Insurance may seem too expensive until you need it

Small business owners dealing with damage caused by Hurricane Gustav, Tropical Storm Fay, Midwest flooding or California wildfires are likely feeling some regret because they didn't have adequate insurance coverage. And so the cost of salvaging either a building or the business itself is falling squarely and solely on them.

Many small businesses are underinsured, either in dollar terms or in the kinds of policies they've taken out. Sometimes the culprit is ignorance -- an owner may not realize that a policy doesn't cover certain hazards. But in this difficult economic climate, the problem may be that an owner decides to forgo the cost of insurance because of cash flow problems.

Insurance is always a gamble, whether it's for a business or a home. An owner needs to weigh the chances of a disaster striking the company against the cost of coverage, or the cost of having to rebuild the business if it is underinsured.

Some communities flooded this summer when the Missis- sippi River spilled over its banks were considered remote enough from the river to be safe, noted Mike Barry, senior vice president for media relations at the Insurance Information Institute, a New York-based industry group.

The odds are that some business owners never took out flood insurance -- which must be purchased separately from standard property coverage -- because they never imagined they'd be washed out.

Too often, Barry said, owners regard insuring against a disaster "as money going out with a very indefinite return on investment. It's seen as an unnecessary expense by some."

A big mistake is to take out a policy that covers property damage from forces such as wind, rain, hail and fire, and assume that's all they need. They'd be better off with a business owner's policy, which includes property coverage and, perhaps even more important in the event of a disaster, business interruption insurance. A BOP costs more than a standard property policy, but business interruption insurance can save a company from going under.

Business interruption insurance can cover a company's operating expenses and lost profits if the business is shut down for an extended period. That can include salaries and employee benefits, rent and line of credit payments. And it doesn't have to be a natural disaster that shuts down the business; even losses due to a power outage can be covered.

Owners also need to be sure they're insured against specific kinds of disasters. Flood insurance has gotten a lot of notice since Hurricane Katrina three years ago, but many businesses still don't buy the extra protection.

Flood insurance is something many people never expect to need. But the fact is, if a small stream near your business swells up after an unusually long period of rain and water pours in through the windows or door, you won't be covered without it.

Flood insurance is available through the government's National Flood Insurance Program. An agent can sell you a policy, but you can get information beforehand at the program's Web site, www.floodsmart.gov.

Similarly, earthquake damage is unlikely to be covered in a standard policy. In California, businesses can buy insurance through the state-run California Earthquake Authority at www.earthquakeauthority.com.

Barry noted that since the Sept. 11, 2001, terrorist attacks, insurance carriers generally require businesses to purchase separate policies to cover terrorism-related losses. He said a business doesn't need to be in a high-profile place like New York to consider such insurance -- it just has to be "close to a federal courthouse."

Some small companies should carry special insurance because of the business they're in. A heavily damaged bed and breakfast that would need to restore its quaint ambience by purchasing antiques would probably need additional guaranteed replacement coverage, Barry said.

"It restores it to its pre-existing state," he said.

Owners looking for a grounding in business insurance can find it at the insurance institute's Web site, www.iii.org.

Insurance agents also have plenty of information, and business owners can also consult with an insurance-savvy counselor at SCORE, which offers small businesses free advice. You can find a SCORE counselor -- they are all retired executives -- at www.score.org.