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Property losses stem from one of the following:

  • Physical damage to property
  • Loss of use of property
  • Criminal activity

Physical Damage

Property damage can be caused by many common perils, such as fire, windstorm, lightning and vandalism. To cope effectively with the possibility of physical damage to property, the business owner should consider more than just damage to or destruction of a building. Contents may be even more susceptible. Manufacturers might lose raw materials and finished goods, and merchants, valuable inventories and fixtures. Any business might lose valuable accounting records, making it difficult to bill or collect from customers. Vital machinery or equipment may become inoperable, and, if replacements can't be found and installed immediately, the business may even be forced to temporarily shut down. (There is a detailed discussion of business interruption later in this booklet.)

Loss of Use

You can lose the use of your business property for reasons other than physical damage. A government agency can close a manufacturer for violating health and safety regulations. The local health department can close a restaurant because of unsanitary conditions. These are normally uninsurable losses unless caused by an insured peril, e.g., smoke. A gas-main break or a downed utility line may shut down an entire block for a day or more.

Criminal Activity

Small businesses may also be susceptible to crimes. Burglary and robbery are obvious perils, but so are employee theft, embezzlement and forgery. Merchants, in particular, may need protection against losses caused by forged checks or unauthorized use of credit cards.

Obviously, the property loss exposures a bank faces are different from those that a painting contractor, a delicatessen or a bookstore faces. An experienced insurance agent is familiar with the exposures of many different businesses. Just as you rely on an accountant to guide you through the maze of tax regulations and record-keeping requirements, you can rely on an experienced insurance professional to help you identify the exposures to loss that your business may face.

Business Interruption Losses

You have already seen how a direct loss from fire can shut down a business temporarily. Although insurance provides money for repairing or rebuilding property damaged as a direct result of fire, most policies do not cover indirect losses, such as income that is lost while the business is interrupted for repairs.

A special kind of insurance covers indirect losses that occur when a direct loss (that results from a covered peril, such as fire) forces a temporary interruption of business. Business interruption insurance reimburses policyholders for the difference between normal income and the income earned during the enforced shutdown period. Not only is income reduced or cut off completely during such interruptions, but many business expenses continue, such as taxes, loan payments, salaries to key employees, interest, depreciation and utilities. Without income to pay these expenses, the business is forced to dip into reserves.

Interruptions in business also often trigger extra expenses. For example, overtime may be authorized to speed the business toward full operation again, or it may reopen with a skeleton staff (additional payroll) in temporary quarters (additional rent) using leased furniture and equipment (additional overhead). These expenses put an added strain on finances at a time when little if any income is being produced.

A firm can also buy business interruption insurance to protect against interruptions triggered by direct loss on someone else's property. For example, if a key supplier is shut down by a fire and can't deliver critical raw materials to a manufacturer, the manufacturer's business may be seriously interrupted. Property damage at a key customer's business may have the same effect. If you depend on one firm for most of your volume and that firm is forced to suspend purchasing, you will lose income.

Every year hundreds of businesses that carry adequate insurance against direct property losses fail because they are not insured for indirect losses. Don't forget to protect your business against loss of income and unusual expenses that may result if indirect loss forces you to close temporarily.

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This article is reprinted by permission of the SBA and The Travelers, Hartford, Connecticut.
For more information on SBA programs go to www.sba.gov


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