Business interruption insurance, off-site storage keep businesses afloat

Business interruption insurance, off-site storage keep businesses afloat
By John Rondy, of SBT
When Wisconsin Furniture’s Ixonia plant burned to the ground on a blustery March morning in 1998, employees rallied to put the embattled company back on its feet.
Two days after the fire, the office staff was doing business off of card tables in a rented strip mall location. A day later, front line workers were building workbenches at Schweiger Industries in Jefferson, where Wisconsin Furniture would rent production space for 15 months until a new facility could be completed in Watertown. By the end of the week, several cabinets were finished out of the temporary quarters.
“Our employees really pulled together after a devastating situation,” recalls owner and president Frank Krejci. “Mentally, they could have given up. Without that sort of support, I’d be telling a different story right now.”
While Wisconsin Furniture, which is now better known as The Custom Shoppe, kept operating despite incredible odds, decisions that Krejci and chief financial officer Bert Figi made several years earlier helped keep the company afloat.
The one decision that probably saved the maker of custom office furniture is that it backed up its computers and stored the information offsite.
Krejci advises putting copies of all legal documents in a secure location for safekeeping.
“We had to contact our bankers, attorney, accountants, and get copies of all legal documents,” Krejci says.
The company had replacement insurance coverage, meaning that equipment and virtually everything that was lost in the fire could be replaced at little or no cost. Just as important, The Custom Shoppe purchased business interruption insurance before the fire, which guaranteed operating funds until the company could resume full operations.
The business interruption coverage helped the company cover its payroll and other continuing costs until an income stream could be re-established.
While the ability to rent space from Schweiger helped soften the impact, there was still the matter of lost lead times with customers, lost opportunities and countless other little things that cost the company money while it scrambled to get back up and running from the temporary location in Jefferson.
“You are not operating as efficiently as you were before, so there are costs associated with that,” Krejci says. “It is difficult to calculate business interruption loss. There are so many hidden losses.”
That’s where extra expense coverage comes in, says Jeffrey Schmidt, a consultant with T.E. Brennan Co. in Milwaukee. Extra expense coverage allows for atypical costs such as renting temporary machinery to keep the business running. An additional $250,000 worth of extra expense coverage will not have a significant impact your premium, Schmidt says.
Even though Krejci was able to take advantage of his previous business relationship with Schweiger Industries to secure temporary quarters, it took much longer than he expected to get up and running.
“You can never have enough business interruption insurance,” adds Figi. “It is hard to realize until you have been through it.”
Business interruption insurance is calculated using a worksheet that comes up with a reasonable value for your business. The process involves developing a ratio of continuing expenses as a function of gross anticipated earnings. The process is somewhat of a crapshoot, Schmidt admits.
The Custom Shoppe’s insurance company, CNA, developed a timeline of six to eight months for replacing the facility, which is how long the business interruption insurance would be in place. But, it took the company 11 months to get the new plant built, and CNA agreed to extend the policy for that period. The policy also contained a dollar cap limit. The Custom Shoppe’s ability to operate from temporary quarters as soon as it did mitigated the dollar loss from the cap limit.
“I increased our business interruption coverage almost fourfold after the fire because of the experience we had,” Figi says.
Schmidt says an area of business exposure that is frequently overlooked is contingent business interruption coverage. This typically involves a manufacturer who relies on a single supplier for a raw material or component. If that source is cut off due to a natural disaster or other unforeseen event, this means the manufacturer is also out of business. Contingent business interruption coverage also applies when a key customer dries up.
Thus far, The Custom Shoppe’s experience with its insurance carrier has been positive. CNA renewed the company’s policy, and has made payments in a timely manner.
Krejci says The Custom Shoppe is doing more volume than it did before the fire.
“You really have a lot of partners when you go through something like this, so pick your partners well,” Krejci says of his bank, his law firm and his insurance carriers. “While price is always a consideration, you need partners you can count on in a time like this. Those people were behind us.”
9-9-1999 Small Business Times, Milwaukee