With credit insurance, it's usually a case of not having it at all. In contrast, BI is bought by virtually every company, but skimping on it and failing to get full coverage is all too common.
If a major customer that owes you a lot of money goes out of business or doesn't pay you for one reason or another, it could be a financial catastrophe. There's probably greater risk of this today because manufacturers often sell to companies worldwide. It's difficult enough to collect from an insolvent domestic client, and may be even tougher to get a foreign customer to pay up.
Your property insurance policy typically would cover you if you can't collect because your accounts-receivable records were destroyed by a covered peril like fire, theft or vandalism. But it offers no protection against deadbeats who won't or can't pay.
However, you can insure your credit risks. Determine how much credit risk you're exposed to. If your company does extensive business on credit, you probably need insurance.
Ask your broker to research the market and find out what credit insurance would cost. Before offering a quote, the insurance company will first investigate the financial stability of the customers you extend credit to. If they're in good shape and are steady bill-payers, you'll get a good rate. But if their credit is shaky, you'll pay more.
You can tailor a policy to meet your exact needs by selecting the amount of credit coverage, size of deductible and policy features.
BI insurance covers the income you'd lose if your plant were to shut down because of an insured peril such as a fire, flood, storm, earthquake or terrorism. There's a type of business-interruption insurance that can even cover you if you have to shut down because a key supplier's plant is offline.
How much and what kind of BI insurance do you need?
To find out, first determine your risk by conducting an exposure review and analysis. How much income would you lose if a location had to shut down? Take into account that, while some expenses for the location would stop during a shutdown, some would continue. You may have to continue paying for utilities, rent, loans, taxes and other items.
Also, you may want to keep paying your employees. For instance, a big Canadian factory was destroyed by fire a number of years ago. It had no BI insurance, and the employees were all laid off. When the factory reopened, the managers learned that many skilled employees had found other jobs elsewhere and wouldn't return.
Take a look at all the risks you face too. Your site could be perfectly intact but still be forced to shut down. For instance, if a flood destroys highways or bridges and cuts off access to your office or plant--Hurricane Katrina is an extreme example--you'll have to shut down until the infrastructure is repaired. A terrorist attack on a nearby area could force you to close even though your own facility wasn't hit.
Besides basic BI insurance, you'll also need an "ingress and egress endorsement," which protects you if you have to shut down because of conditions in the area or a government edict. This add-on is essential, and the additional cost is low.
Consider as well how vulnerable you are to shutdowns of your key suppliers. If you could easily switch to another supplier if one went down, your risk may be minimal. But if you depend on one or more specialized suppliers that would be difficult or impossible to replace, you're highly exposed. A shutdown of an irreplaceable supplier could be as catastrophic as a disaster at your own facility.
Fortunately, you can purchase contingent BI insurance. It covers the financial loss you'd incur because of someone else's physical loss--fire, flood, storm, earthquake and the like. It seems like a small clause in the contract--but it could have a big impact.
Coverage for terrorism is excluded from BI policies. However, you can "buy back" terrorism coverage for an additional premium, whose size varies on how terrorism-prone your area is considered.
BI policies offer many options and deductible levels. Policies for midsize organizations are generally packaged, combining interruption, rental and extra-expense coverages in one policy, while major corporations may buy these coverages separately.
No one wants to think about disasters, but full BI coverage is one of the most vital protections any business can have. In the wake of Hurricane Katrina, many business owners testified that BI saved their business.
MARJORIE YOUNG is vice president of E.G. Bowman Co. Inc., a full-service commercial lines insurance brokerage and loss-control consultancy in New York City that serves clients regionally and nationally.
April 15, 2008
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