Our office located in Joplin, MO, knows all too well many of the issues that can occur after a major disaster. One year ago our community was hit by an EF5 tornado that destroyed 8,000 structures, 530 businesses, 19,000 cars, a 400 bed hospital and eight school buildings. One-hundred and sixty-one people lost their lives and thousands more were injured.
The lessons that were learned following this massive disaster have helped us do a better job for our other clients around the country. Two of our carwash clients were total losses in Joplin.
What would happen if you have done everything right and disaster still strikes?
- You have purchased property and liability insurance after consulting your professional insurance agent.
- You have made certain you have back-up for your valuable business data and moved it off premises for safekeeping.
- You have a formal safety plan for your employees and have executed disaster drills on numerous occasions.
Yes, you had seen a lot of instructions about preparedness and ways to reduce your chance of loss and had implemented their suggestions. Now you are wondering, “Why did I not hear nearly enough about what to do next after the loss has occurred?" When your property is destroyed and your world is upside down, your initial priorities will include being sure your family, your employees and their families, and others in your community are safe. Secondly, you will focus on the physical location of your business. Securing the premises from further damage and cleaning up the debris are major time-consuming and costly undertakings.
As we learned in Joplin, debris removal can be a difficult and expensive process. The majority of businesses that shut their doors following a severe property loss, unfortunately, never reopen them. When a business is temporarily closed, revenue streams dry up. But, expenses continue. In fact, they often rise significantly! Following a major loss, there are lots of things you may be able to do without. Your revenue is not one of them. Have you ever thought about how long it would take for you to get back to normal business operations in the event of a property loss?
- The debris from the loss will have to be removed. This can take days, weeks or even months even if your loss is an isolated incident. If it is a catastrophe damaging many businesses in your area, it can take even longer as resources are shared by others in your same or similar circumstances.
- You will need time to consider your options regarding your continuation of business. For example, can I rebuild? What are others in my area doing about their losses? What would my operations be like if I were the only one who is rebuilding my location? Should I relocate my business?
- Securing permits to repair or rebuild can take months especially in urban settings due to density and local authority or major disasters where, again, many of your fellow business people are also trying to get their permits, etc.
- On average, when only one business is involved it can take several months to reconstruct a building. In a major disaster, you may find you have to wait for contractors to get to your location to begin construction. Again, in Joplin, which has been very resilient, only 60 percent of destroyed structures have had a building permit issued one year later.
- Once the building is constructed, replacement of machinery and equipment can take another two to 18 months. Troubleshooting and testing can take another one, two, or more months.
- The Environmental Protection Agency and other regulatory agencies can create even further delays.
Would you be able to survive without revenue, pay your continuing expenses, or go without your own payroll for several months? For most of us the answer is a resounding “No." Business Income and Extra expense coverage increases your ability to survive a substantial loss. Are you ready for a reality check? I am including below a simplified Business Income and Extra Expense Worksheet for you to complete. Before you do so, however, I want to review some of the terms used in the form and why they are important to you. Ordinary Payroll is designed to provide funds that will allow you to be reimbursed for the money necessary to pay staff employees for a specified period of time while reconstruction is in process. This can save you hundreds if not thousands of dollars that it would cost to hire and train new staff employees. Extra Expense covers the costs related to reducing the duration and severity of the loss. If you can resume operations at a temporary location while trying to get back to normal after a loss or shorten the length of time you are out of operation, you will incur extra expenses.
Some examples of extra expenses include:
- Rent at a temporary location
- Temporary fixtures, machinery & equipment
- Moving & hauling
- Installation of your operations
- Light, heat & power at temporary location
- Maintenance at temporary location
- Insurance at temporary location
Additional Employee expenses, such as:
- Travel allowances
- Additional staff
Other expenses may include advertising, telephone and communications (installation and maintenance at temporary location), engineering and administrative costs, emergency facilities, sums to others for services and manufacturing, additional freight and shipping costs due to temporary location, or any number of miscellaneous ways you may attempt to shorten the period of time you are out of operation such as automobile rentals, and others.
Total calculations should be based on the longest foreseeable recovery period in order to ensure adequate coverage regardless of when the loss may occur. Remember, for most of us, the revenue from our business is not the same during all of the months of the year. You can identify seasonal variation of revenue so you can protect from the worst case scenario. (Remember Murphy’s Law: “If it can happen, it will happen at the most inopportune time.
Net Income before taxes is the amount listed on your latest income statement under “Net Income before Taxes." Don’t include other types of income listed on your income statement such as other income, extraordinary gain or loss or other income sources that aren’t related to the primary operation of your business.
Total Operating Expenses are annual expenses you have that relate to the primary operation of your business. It includes items such as rent, lease payments on property or equipment, wages and salaries for managers and key employees (including yours), payroll taxes, benefits, insurance premiums, property taxes, utilities, administrative expenses, depreciation and professional services.
Ordinary Payroll Expense Deduction
In this section, you must decide whether you want to continue to pay your employees if your business is shut down and your property is destroyed. For example, during a shutdown, if you plan to continue to pay all employees, deduct nothing (enter $0). If you do not plan to pay all of your employees during a shutdown, you’ll exclude the costs of their pay here. When you enter this deduction, you can include payroll, benefits, FICA, union dues and workers’ compensation insurance costs. Don’t include payroll for officers, executives, department managers and others designated as key employees in your Income Statement. That compensation is not considered part of your “Ordinary Payroll”.
Recovery time is the number of months you believe it would take your business to rebuild your property and return to your current revenue level if your business property were totally destroyed. Are you ready? Let’s get started.
There are “benchmarks” that can serve as a starting point for your determinations. These benchmarks are expressed as percentages of your total annual revenue and represent an estimate of the amount of Business Income coverage you would typically need to fund a 12-month Business Income value. These benchmarks include 100 percent payroll and benefits expense. Obviously these benchmarks are only a guide; there is no substitute for your taking the time to complete a Business Income worksheet. The benchmark percentages range from 23 percent for Motor Vehicle Dealers to 85 percent for Hospitals and Healthcare facilities. For auto care facilities including carwashes and quick lube operations, the benchmark is set at 30 percent to 40 percent.
Do you rely on other business in your area to supply or draw customers to your business? You can identify these Dependent Business Income sources. You can help to continue your revenue stream if one of those businesses were damaged by an insured peril even if your business doesn’t experience a direct property loss. Every business is different. Before purchasing coverage, you should discuss these issues with your financial advisor or insurance agent. Rounding out your property insurance program with Business Income and Extra Expense coverage reduces your exposure to unforeseen loss. Business Income insurance is an essential part of your business’ blueprint for disaster recovery and ultimately business survival and potential for growth.
Scott Brothers, CIC, is the president and CEO of Joplin, Missouri-based The Insurancenter. The Insurancenter has been insuring the car care industry since 1986 and is the leading writer of insurance for the industry nationwide.