A business owner wants to protect company assets, and one way they achieve this is by handling direct threats to buildings, equipment, office furniture, etc. However, there is another area of concern that is critical for survival - addressing indirect threats.

Paula's Dry Cleaning suffered a minor fire caused by a dryer that short-circuited. 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 property (the 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 be the more serious threat to your operation's financial health.

Direct Versus Indirect Damage

Direct damage refers to tangible damage to property such, as a fire breaking out in a warehouse. That warehouse has experienced direct damage. Time element damage is not as clear. It refers to the property being damaged or destroyed. The business must stop operations until the property is repaired or replaced and normal operations can resume. The amount of the loss is not always dependent on the value of the 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 1: A printing plant's employees go on strike for two months, closing down operations.

Example 2: A local restaurant featuring Australian cuisine loses 80% of its business when a similar restaurant opens close by.

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 and extra expenses 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 rebuilding or finding a new office.

In Conclusion

You have invested countless amounts of time, money, effort, and energy into your business. That's why it’s important that you take steps to deal with direct and indirect sources of loss. If you have questions about this topic and how it relates to your business, call the insurance professionals at Williams Insurance. With over 80 years of experience and expertise, we know how to help you.

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