the company’s real and personal property. Property insurance will generally provide coverage for damage to office furniture and equipment, including computers and hard drives as well as tools and heavy equipment.
However, not all property insurance is created equal. Contractors must decide whether they need coverage based on the actual value of their property or the replacement value. In essence, there are two “values” to a piece of property. The first is the actual value or, the current value of the property. The second value is what it would cost to replace the property if it was damaged due to a disaster.
Of course, ensuring property for its replacement value as opposed to its actual value will increase the premium. Nevertheless, there may be little benefit to ensuring office equipment for its actual value due to immediate depreciation.
For example, assume a property policy provides insurance for the actual value of the business’s contents. A contractor has four high-end computers that cost $2,200 each 12 months ago. These computers are damaged as a result of a roof leak due to severe weather. After submitting an insurance claim, the contractor may be shocked to learn that the high-end computers now only have a value of $500 each, leaving him to make up the difference. Conversely, if office property was insured for its replacement value and the above scenario occurred, the insurance company would reimburse the actual cost of buying the same or similar computers.
Business interruption coverage is often misunderstood to be a separate policy of insurance. To the contrary, it is part of a commercial general liability or property insurance policy. In fact, it is rarely, if ever, sold as an individual policy, but is instead insurance that can be purchased as an “add-on” to an existing business policy.
The purpose of a business interruption policy is to reimburse the policyholder for lost income when its business is interrupted by loss of property due to an insured event. It is intended to return the business owner the amount of profit that it would have earned had the business not been interrupted. However, the most important point to understand is that business interruption insurance is only triggered if the interruption is a result of property damage due to a covered event. In other words, if the business does not sustain physical damage, the contractor cannot make a claim under business interruption coverage.
In general, business interruption insurance coverage is only triggered in three limited circumstances:
- There is physical damage to the property of such magnitude that it causes the business to shut down.
- There is physical damage to other property caused by a loss that would be covered under the company’s insurance policy and that damage totally or partially prevents customers or employees from gaining access to the business.
- The government shuts down an area to do property damage caused by a peril covered by the company’s insurance policy that prevents customers or employees from gaining access to the premises.
It is important to note that even when business interruption coverage is triggered, most policies contain a waiting period of several days before the carrier will begin reimbursing lost profits. In other words, coverage is not retroactive to the day of the event.
Separately, business interruption policies provide for the loss of net income, temporary relocation expenses and ongoing expenses such as payroll that enable businesses to continue paying employees rather than laying them off. The company must be able to prove, typically by submission of financial statements, all business interruption losses. Such coverage is generally afforded until the business is back up and running but does not extend beyond 12 months.
While business interruption policies are limited in scope, it is a critical piece of insurance that most businesses should include in their commercial general liability policies. It often can be the difference between staying afloat or going out of business.
It is not enough just to “have” insurance. Rather, contractors must have the appropriate policies and understand their limitations. If a policy does not include coverage for property damage or business interruption, it may be wise to speak with a broker and add the coverage. If contractors are not sure what their policy covers, they should speak with an attorney or broker to obtain the information.