Jack is a busy contractor with a thriving business. One night there was a major fire at his office/warehouse, and some essential equipment was destroyed. Like most contractors, Jack had property insurance as part of his construction insurance package. He ordered replacement equipment right away, only to discover that the equipment was backordered. Without this crucial equipment, he couldn't complete his pending projects. Needless to say, this scenario created a major crunch in cash flow.
For many contractors, this kind of business interruption can result in insolvency. They don’t realize that an additional coverage, known as business interruption insurance (BII), can make all the difference. But, those who do purchase BII often don't purchase enough coverage. Choosing a BII coverage limit can be challenging with many loss variables involved. It’s important to get enough coverage to bridge potential income interruptions.
Here are 10 key questions contractors should ask when considering what BII limit they need:
- What equipment, tools, supplies, paperwork and other assets would you lose in a fire or other disaster?
- Without those items, how much revenue would you lose per week or month?
- While you're unable to work, what expenses would continue to accrue?
- How long would it take to replace everything?
- How long would it take to replace just the critical items?
- If these items aren’t readily available, what items can you substitute, and what kind of delay will be involved in getting the substitutes?
- Can you temporarily rent or borrow needed items?
- Once everything is replaced, how long will it take to get your operation back to 100 percent?
- What kind of extra expenses would you incur (such as penalties for failure to meet a contract deadline, rush shipping on supplies or equipment, labor to update contracts)?
- What kind of loss could you sustain if a fire or other covered peril affects one of your key vendors?
Taking the time to run through these scenarios and calculate the potential loss exposure can pay huge dividends down the road. In fact, it can make the difference between protecting your profits and filing for bankruptcy.
Fortunately, Jack was smart. He had purchased BII coverage as well as contingent business interruption coverage in case one of his major suppliers went down. This foresight helped keep his business on track despite the interruption of income.
How would your business fare if you were in Jack’s situation?
Since business interruption insurance is among the least understood coverage types, many contractors simply don’t have enough coverage – and that’s one of the biggest causes of business failure following a fire or other disaster.
If you or a crucial supplier suffered a fire or other disaster, would your income be in jeopardy? For more information about protecting your profits with business interruption insurance, talk to the construction insurance specialists at Higginbotham today.