Inside Self-Storage Magazine 05/2001: Business-Interruption Insurance

May 1, 2001

4 Min Read
Inside Self-Storage Magazine 05/2001: Business-Interruption Insurance


Business-Interruption Insurance

Protecting your income during temporary business shutdowns

By David Wilhite

Every self-storage facility owner should be aware of the need to protect hisincome against business interruptions. If you should sustain a direct physicalloss from a fire or other covered cause of loss, the chances are good you willalso suffer an indirect loss of income. (Indirect losses refer to the lostprofits and fixed expenses that continue month to month whether your facility isoperating or not.) You are also likely to incur extra expenses as you attempt toresume your normal business operations.

Business-interruption insurance--specifically, loss-of-income insurance andextra-expense insurance--are designed to minimize your risk in the event of aloss. "Loss of income" refers to the suspension of your businessoperations by direct loss or damage as a result of an insured cause of loss."Extra expense" refers to any extraordinary expenses you incur duringthe period of restoration that you would not have incurred had there been nodirect physical loss or damage to property. The "period ofrestoration" begins with the date of direct physical loss or damageresulting from any covered cause of loss.

Also known as time-element coverage, business-interruption insurance providesseveral important benefits: 1) it protects you against reduced sales income (andincreased expenses) that result from damage to your buildings orbusiness-personal property; 2) it allows you to retain key employees bymaintaining their salaries and benefits; 3) it encourages prompt settlement ofbuilding and business personal-property losses; 4) it helps you to retain yourtenants; and 5) it can restore you to the same position you were in before theloss 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 exceeddirect-damage losses, the importance of this coverage becomes clear.Business-interruption insurance is of particular value to self-storage facilityowners who sustain a covered loss in that it compensates you for lost profitsbased on your self-storage operations' projected monthly earnings, thus takinginto account the seasonal nature of the market.

When shopping for business-interruption insurance, keep in mind thatloss-of-income and extra-expense coverages are limited to the actual length oftime required to rebuild, repair or replace your damaged buildings orbusiness-personal property. In other words, the amount of financial loss isdetermined 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 businessoperations must be caused by direct loss or damage as a result of a coveredcause of loss. Payment is based upon your operation's past history of seasonalprofits and losses. (Note that it is your responsibility to make everyreasonable effort to resume complete or partial operation as soon as possible inorder to minimize loss.)

It is a surprising but true fact that a small percentage of self-storagefacility 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 reasonablecost it's very difficult to understand why anyone would knowingly skip thisessential coverage.

As a general rule of thumb, it's a good idea to secure a full 12 months ofloss-of-income coverage to protect yourself against business interruptions.While it may only take three to six months to rebuild your business after acovered loss, you will first be required to remove debris, obtain bids andbuilding permits, and perhaps face ordinance and zoning requirements prior tostarting reconstruction. Since most conventional coverage ends when rebuildingis complete, you should ask your insurance agent about an extended period ofindemnity.

This important enhancement provides for loss of rental income during aspecific period following reconstruction. While an average retail store orrestaurant can begin generating profits as soon as it is re-opened after acovered loss, self-storage facilities may take several months to locate enoughnew tenants before becoming fully profitable. No matter how large or small yourself-storage facility may be, securing adequate coverage is essential forprotecting your business and your peace of mind.

In addition to loss-of-income and extra-expense coverages, UniversalInsurance Facilities Ltd. offers a complete package of coverages specificallydesigned to meet the needs of the self-storage industry. For more information,or to get a quick, no-obligation quote, write P.O. Box 40079, Phoenix, AZ85067-0079; call 800.844.2101; fax 480.970.6240; e-mail [email protected];

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