The Thomas Fire and ensuing mudslides devastated our community and caught many businesses by surprise. In addition to the tremendous damage and loss of life they wrought upon us, these disasters have demonstrated the importance of having a good business insurance policy. Standard business interruption insurance policies typically cover profits, fixed costs, temporary relocation, reimbursement of extra expenses and civil authority ingress and egress service interruption. Understanding what your insurance policy covers and what it does not is crucial for the survival and prosperity of your business during and after a disaster.
One of the biggest issues affecting those that are under-insured in their business interruption insurance is in regards to indemnity periods. An indemnity period in an insurance policy is the length of time for which benefits are payable under the insurance policy. Business interruption insurance only lasts until the maximum indemnity period under your policy expires. Indemnity periods are one of the most common causes of under-insurance. Standard indemnity periods last up to 12 months or until the policy is reinstated, whichever comes first, but this often is not long enough. Therefore, you must ensure you have an adequate indemnity period that could cover any type of disaster your business could suffer.
Some business interruption policies cover employees’ wages as well. Opting for this type of policy, while being more expensive, may provide many unexpected benefits. First, a policy that covers employees’ wages allows you to keep your team together in the event of a disaster. This demonstrates to your employees that you care about them, which, in turn helps to build employee loyalty. It also allows you to rebuild your business faster by cutting out the time you would otherwise be spending on recruiting and training new employees.
In the modern world, small businesses must protect themselves from more than traditional disasters. Cyber-attacks have quickly become a prevalent form of attack on businesses of all sizes. Unfortunately, for business owners standard business interruption insurance does not extend property loss or damage to electronic data because data is not considered to be a physical object that can be damaged. Standard policies only cover damage to data if the physical media in which the data resides is damaged.
When purchasing business interruption coverage for cyber-attacks, it is important to understand the scope of what constitutes a cyber-attack in your policy.
Misrepresentation and Good Faith Requirement
California has enacted laws to protect the insured (California Insurance Code Section 790.03 and 2071). Because of these laws, insurance companies have a legal duty under California law to investigate, administer and to pay out a claim swiftly and to deal with the insured, at all times, in good faith. Generally, representatives of insurance companies are legally required to tell you the truth – meaning that they must be honest about what they sell you, what you have paid for and what you are entitled to if you file a claim. Additionally, insurance company representatives are required to inform you of all insurance related deadlines, even any deadline related to you filing a lawsuit against them!
Review your business contracts and other legal documents
To avoid being caught unprepared, small businesses should prepare a business continuation plan. In addition, it is good practice to review your business contracts to better understand your obligations if disaster strikes. Are you still required to pay your landlord rent despite not having access to your business? Do you have force majeure protection or can the counterparties cancel agreements on you and leave you scrambling to find replacements?
If you have any questions about business interruption insurance or any other element of this month’s advisor, please feel free to contact me or the BFAS attorney with whom you regularly work.
Nicholas A. Behrman, Attorney
DISCLAIMER: This Advisor is one of a series of business, real estate, employment, estate planning and tax bulletins prepared by the attorneys at Buynak, Fauver, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution or use of this Advisor.