How Natural Disasters Impact Business Insurance Coverage

When natural disasters strike, millions of businesses can get disrupted. If you want to protect your business from natural disasters, you need the right insurance policy. Standard commercial insurance policies often exclude damages from flooding, earthquakes, and other extreme weather perils.

In this guide, we will go over how natural disasters impact business insurance coverage and how to choose a suitable insurance policy.

Types of Natural Disasters and Associated Risks

In insurance, a peril is an event (e.g. a natural disaster) that can cause losses and damages. When it comes to business insurance coverage, make sure the risks faced by your business are considered covered perils. Natural disasters and extreme weather events are often counted as individual perils.

Here are common natural disasters that can disrupt businesses.

Hurricanes

Most hurricanes in the United States take place in August, September, and October. Hurricane season causes severe damage to businesses every year. One of the most devastating natural disasters in U.S. history was Hurricane Katrina, which caused around $125 billion in damages.

Earthquakes

The Ring of Fire is the region infamous for the most earthquakes. In the United States, the West Coast, the Western mountain range, and the Midwest South have higher risks of earthquakes. If your business has suppliers from around the world, earthquakes can also disrupt your supply chain.

Many property insurance policies exclude earthquakes from covered perils.

Floods

Floods and tsunamis can cause serious water damage to buildings. Flood insurance generally also protects you from tsunami damage.

Many standard property insurance policies exclude flood damage from coverage due to the high costs and risks associated with flooding.

Wildfires

Wildfires can quickly spread, destroying buildings and business assets. It can also disrupt business operations, resulting in an indeterminate period of disrupted business.

Tornadoes

Like hurricanes, tornadoes are common in the South and Southeast regions. They also often spread across the Midwest, disrupting businesses and damaging property.

Types of Insurance Coverage for Natural Disasters

Here are the main types of insurance coverage that can cover natural disaster damages and losses. For some natural disasters, you can expect to pay extra for an add-on if you want the specific peril to be covered.

Property Insurance

Commercial property insurance covers physical damages to buildings, equipment, and inventory. This includes common perils such as fires, theft, and vandalism.

The typical commercial property insurance excludes various natural disasters. Your standard business property insurance policy usually does NOT cover:

• Flood damage
• Hurricane damage
• Earthquake coverage

If you want damages from floods, hurricanes, and earthquakes to be covered, you may need to purchase extra insurance.

Business Interruption Insurance

When a natural disaster strikes, businesses need to close or relocate for a long period of time. The lost income and the need to fulfill payroll obligations often force businesses to shut down.

Business interruption insurance can provide valuable coverage for lost income and operating expenses during business shutdowns. If a natural disaster occurs, resulting in disrupted business, you can usually file a business interruption insurance claim. The insurer can help you replace lost income and overcome financial challenges as a result of the halted operations.

Business interruption insurance can cover:

• Operating expenses
• Loan payments
• Taxes
• Payroll
• Relocation to a temporary location

Business interruption insurance generally does not cover risks such as pandemics. It also does not cover the physical damage caused by the natural disaster. Review your business interruption insurance terms to see how the insurance is triggered and what exclusions exist.

Flood Insurance

Since floods are an excluded peril for most standard business insurance policies, you might want to purchase a separate flood insurance policy for your business. Flood insurance is highly recommended for businesses that have inventory or property in high-risk flood zones. Business owners in high-risk flood zones may even be required to carry flood insurance.

Business owners may benefit from the National Flood Insurance Program (NFIP) as well as private flood insurance options.

Earthquake Insurance

Earthquake insurance can potentially save a business millions of dollars. Businesses, particularly ones that have locations in earthquake-prone regions, should obtain specialized coverage for earthquake-related damages, such as:

• Direct damage from earthquake
• Loss of business income
• Commercial property

Many factors influence the cost and availability of earthquake insurance. It’s important to purchase earthquake insurance ahead of time so that your coverage is activated before any natural disaster strikes. Your commercial earthquake insurance premium will depend on:

• Location: Whether your business is in seismic zones or on a fault line
• Value: The value of your property can affect your premium
• Coverage limit: Smaller businesses choose an earthquake coverage limit of $150,000. However, many businesses require higher coverage limits.

Windstorm Insurance

Windstorm insurance (AKA wind/hail coverage) can cover damages that are caused by high winds. Wind and hail damages may be covered by your commercial property insurance. However, if your business operates in a high-risk region, you might need to obtain special wind/hail insurance.

Across the United States, you will encounter regional variations in windstorm coverage requirements. If you want damages from a hurricane to be covered, your business may need to purchase a separate hurricane or flood policy.

Wildfire Insurance

Businesses that operate in regions prone to wildfires may want to obtain additional wildfire insurance on top of standard business property insurance.

If you implement fire safety and preventative measures throughout your business, you may be able to lower your wildfire insurance premium.

Key Considerations for Business Owners

1. Assessing Risk Exposure

Geography plays a critical role in determining the natural disaster risks faced by a business. A region can be prone to hurricanes, floods, earthquakes, and/or wildfires. Even within a state, your business’ risks can vary greatly depending on where exactly your property and assets are located.

Some industries also face greater natural disaster risks. Companies that deal with hazardous industrial activities (e.g. oil and gas production) tend to be more heavily impacted by natural disasters.

Businesses can use online tools and resources to assess their risks and suggested insurance coverage types. The FEMA Flood Map Service Center offers online flood maps that can help you find out if your business is located in a high-risk flood region.

2. Choosing Coverage Limits

The natural disasters that threaten your business will affect what coverage limit you should choose for your natural disaster insurance. Make sure that your coverage limit matches the value of your business assets. Consider how much potential loss you are willing to tolerate. Businesses also need to factor in the annual premiums when picking a suitable commercial insurance policy.

Many businesses (especially small businesses) make the common mistake of underestimating coverage needs. A natural disaster can cause serious damage to both property and people. While a coverage limit of over $1,000,000 may seem excessive, it may not even be adequate depending on your business’ circumstances and assets.

3. Reviewing Policy Exclusions and Limitations

Know what exclusions and limitations exist in your business insurance policies. Common exclusions for the standard commercial insurance policy include:

• Floods and earthquakes
• Contractual liability
• Expected or intentional damages
• Employee injuries
• Wars
• Military actions

Add-ons and specialized insurance policies can help you cover perils that are often excluded, such as floods and earthquakes.

If you are confused by any portion of an insurance policy, reach out to your business insurance provider for clarification.

4. Knowing Deductibles and Waiting Periods

The deductible is how much your business needs to pay in out-of-pocket expenses before business insurance coverage kicks in. Deductibles can vary greatly depending on your policy details, coverage type, and value of property. For example, the deductible of your earthquake insurance may be a percentage of your property’s value.

Business insurance coverage comes with a waiting period, like other insurance policies. After purchasing insurance, you need to pass the waiting period before insurance coverage actually activates.

Strategies for Mitigating Risk and Reducing Insurance Costs

For business operational security, it’s crucial to devise risk management plans and crisis management plans. Not only can proper planning greatly mitigate your risks, but it can also reduce your insurance premium.

Disaster Preparedness Planning

Businesses should consider what natural disasters are most prevalent in their regions. A comprehensive disaster preparedness plan should be developed and implemented.

Run drills at your business locations to ensure that your business employees are ready in case of an earthquake, fire, or other natural disaster. Make regular updates to your disaster preparedness plan as necessary.

Risk Mitigation Measures

Businesses that comply with safety regulations and implement preventive measures can minimize natural disaster damage. This may include:

• Reinforcing buildings to withstand extreme weather
• Installing fire suppression systems
• Securing critical infrastructure and assets

Implementing risk mitigation can also help you save on your commercial insurance premiums. Ask your business insurance provider whether they offer discounts for effective risk mitigation measures. This can give you a good framework of what measures can protect your business from natural disaster-related losses.

Working with Insurance Providers

Businesses can work proactively with insurance providers to optimize coverage and minimize premiums. Review your business insurance policies at least once a year to see whether they accurately cover potential losses. Your coverage limits should reflect your current property value, business size, and risk tolerance.

It’s a good idea to establish an amicable relationship with your insurance provider. Demonstrate to the insurance provider that your business implements up-to-date and effective risk management practices.

Case Studies of Businesses Affected by Natural Disasters

Case Study 1: Small Retail Business Hit by Hurricane

A small retail business was seriously impacted by a hurricane. Physical property damage resulted in halted business operations. Fortunately, the retailer had business interruption insurance that helped cover lost income, payroll, loan payments, and relocation expenses so they could work temporarily elsewhere.

Unfortunately, the business did not have the right insurance for hurricane coverage despite living in Florida, a state with hurricane seasons. To prepare for the future, the small retail business looks into obtaining commercial hurricane insurance.

Case Study 2: Manufacturing Plant Damaged by Earthquake

A manufacturing plant was seriously damaged by an earthquake, resulting in broken machinery and a prolonged shutdown. The business filed a commercial property insurance claim, which takes a long time as the business lacked up-to-date documentation of assets and operations.

After this incident, the manufacturer has learned to implement effective safety measures, such as training their employees on how to deal with an earthquake, and strengthening the plant’s structure.

Case Study 3: Tech Company Affected by Wildfire

A tech company in California was forced to evacuate from its location when a wildfire spread. The wildfire caused severe property damage and business continuity disruptions. Fortunately, the tech company had the necessary wildfire insurance coverage and business interruption insurance. These policies allowed them to successfully manage relocation and operating expenses. Within several weeks, the business was able to recover operations.

The case of this tech company highlights how comprehensive insurance and risk mitigation planning can protect a company from natural disasters.

Lessons Learned and Best Practices

Small business owners often make the mistake of believing a natural disaster will not affect them or that insurance is not necessary. However, businesses in high- and medium-risk areas should seriously consider obtaining business insurance for natural disasters.

Compare different insurance policies to ensure you’ve chosen a competitive, reliable insurer. Here are the best business insurance companies to consider:

• NEXT Insurance
• The Hartford
• Simply Business
• Tivly

Conclusion

Natural disasters can swoop in at any time, causing severe damage and stress. Insurance tailored to specific natural disasters can protect a business from physical damages and lost income.

Business owners should periodically assess their risks, insurance coverage, and asset values to ensure they are ready in case of a natural disaster. The more prepared your business is for a natural disaster, the better it can recover continuity.