Every self-storage facility owner should be aware of the need to protect his income against business interruptions. If you should sustain a direct physical loss from a fire or other covered cause of loss, the chances are good you will also suffer an indirect loss of income. (Indirect losses refer to the lost profits and fixed expenses that continue each month whether or not your facility is operating.) You are also likely to incur extra expenses as you attempt to resume your normal business operations.
Business-interruption insurance--specifically, loss-of-income insurance and extra-expense insurance--are designed to minimize your risk in the event of a loss. "Loss of income" refers to the suspension of your business operations by direct loss or damage as a result of an insured cause of loss. "Extra expense" refers to any extraordinary expenses you incur during the period of restoration that you would not have incurred had there been no direct physical loss or damage to property. The "period of restoration" begins with the date of direct physical loss or damage resulting from any covered cause of loss.
Also known as time-element coverage, business-interruption insurance provides several important benefits: 1) it protects you against reduced sales income (and increased expenses) that result from damage to your buildings or business-personal property; 2) it allows you to retain key employees by maintaining their salaries and benefits; 3) it encourages prompt settlement of building and business personal-property losses; 4) it helps you to retain your tenants; and 5) it can restore you to the same position you were in before the loss occurred.
Business-interruption insurance is usually included in most business-owners' policies as a standard endorsement, which might lead you to take it for granted. However, when you consider that business-interruption losses can easily exceed direct-damage losses, the importance of this coverage becomes clear. Business-interruption insurance is of particular value to self-storage facility owners who sustain a covered loss in that it compensates you for lost profits based on your self-storage operations' projected monthly earnings, thus taking into account the seasonal nature of the market.
When shopping for business-interruption insurance, keep in mind loss-of-income and extra-expense coverages are limited to the actual length of time required to rebuild, repair or replace your damaged buildings or business-personal property. In other words, the amount of financial loss is determined by the length of time it takes to get your facility back in business. For loss-of-income coverage to kick in, the suspension of your business operations must be caused by direct loss or damage as a result of a covered cause of loss. Payment is based upon your operation's past history of seasonal profits and losses. (Note that it is your responsibility to make every reasonable effort to resume complete or partial operation as soon as possible to minimize loss.)
It is a surprising but true fact that a small percentage of self-storage facility owners choose to operate without business-interruption insurance, perhaps because the coverage is not required by most lending institutions. However, when you consider the value of this insurance and its very reasonable cost, it's very difficult to understand why anyone would knowingly skip this essential coverage.
As a general rule of thumb, it's a good idea to secure a full 12 months of loss-of-income coverage to protect yourself against business interruptions. While it may only take three to six months to rebuild your business after a covered loss, you will first be required to remove debris, obtain bids and building permits, and perhaps face ordinance and zoning requirements prior to starting reconstruction. Since most conventional coverage ends when rebuilding is complete, you should ask your insurance agent about an extended period of indemnity.
This important enhancement provides for loss of rental income during a specific period following reconstruction. While an average retail store or restaurant can begin generating profits as soon as it is reopened after a covered loss, self-storage facilities may take several months to locate enough new tenants before becoming fully profitable.
David Wilhite works for Universal Insurance Facilities Ltd., which offers a complete package of coverages specifically designed to meet the needs of the self-storage industry. For more information on Universal's coverages, or to get a quick, no-obligation quote, call 800.844.2101; fax 480.970.6240; e-mail [email protected]; visit www.vpico.com/universal.