Dealing With Indirect Loss
One major duty of a business
owner is to protect his or her company’s assets. The logical focus may be on handling
threats to your tangible assets, such as buildings, equipment, office
furniture, etc. However there is another area of concern that is critical for
survival. Consider the following:
Example: Paula’s Dry Cleaning suffered a
minor fire caused by a short-circuit in a dryer. While
the actual fire damage was negligible, it was accompanied by a lot of smoke and
residue. The dryer could be repaired and cleaned in a few days, but the
premises would take three weeks to properly clean and decontaminate.
In this case, the business
owner's loss of use of her store was a far greater loss than the actual damage
to the physical item (dryer). Depending upon the type of loss and the type of
business you operate, intangible or indirect losses (also known as Time Element
losses) may threaten your operation's financial health as seriously as any
direct loss.
The term Time Element describes
losses to businesses that occur because of the time needed to repair or replace
property that has suffered direct damage. The longer repairs take, the greater
the amount of the time-related loss.
Direct Versus Indirect Damage
Direct damage refers to tangible
damage to property. A fire occurs to a warehouse. That warehouse has
experienced direct damage. Time element damage is not as clear. It refers to
property being damaged or destroyed and then the business must stop operations
until the property is repaired or replaced and normal operations resume. The
amount of the loss is not always dependent on the value of damaged property.
Rather, it is related to the impact the loss has on regular operations.
Insurable Vs. Business Risk
Tangible losses are not the
sole cause of time element losses. Any event that interrupts operations causes
a time element loss.
Example: A printing plant’s employees go on
strike for two months, closing down operations.
Example: A local restaurant featuring
Australian cuisine loses 80% of its business when customers’ tastes change.
However, these are business
risks and are not eligible for protection under most insurance contracts.
Securing Coverage
If you decide to purchase
coverage against indirect loss, be sure that it addresses any loss of business
income as extra expenses that are created by a direct loss. Getting adequate
protection means you'll have to determine the level of income coverage you may
need, the likely length of business interruption you may suffer and the importance
of continuing operations. Once you determine your priorities, you can find
matching coverage.
Example: An insurance agent’s office is
severely damaged by fire. She keeps a full set of backup files at a remote
location. The agent will not actually lose any income because of the loss of
her office, but she will need to rent temporary replacement space, furniture,
equipment, communications services, etc. She will also incur significant costs
to notify clients and insurers and other expenses to maintain her operation
while she rebuilds or finds a new office.
You have invested a lot in
your business. It is important to be sure that you take the steps to deal with
both direct and indirect sources of loss. As usual, it is always a good idea to
discuss your questions and needs with an insurance professional.
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