Let it be a lesson to business owners everywhere. With the unexpected disaster brought on by Hurricane Katrina in the Gulf Coast region, there will be many business owners who wish they had spent more time understanding their insurance coverage. After 9/11, hundreds of businesses that closed afterward might have been saved if they had had an income stream to sustain them while the business was recovering.

The lesson learned: businesses here that have the luxury of reviewing their insurance coverage and talking to their agents or brokers before disaster strikes should consider doing it now.

One important aspect of commercial property and casualty insurance is business interruption insurance. This type of coverage provides a stream of income while the business is unable to operate normally because of an insured loss. Business interruption insurance is not sold as a separate policy, but is usually part of the package of insurances or can be added onto a commercial package.

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Boyd Drachman, a co-founder of Drachman Leed Insurance, a multi-service insurance brokerage firm located at 1889 N. Kolb Road, believes business interruption coverage is a very important part of commercial insurances. "Business interruption insurance is money to pay for ongoing business profits or revenue in the event of an insurance loss," he said. "Coverage will be triggered by the same events that trigger coverage under property and casualty insurances."

But not all business owners understand its value to their operation.

The following findings from a recent survey by Safeco Property and Casualty Co. confirmed this:

• 55 percent of the respondents had no business interruption income insurance

• 63 percent were not familiar with the insurance

• 45 percent were overly optimistic about the time needed to recover from a business interruption

• 60 percent did not have the information needed to calculate income coverage needs.

Drachman doesn't foresee a natural disaster for Tucson on par with Hurricane Katrina, but he said that floods are always a possibility. "There are many designated flood zones at or near local washes. But what we see most often is wind or hail damage from monsoons. There have been a few earthquakes in this area, too," he said, citing one earthquake in the late 1800s that would have measured around 7.1 on the Richter scale.

The type of event that could cause a business interruption may vary depending on the type of business. For example, he noted that rental property owners might have a policy that covers rental income if something should happen to the property. "The business owner has to think about a question like, ‘what would cause a potential loss of revenue?'"

Another form of business interruption a company might experience relates to a loss of business income because of the situation of another company. Drachman explained that there are some types of business interruption insurance that cover losses to a business that are not the result of a direct interruption, but the result of a business interruption to another company.

This kind of coverage is called dependent properties business interruption coverage. There are several types of dependent properties coverage.

Drachman cited some examples:

• In a "contributing" dependent property, UPS might be the contributing property. "You might depend on UPS to deliver lobsters to your lobster restaurant. If something happens to UPS and they can't deliver, then that could cause a business interruption to you."

• A "recipient" dependent property: "If something happened to a company who accepts your product or services, for example, the airport, then that recipient's problem could also cause an interruption to your business."

• A "manufacturing" dependent property is a manufacturer who supplies a product for a company, for example, "the lobster supplier in Boston."

• An interruption because of a "leader location" property would be "if you had a restaurant in a shopping mall and the mall closed because of a fire. The shopping mall is the leader location."

A current example of a business interruption because of a dependent property, said Drachman, would be Tucson companies that can't operate as usual because they are unable to get products they would normally buy from New Orleans suppliers.

While no one can insure against every risk, Drachman recommends that business owners review their policies with their agents at least annually. "Business interruption insurance should be included on most commercial policies," he said.

Contact Martha Lundin at

mlundin@azbiz.com or call (520) 295-4259.