Retail Solutions Forum: How important is business interruption insurance?

All industries can interact and communicate to help out each other — ours are no different. The Retail Solutions column in our new Expert Network section is designed to be your personal retail advisory sounding-board with retail owners, managers, buyers and merchandisers from our retail advisory partner, Grassroots Outdoor Alliance, available to answer your questions. The format for this, as with other Expert Network sections, will not be unlike a “Dear Abby” for business. Together with our panel of experts, SNEWS® will offer a forum for readers to discuss a topic, chime in with their own ideas, and suggest different recommendations to a variety of business concerns or issues. Fire off a question about any topic specific to the retail business by email to retailsolutions@snewsnet.com. Our experts are standing by.



Q. How important, really, is business interruption insurance for me? I operate only one small specialty store and insurance premiums keep going up. It seems to be one cost I might be able to do without.

A. Here’s the way to look at it if you have one store:

First, do a hard assessment of the likelihood of a long-term, business-closing event. Keep in mind that a claim for business interruption can sometimes include litigation and is usually too small to be meaningful. Focus on events lasting at least seven days. For example, in the past 50 years, how many events would have closed your store for at least seven days? If it is one event, the percentage likelihood is a 2 percent chance.

Second, analyze what costs are “hard” and would have to be continued during an “event.” Bear in mind that insurers will be brutal in deciding your costs and missed profit opportunities. They will exclude owner pay, abnormal profits that could have occurred, and they will add back (i.e., reduce) your claim by business that was above normal once you got the store back open. (Insurers will reduce your claim because they don’t see it as business “lost” but, instead, “postponed.”) Some hard costs that can be included are rent, some utilities, salaried personnel, ongoing contractual obligations and some profit. Remember, family/owners will NOT be paid.

Third, take the likelihood of a calamity (i.e., 2 percent) and multiply that by what you could conservatively (yes, your insurer will be very conservative in paying this claim) expect to be paid. So, if your hard costs for a likely calamity are $5,000 and you have a 2 percent chance of having a calamity, it would be worth $100 of insurance. If you think there is a 1 percent chance of having a 14-day business-closing event, you would calculate: $10,000 (cost of the event) x 1 percent (likelihood) x 0.5 (because you’ve already calculated the first week’s risk, you need to remove that ratio from the second week). That equals $50.

Thus, you have decided that interruption insurance is worth $150 (annually) for the possibility of a two-week claim happening every 50 years.

Of course, you will be asked to pay more than that because that is simply the actual value of the claim. It doesn’t account for the costs of selling and servicing the insurance.

So, the bottom line is: You can get pretty close to determining the “logic” in the decision, but you still have to account for your tolerance for risk by taking a hard look at what you really have to lose. You also need to really understand what you have to gain. This insurance does not cover everything you probably think it does.

As someone who has made a claim, and won a lawsuit over business interruption insurance, I can say that the actual end process is mind numbing. You will spend weeks providing data and defending hard and soft costs. Many will be rejected. Insurers also know they can drag their feet and wear you down. The only way to get past that is to hire an attorney, who will likely cost 30 percent to 40 percent of your claim, thus further reducing it.

So, if you are small, and have family working in the business, the only real value of the insurance is to pay rent, and maybe a salary or two (but not yours). And to get that, you’ll have to fight like crazy.

The real bottom line is, can it help you sleep at night? Given the extreme unlikelihood that you will ever make a claim successfully, the value of sleeping at night knowing the worst-case scenario has a backstop may be worth a few thousand dollars.

About Grassroots Outdoor Alliance

Grassroots Outdoor Alliance unites independent outdoor retailers as a strong voice to protect and promote the experience of outdoor enthusiasts across the United States. We enable access to best business practices for our retail members, to the best equipment and apparel brands for the public, and to the backcountry for all. For more information, visit www.grassrootsoutdoors.com.