A disaster can wreck everything you’ve worked so hard to build. Recovering from a disaster takes time and money, and both of those resources can be in short supply for small business owners.
Disaster insurance can help you bounce back. Learn more about the types of insurance you should have in place in the event of a disaster.
What Does Disaster Insurance Cover?
There is no single disaster insurance policy that covers everything. Instead you’ll need to look at the risks your business has the potential to face and purchase insurance to cover those risks.
Here are disasters businesses may face and how they are covered by insurance.
Fire
While you can purchase fire insurance policies, most businesses cover potential fires through commercial property insurance policies. You can buy this type of policy on its own or as part of a business owners policy (BOP).
A commercial property insurance policy covers business structures, including the walls, floors and ceilings. It also covers permanently installed fixtures, appliances and additions that are under construction.
This insurance coverage includes the contents of your building, like your computers and inventory, and the property of others in your care. For example, if you own an electronics repair business and a fire damaged a client’s cell phone that had been dropped off for repairs, a commercial property insurance policy would typically cover the cost of that cell phone.
Storms
Storms, including lightning, windstorms and hail, are typically covered under commercial property insurance policies and BOPs.
Floods
Damage from flooding is typically not covered under a commercial property insurance policy or BOP. You can purchase a separate flood insurance policy through the National Flood Insurance Program (NFIP), which is overseen by the Federal Emergency Management Agency (FEMA). You can purchase NFIP through partner insurance companies; the NFIP doesn’t sell coverage directly. You can also buy private flood insurance policies.
Flood insurance covers damage to your building and its contents. It usually covers flooding from overflowing rivers or streams, heavy rain, snowmelt, storm surges and broken dams or levees. With NFIP policies, to be categorized as a flood, water must cover at least two acres or affect two or more properties.
Your lender may require you to purchase flood insurance if you live in a flood-prone area. If you’re buying private flood insurance, confirm that your lender will accept the policy before you buy.
Earthquakes
Earthquakes are similar to floods in that commercial property insurance policies and BOPs do not typically cover them. You can purchase an earthquake insurance policy to cover the structure of your building and its contents. Some policies also cover lost income.
The Insurance Information Institute notes that earthquake policies often have a high deductible of 2% to 20% of the value of your building. For a building valued at $500,000, that means your deductible could be as much as $10,000. Keep the deductible and the financial standing of your business in mind.
Other Risks Businesses Face During a Disaster
During a disaster, businesses have other risks to deal with beyond rebuilding and replacing inventory. Here are a few to consider:
Lost Income
Closing your business to complete repairs can be devastating. Many small businesses don’t have the resources to remain closed for days, weeks or months. Business interruption insurance can help.
This policy helps to pay your expenses if you have to close due to a covered event. It can help make up for lost income, pay mortgage, rent and loan payments, pay taxes and cover your employee payroll.
These policies typically have a waiting period of 2 to 3 days, and the benefits last for 30 days, but you may be able to extend the benefit period when you purchase a policy.
Lawsuits
Let’s say a customer slips and falls on your property after an ice storm. Unfortunately, even when your business is coping with a disaster, things can happen that could lead to a lawsuit. Commercial general liability insurance helps to cover lawsuits related to non-professional negligence. You can buy this coverage on its own or as part of a BOP.
It can help to cover lawsuits related to bodily injuries and property damage to 3rd parties (workers’ compensation covers injuries to your employees). It may also cover medical payments for the injured party, even if they don’t file a lawsuit.
Theft
A disaster and the chaos surrounding it could lead to theft. Theft by third parties may be covered by commercial property insurance. Theft by employees isn’t usually covered. Fidelity bonds and commercial crime insurance both help to cover employee theft and fraud.
What Does Disaster Insurance Not Cover?
Some events aren’t covered by commercial property and other business insurance policies. These include:
- Intentional acts
- Illegal acts
- Auto accidents and damage to vehicles (these are typically covered by your auto insurance)
- War
- Pollution that’s not related to a covered event
How Does Disaster Insurance Work?
Business insurance policies that cover disasters have deductibles and policy limits. Your deductible is the amount you’re responsible for paying before the insurance company starts coverage. Your policy limit is the most your insurance company will pay for a single claim.
To use your disaster insurance policies, you’ll start by filing a claim with your insurance company. You’ll need to describe what happened and provide details about the damage. The insurance company will review the claim. They may send out an adjuster to assess the damage.
Once your insurance company has all the information, it will make a decision about your claim. If it approves your claim, you’ll receive payment(s) according to the terms of your policy. The company may also request additional information or deny your claim. If your claim is denied, you can appeal the decision.
How Much Does Disaster Insurance Cost?
The cost of disaster insurance depends on several factors:
- The type of policies you purchase
- The deductibles and policy limits you choose for your policies
- The type of business you have
- Where your business is located
- The number of employees you have
- The size of your payroll
- Your previous claims history
Quotes are specific to each business, so the best way to find out how much coverage will cost is to contact at least 2 to 3 insurance companies to get a quote and compare coverage.
Best Disaster Insurance Companies
Here are Benzinga’s recommendations for the best disaster insurance companies.
Do You Need Disaster Insurance?
Every business needs to be prepared for the unexpected. Consider which risks your business is likely to face and buy insurance to cover those risks. While insurance might seem expensive, it’s far less than you would pay out of pocket to recover from an emergency.
Frequently Asked Questions
Q. What is a catastrophe limit?
This is the most your insurance company will pay for a covered event. A high limit typically costs more to purchase, but a lower limit could mean you have to pay more out of pocket if your expenses exceed your policy limits. For example, if you have $300,000 in damages from a flood and you purchased a flood insurance policy with a $250,000 limit and a $5,000 deductible, you’d be responsible for $50,000 in out-of-pocket costs.
Q. How does a catastrophe or disaster declaration affect my claim?
A disaster declaration doesn’t directly affect your claim. It still must be handled by your insurance company. What it does do is offer more resources for assistance. FEMA can’t duplicate benefits covered by your insurance, but it can help with what isn’t covered by your insurance.
FEMA can also assist you if you haven’t received any funds from your insurance company within 30 days of filing your claim. You’ll need to explain the circumstances to FEMA and provide proof you’ve filed the claim.
If you qualify, you can receive funds from FEMA that you must repay once you receive your settlement.
