Does The Coverage Match The Calamity?

The fire that destroyed Sport-O-Rama health club in Monsey, N.Y., generated

enough heat to melt the building's steel beams. Owner Mark Goldstein believes he and his partner got burned again a few weeks later in January, when they assembled their insurance claim. The insurer refused to reimburse Sport-O-Rama for the hundreds of thousands of dollars of prepaid membership fees it must return. Instead, the insurer informed Goldstein it would pay only for the net income the club would have made during months of rebuilding. "It's a big thing with people who collect money up front. That was one large gap we didn't foresee," he says.

To survive a disaster, small-business owners need to match their insurance to the financial crisis that could occur. That often means asking insurers questions that make them squirm about exactly how they settle specific types of claims. In Goldstein's case, he needed to clarify whether he could get reimbursed for refunded membership fees--before he purchased a policy. Had he pressed the point, he may have learned that he needed a special rider to cover that type of loss. Or he might have chosen to search for a company with a more favorable policy.

KEEP TRACK. Standard small-business owner policies provide insurance against business interruption, or lost income, in addition to property and liability coverage. They pay for fixed expenses such as payroll, debt, and taxes that continue even though business has ground to a halt.

Premiums start at $250 to $300 for a year's worth of business-interruption protection, plus a maximum benefit of $50,000 for property damage and $300,000 for liability claims. A more typical policy would cost $1,500 a year and buy $1 million of liability, $100,000 of property coverage, and a year's income replacement. Buffalo-based Nova Casualty, which caters to small businesses, limits its business-interruption benefit to 20% of the coverage limit on your building and contents plus 100% of the personal-property limit. The minimum premium is about $200 a year. A few companies, such as RLI Insurance in Peoria, provide lost-income protection under home-office policies.

To collect for business-interruption losses, you must be able to document your cash flow and expenses. Be prepared to hand over past tax returns, receipts, and records of continuing expenses, such as salaries or rent. That can be a problem for owners who deliberately keep profits low to avoid taxes. "If you haven't been making any money the last four years, you have no loss," warns Rick Blank, an agent at Preferred Services Group in White Plains, N.Y. And remember: Keep copies of all records off your premises.

Pin down how tightly the insurer's adjuster will interpret vague phrases in the policy, such as "fixed expenses." For example, who are the key employees who must be kept on the payroll until you reopen? The chef at a gourmet eatery? Maybe. The cook at a mom-and-pop diner? Probably not. "We won't pick up the entire payroll expense and all the time-card employees, but we will pay for management," explains Vernon Veal, manager of product planning and development for State Farm Fire & Casualty in Bloomington, Ill.

Above all, become familiar with the policy limits. Standard policies cover fires, windstorms, and even riots, such as those that ravaged Los Angeles in 1992. But floods from natural bodies of water are excluded under business owner policies, and separate flood insurance doesn't cover lost income. Earthquake insurance must also be purchased separately. And consequential or indirect damage is not covered--say, from downed utility lines more than 500 feet from your business that shut you down.

REALITY CHECK. So pay close attention to the kinds of losses you may sustain that require special coverage. If you're a retailer earning most of your money in the fourth quarter, make sure your lost-income benefit is weighted to that busy period, says Sean Mooney, an economist with the Insurance Information Institute.

You may be better off devising a disaster-recovery plan rather than buying extra coverage to insure every risk, however. That's what many businesses learned after the World Trade Center bombing in New York City in February, 1993. They needed only phones, computers, and furniture to work again. The National Insurance Consumer Helpline (800 942-4242) offers a free brochure, Insuring Your Business Against a Catastrophe, that outlines the components of a disaster plan.

Still, matching your coverage to forecasts of your cash needs is a must. In an emergency, that reality check could mean the difference between a temporary closing and a going-out-of-business sale.



-- Fire or smoke -- Natural floods

-- Lightning -- Earthquakes

-- (Nonsteam) explosion -- Landslides

-- Windstorm -- Nuclear contamination

-- Volcanic eruption -- Off-premise power failure

-- Riot -- Structural weakness

-- Vandalism -- Lasting software damage


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