Fires, Floods, and Pestilence

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If last year’s flooding in the Midlands wasn’t enough of a wake-up call, last month’s Hurricane Matthew drove the point home to South Carolina businesses: disaster-related insurance is a non-negotiable asset.

But if that’s the case, why don’t more businesses carry it? Dollars and not-very-good sense.

“Many businesses operate on a thin profit margin,” says Dr. Robert “Bob” Hartwig. “The danger is that you are seduced by the savings and ultimate what winds up happening is you become penny wise and pound foolish. A mistake like that can literally cost you your business.”

Hartwig is the clinical associate professor, finance department, and co-director of the Center for Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina. Prior to joining the university faculty this year, he spent 25 years in the insurance industry, most recently as the president and economist for the Insurance Information Institute in New York.

He says the lack of proper insurance can be the death knell for a business, particularly a small one.

“Up to a quarter of businesses in the most severely impacted areas never reopen,” Hartwig says. “That can be entirely avoided if you have proper insurance.”

Originally, property insurance policies covered nothing but fire, because that was the principal peril 100 years ago when the insurance industry took off. Coverages have expanded to include wind, theft, vandalism, and even terrorism, but not flooding. Flooding, however, was such a problematic issue in the 1960s that the federal government formed the National Flood Insurance Program. Now, nearly all flood insurance written on both homes and businesses is done through that program.

For businesses, the maximum available coverage is $500,000 for the structure of the business and $500,000 for the contents. Larger businesses have to seek additional coverage from the private insurance market, consequently paying the market prices.

Hartwig says the average individual is terrible at ascertaining risk. The best course of action is to meet with a licensed insurance agent to discuss risk probability and coverage options, but most individuals and business owners underestimate the danger they’re in.

“People look at their immediate environment and time frames and use that information to make long-term decisions,” he says. “They think that they haven’t had a claim in “x” years, therefore I don’t need to insure my business against flood. That sort of reasoning will ultimately get you in trouble.”

Even those who don’t live or own a business on the coast are still vulnerable to flooding.

“The majority of natural disaster claims involve some kind of water damage,” says Hartwig. “There may be more than one type of damage, but the majority of them have some form of water damage.”

He encourages any businesses that have suffered damage from Hurricane Matthew to call their insurer immediately. The next step is to document the damage as extensively as possible by taking photographs of damage to the structure and/or inventory. Business owners should also collect any receipts that document existing inventory, particularly perishables, because the payout for damage will be a function of inventory level at the time of the event. Depending on the time of year or of week, such as Valentine’s Day for a florist or the weekend for a restaurant, businesses may carry more or less inventory.

Any temporary repairs, such as patching up broken windows or holes in the roof, should be noted and sent to the insurer; money spent for those quick fixes should also be covered be insurers. Businesses who take those steps should see funds from insurers quite quickly.

“Your objective is to get your doors back open as rapidly as possible,” says Hartwig. “It’s that loss of income, even for a short period of time, that is the kiss of death of small businesses. If you have business interruption coverage you should be okay, but if not, you should minimize the time you’re closed. And when you reopen, make sure you have proper insurance.”

The good news, he says, is that as devastating Hurricane Matthew was for many, the damage to the state’s economy shouldn’t be permanently affected.

“This is not a Katrina in New Orleans-type situation,” he says. “In the greater scheme of things, this will be merely a blip in the overall economic output of the coastal area of South Carolina.”

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