Reviewing your organization’s business interruption insurance coverage is a key part of working on your organization’s business continuity and disaster recovery (BC/DR) plan. BC/DR practitioners should not assume that their organization has all the bases covered when it comes to insurance.
An organization’s BC strategies should define the types of business interruptions and total disasters that it could face, as well as address the financial effect of recovery and restarting business operations.
According to the Property Casualty Insurers Association, one in five businesses is affected by a major disruption in operations each year, which can be costly. The Federal Emergency Management Agency website (www.ready.gov) reports that inadequate business insurance can lead to a major financial loss if operations are damaged, destroyed or even interrupted for a period of time.
It is essential that your organization can finance a recovery when needed, because an insurance reimbursement for a loss is the only source of income a business has that is not tied to revenue or the firm’s credit line. Even small- and medium-size businesses can face huge bills following a disaster.
Types of insurance
An organization’s insurance policies should clearly state what types of incidents are covered and whether claims will be paid. The most important type of insurance from a BC/DR perspective is probably business interruption insurance.
Business interruption insurance is a specialized kind of coverage that indemnifies the insured against losses arising from the inability to continue normal business operations and functions. The principal purpose of business interruption insurance is to protect the earnings that the insured entity would have generated during normal business operations.
The key challenges when dealing with business interruption insurance claims are proving the losses attributed to a business interruption loss, determining the amount of those losses and agreeing on the amount of financial damage with the insurance provider. Among the issues to incorporate into the business interruption policy are the following:
- Triggering events: Identifying what occurred to cause the interruption
- Duration of the interruption
- Timing provisions: This addresses the time needed to recover and restore business operations
- Determining the financial loss to the organization
Businesses should also avail themselves of other types of insurance, such as general liability, workers compensation, directors and officers (D&O), automotive and fire.
Make sure your legal department carefully reviews any draft insurance policy and what it covers, because legally it is subject to what are called “ordinary contract interpretation rules.”
Relationship to BC/DR
While often overlooked, business interruption insurance coverage should be a part of your BC/DR mandate. Even if your organization has its own insurance department, meet with the staff to determine what provisions are in place to deal with business interruptions.
Business interruption insurance can be an important part of business survival and an important BC/DR activity. Be sure to review your organization’s business interruption policies carefully in terms of coverage and legal issues so they will provide maximum benefits in case of a disaster.