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Peter J. Strauss

Management

Three Steps to Properly Insure Your Small Business Against a Natural Disaster

Thoughts on risk management and recovery

Published: Monday, December 18, 2017 - 12:01

The recent spate of natural disasters that devastated parts of North America included a violent variety of events. There were three major hurricanes—Harvey, Irma, and Maria—wildfires in California, an earthquake in Mexico, and tornadoes in Oklahoma.

One thing these calamities have in common: They inflicted billions of dollars in property damage and adversely affected many small businesses. History portends that many of those operations won’t ever completely recover.

Almost 40 percent of small businesses don’t reopen after a disaster because the cost of recovery is so high, according to the Federal Emergency Management Agency (FEMA). One of the major reasons is that the businesses didn’t have sufficient insurance.

As I explain in my book, The Business Owner’s Definitive Guide to Captive Insurance Companies (AuthorHouse, 2011), many small business owners will face additional losses due to these disasters, some of which may not be as obvious as flood or wind-damage claims.

Although utilizing the commercial market for major lines of coverage—e.g., property, general liability—is crucial for major events like a hurricane or tornado, it is very likely that not all the losses your small business could suffer will be covered. It’s a big blow—and often a terrible surprise. So as a business owner, it’s critical that you know you’re completely covered. If you’re unsure, a little homework is necessary.

Here are three steps small business owners should take to be properly insured in a disaster:

1. Weigh the worst-case scenarios. A natural disaster can affect a small business in many ways, so the owner needs to schedule a complete risk assessment and consider every aspect of potential damage when seeking an insurance policy. These include things like costs incurred by the property while the business is closed, extra expenses for moving to a temporary location, loss of customers, and loss of employees because their homes were badly damaged, and relocating is the only feasible option for them. There are a multitude of scenarios that could occur, and as the business owner, you really can’t afford to leave anything exposed.

2. Don’t roll the DICE. The insurance acronym DICE can be used as a checklist for analyzing your policy. DICE includes the Declarations page, the Insuring agreement, Conditions, and Exclusions. The business owner should read the policy thoroughly, or go one step further and have an expert review the policy. The declarations page is as far as most people will read, but when you dig into the insuring agreement and beyond, that is where you will find the real meat of what is actually covered. Pay attention to key words and phrases, and research the terms.

3. Consider insurance alternatives. Some small business owners shopping the commercial insurance market find that the coverage is too restrictive or expensive for their kind of business. One of the best options available is to form a captive insurance company, or more commonly called a “captive.” A captive is an insurance company that is owned and controlled by the business. Not only does a captive insurance company help control the cost of premiums because the business determines the risks it is going to insure, but there can also be significant financial advantages.

The commercial insurance market can be a sticky wicket. We make the conscious choice to spend money on various insurance policies vs. sweating the odds of not being covered in an emergency. But what if the real gamble was buying the insurance in the first place?

Discuss

About The Author

Peter J. Strauss’s picture

Peter J. Strauss

Peter J. Strauss is the founder and managing member of The Strauss Law Firm, LLC, located on Hilton Head Island, South Carolina. He is also the founder and CEO of Hamilton Captive Management, LLC, one of the most admired and respected management firms in the country, as well as numerous other insurance companies.