Catastrophes are occurring more than ever, whether humans or natural disasters create them. Business owners should consider being prepared for these destructive events by obtaining catastrophe insurance to protect their business assets that are needed for their business operations.
The last thing you want is to see everything destroyed by a natural disaster or manmade destruction.
Severe damage is likely to exceed the limitations on your current commercial insurance policies. What’s more, your business policy may exclude these catastrophe events altogether from coverage. The result is that you would have to make up the difference and reinvest in your company from your own pocket unless you have catastrophe insurance to bridge the gap and pay for these excessive losses.
Depending on where you base your business’s operations, disasters may occur more frequently or less frequently than average. Even if you live in an area where disasters occur less often, they are typically high-cost events that can potentially cost more than most businesses are prepared for.
We’ll dive deep into the subject of catastrophe insurance and find out if it’s right for your business.
But First, What is Catastrophe Insurance, and What Does it Cover?
Catastrophe insurance offers protection to businesses against disasters created by both humans and naturally occurring, devastating events. These disasters can result in insurance claims of $25 million or more in some businesses.
Catastrophe insurance can help you recover losses for your business when a disaster occurs. It can help you rebuild your commercial building, purchase and replace your business’s equipment, tools, office furnishings, commercial vehicles, and other business assets.
Manmade disasters include:
- Acts of terrorism or other acts of war
- Chemical spills or hazardous material accidents
- Construction accidents
As most of us have seen over the past year, manmade disasters are becoming more frequent. Natural disasters are on the rise as well.
Natural disasters include:
According to the Insurance Information Institute, in 2020, the total estimated insured property losses in the U.S. due to natural catastrophes totaled $74.4 billion.
Moreover, a 20-year period from 1997 to 2016 showed that the highest percentage of insured catastrophe losses came from weather events that involved tornadoes (39.9%).
The other types of catastrophes to incur the most losses were:
- Tropical systems and hurricanes: 38.2%
- Wind, hail, and flood: 7.1%
- Winter storms: 6.7%
- Terrorism: 5.9%
- Fires: 2%
The remainder of the losses came from civil unrest, utility disruptions, and water damages.
Some catastrophe insurances will cover only certain disasters, while other policies will offer more comprehensive coverage. It’s also possible that some of the more general commercial insurance policies might include some types of disasters on a policy or add them as a rider.
It’s essential to understand precisely what type of coverage your primary commercial policies offer. Then you and your insurance agent can determine what types of catastrophe coverage are appropriate for your business.
Does Your Business Need Catastrophe Insurance?
Studies show that losses due to disasters doubled over the last 20 years. Catastrophes are likely to continue doubling every decade or so.
The main question is that if a catastrophe were to strike and destroy all the physical properties of your business, would your primary business insurance replace it? If not, do you have enough cash saved to replace it on your own?
The inherent problem with disasters is that they’re unpredictable. A few catastrophes are more difficult to predict, like earthquakes and wildfires. In contrast, others like tropical systems occur more frequently and generally give a little notice when they’re about to happen.
The problem with waiting until these catastrophes are on your doorstep is that insurance companies generally won’t begin coverage in the middle of a disaster or during their peak seasons. Insurers have waiting periods before coverage can begin on catastrophe insurance policies. So you should have coverage in place always to prepare for losses that can occur at a given moment.
A few questions can help you decide if catastrophe insurance is right for your business.
- Is your business in a high-risk area for any of the catastrophes we listed earlier?
- Is your business near dry brush or a forest?
- Are you near the coast, putting your business at a higher risk of damage from tropical storms or hurricanes?
- Is your business located near a fault line?
- Are you in an area that has a higher risk of tornadoes?
- Do you work on a flood plain or in an area vulnerable to flooding?
- Is your business in a larger city that is more likely to experience civil unrest, terrorism, or riots?
If you answered “yes” to any of these questions, catastrophe insurance is a wise idea to protect your business.
A Closer Look at Each Type of Catastrophe
Some of these individual disasters might be covered under your standard commercial insurance policies. It’s a good idea to find out which ones are. Even if they’re covered under your primary insurance, the policies’ limits likely aren’t enough to cover losses from a disaster.
Consider the impacts of the following types of catastrophes.
Hurricanes and Tropical Storms
Suppose you live in a high-risk state for hurricane, like Florida, Texas, North Carolina, Louisiana, South Carolina, Alabama, Georgia, Mississippi, New York, and Massachusetts. In that case, it’s a good idea to have hurricane catastrophe coverage for your business. Depending on the insurance company, this could be available as a rider or a separate policy.
Consider 2020’s record hurricane season, which spawned 31 tropical systems, causing more than $54 billion in damages. Hurricane Laura was one of the more destructive hurricanes and decimated Cameron Parish, Louisiana. Nearly every business in the parish sustained major damage or was destroyed. Undoubtedly, those who had catastrophic coverage likely fared better and could rebuild faster than those who were underinsured.
Wind, Hail, and Flood
These three weather events can occur just about anywhere in the U.S. Most of us can remember watching the extensive flooding that shut down Tennessee in 2010 and the flooding caused by Hurricane Harvey in 2017, impacting millions of Texas residents as well as businesses.
Wind, hail, and floods may be covered events on your commercial auto insurance policy. Your commercial property insurance might also cover it, but carefully study your policy’s coverage and limitations and ask your insurance company if you should have separate catastrophe coverage.
Terrorism and Civil Unrest
Many basic commercial policies exclude losses from these types of catastrophes, which can occur on a large scale. The protests and riots in Minnesota and Oregon in 2020, and the 911 World Trade Center attacks, severely disrupted businesses. Many Minnesota business owners who saw their businesses torched during the riots later learned that they didn’t have enough insurance to cover their losses or clear away debris. Over 1,110 commercial claims were made in Minnesota during the civil unrest, and business losses exceeded $237,500,000.
Unfortunately, these types of catastrophes are occurring more and more each year. While business interruption insurance should help cover losses from disruptions to your business, terrorism and civil unrest can cause additional damage to your commercial property, your tools and equipment, furnishings, commercial vehicles, and more. These types of events can occur anywhere, at any time. It’s wise to ensure your business has protection against potential losses arising from civil unrest and terrorism.
Fires and Wildfires
Fires that occur because of a short in a wire or another common internal cause of fires are usually covered under your commercial property insurance. But wildfires, brush fires, and forest fires, or fires that are set intentionally, as can occur in arson fires or from a wildfire, are typically not usually covered by your primary commercial insurance.
According to the California Department of Forestry and Fire Protection, more than 5 million acres burned due to wildfires from January 2020 through September 2020, resulting in billions of dollars of losses. Many of those losses were commercial losses as the fires ravaged towns and overtook businesses. California, Oregon, and Washington have a reputation for playing host to forest fires, but just about any state is fair game for wildfires to occur.
Tornadoes are another natural disaster that has a reputation for occurring more in an area that’s part of Tornado Alley. These are typically in the Central Plains or central states. But, the 2011 Super Outbreak in the Mississippi and Tennessee Valleys caused $10.2 billion in damages, highlighting the fact that tornadoes can wreak havoc over a large portion of the U.S.
Tornadoes are more common than many business owners realize. More than 1,200 tornadoes occur each year in the U.S., some with winds up to 200 mph, creating a trail of destruction wherever they touch down.
While a general commercial insurance policy, such as a Commercial Property policy or Commercial vehicle, may or may not cover tornado losses, you’ll want to make sure, while also considering additional catastrophe coverage to extend your limits in case your business were to suffer catastrophic losses.
Destructive earthquakes are rare, but when they occur, they create damage on a large scale. Most of the time, you’ll have to have separate catastrophe coverage for earthquakes to cover those losses.
The most costly quake to hit the U.S. occurred in California in 1994, causing $44 billion in damages. But, only $15 billion of the damages had insurance coverage to help recover losses.
If your business is located in a high-risk area for earthquakes, like California, Washington, Alaska, or Hawaii, you’ll definitely want to make sure to have catastrophe insurance in place before the next costly and destructive earthquake hits.
Other rarer catastrophes can occur, such as landslides, mudslides, tsunamis, volcanic disruptions, and even sinkholes. If you live in a high-risk area like Hawaii, you’ll want to consider a separate insurance endorsement for those through catastrophe insurance coverage.
Examples Where Catastrophe Insurance Would be Beneficial
Catastrophe Example #1
Suppose you own a tree service business. You have an entire crew working for you and have invested hundreds of thousands of dollars on bucket trucks, chainsaws, climbing saw, logging saws, ladders, chippers, bush hog equipment, PPE for your crew, and more. You also own commercial property where you store your equipment during off-hours.
Unfortunately, you live in Washington state, and a wildfire that was just 20 miles down the road is now on your doorsteps, threatening your entire livelihood. Orders for evacuation are sent out, and your priority is to get your family to a safe haven.
When the fires are extinguished and you return to your business, you discover that your entire investment in your tree business has gone up in flames. You review your commercial insurance policy and while it covers naturally-occurring fires that start in a commercial dwelling, it excludes wildfires and other natural disasters.
You quickly realize you’re going to have to start over with minimal equipment and significantly scale back your operations. You remember that your insurance agent encouraged you to get catastrophe insurance, but you declined disaster coverage. You regret that decision now because catastrophe insurance would have reimbursed your losses and helped you get back on your feet much more quickly. Now you’re back to square one.
Catastrophe Example #2
Your tree business is located in New York City, an area of the country not unfamiliar with terrorism. A bomb explodes near your business in the very early morning hours, right before your crew gets to work.
Once the authorities allow you in, you discover the explosion took out most of your commercial building and equipment and tools. You’re thankful your crew wasn’t there when the explosion happened. You’re also grateful that rebuilding your business will be easier because you have catastrophe insurance that will cover explosions and terrorism. Your basic commercial policy doesn’t cover terrorism.
You invested nearly $1 million in your tree business, and the policy limits of your catastrophe policy far exceed that, so you’ll be taken care of.
Getting the Most Out of Your Catastrophe Insurance Policy (When Disaster Strikes)
Once you have catastrophe insurance, you’ll want to be prepared well ahead of any disaster that might strike.
As with most insurance policies, good recordkeeping is your best friend when it comes to filing a claim. If a disaster comes along and destroys all of your commercial assets, you’ll want detailed records of everything you lost.
Keep in mind that paper records can also be destroyed in a disaster, so it’s a good idea to take pictures of everything or scan it all on your computer and keep it in the cloud. Also, an itemized list of all of your business’s assets is a good idea, but again, be sure to have easy access to this list on a computer.
Good recordkeeping should also extend to your business operations. Back up all records offsite to help you maintain some of your operations while your business recovers from the catastrophe if it’s at all possible.
Remember that if you have a major loss due to a catastrophe, it’s likely many other businesses are as well. Insurance companies tend to be overwhelmed during disasters.
Being organized helps you submit everything faster and more efficiently, putting your claim ahead of everyone else. This, in turn, enables you to recover your losses more quickly so you can get back to business as usual in a more timely fashion.
There’s really no way to lower your business’s risk of being involved in a catastrophe, whether manmade or a natural disaster. You can only be as prepared as possible to recover your losses.
There are two types of businesses when it comes to catastrophic damages arising from disasters: those who have planned and are protected from potential losses and those who haven’t prepared.
An experienced professional, like NIP Group, can help guide you and determine if you need coverage above your standard commercial policies. A specialized company like NIP Group can help you decide what types of catastrophe insurance are appropriate for your business.