Losses attributable to natural disasters are not commonly included in commercial insurance coverage (or in any other insurance coverage, including homeowners insurance). Yet the location of a business may require such coverage be obtained to protect the life of the business. Businesses located along the southeast coastline of the US, for instance, should have “windstorm,” that is, “hurricane” insurance, especially considering the increasing frequency since 2004 of severe storms hitting these areas.
California businesses must seriously consider the advisability of obtaining earthquake insurance, even though the probability of a catastrophic earthquake causing total devastation of a business is less than that of a hurricane hitting the southeastern US coastline. Flood insurance, back-stopped by the Federal government, really falls into a different category because it is more available and affordable than insurance for the other two kinds of natural disasters mentioned above.
Natural disaster insurance for businesses would seem to be “no brainers” but for a few key considerations:
- The high cost of premiums
- High deductibles
- Limited coverage
- The remote likelihood that a natural disaster will hit an individual business
However, whether or not a business owner decides to purchase natural disaster insurance, the decision may be made for the business by an outside source: a lender or mortgage holder for the business. If a business is located in a high risk area, a lender to a business may insist on natural disaster insurance as part of its loan covenants with the business.
Recent major natural disasters such as Hurricane Katrina and the active hurricane seasons of 2004-2006 have placed extreme stresses on insurance companies with high concentrations of policyholders in the affected areas. This pressure has caused almost unbelievable rate increases in these areas since those storm seasons, increases of up to 600%. Obviously, the expense of actually doing business in these high risk areas has grown proportionately. Unfortunately, however, these high risk areas correspond to high population densities, high property values, high socio-economic demographics and high income areas, meaning they are great places, and potentially very lucrative locations, for businesses to locate.
Some businesses, not tied up with risk-averse mortgage holders or lenders, opt not to purchase expensive natural disaster insurance, because they believe the government will step in to help offset such losses if in fact they occur. In recent times the Federal government has offered loan guarantees and in some cases outright grants to help in rebuilding demolished private residences and in some cases businesses, as well. However, there are no guarantees this will continue and it is also important for businesses to consider that loan guarantees are only what they say they are; they are not outright gifts. Loans to rebuild, even if guaranteed by the government, still have to be repaid at some point, and could place impossible debt burdens on a business.
Natural disaster insurance for businesses is a thorny issue with no clear cut, easy decisions for the average business person located in a high risk area. Its purchase requires careful consideration and the weighing of pros and cons, but even then, the final prudent decision may not be obvious. Sometimes business people have to make decisions based on intuition and their individual risk tolerance, and this is one situation in which those factors definitely come into play.
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