When business owners think about disaster risk, most picture damage to their building or property. But a recent Federal Reserve Banks analysis suggests that lost revenue is the more common consequence, and that business interruption insurance, designed to protect against certain income losses, is far less common than property insurance.
Business Interruption Insurance Doesn’t Match the Risk
Most businesses insured their property, but not their income.
Among small businesses hit by a natural disaster, 84% lost sales or had their operations interrupted, while about half had physical damage. Yet among the businesses that lost sales, 69% carried property insurance, and only 32% carried business interruption insurance. Smaller businesses were the least likely to carry it, the same pattern we examined in The Smallest Firms Are Carrying the Heaviest Load.
Even the coverage owners had often gone unused. Among businesses with physical damage and insurance to cover it, 58% did not file a claim. Federal Reserve researchers acknowledge that more research is needed to understand why.
When Coverage Falls Short, the Owner Pays
Only 4% of businesses that sought outside funds, including insurance, received enough to cover their losses. Many turned to the owner’s personal funds or business cash reserves, and nearly one-third of businesses with uncovered losses fell behind on payments.
Why Proper Coverage Protects More Than Property
An uninsured loss can follow the business into its credit history.
A peer-reviewed study of businesses affected by Hurricane Harvey, cited in the Fed’s report, found that past-due balances on business credit doubled in the areas with the worst flooding. For owners seeking financing, missed payments can affect how lenders evaluate the business.
What to Do Next
Your insurance coverage shows which financial risks your business would have to absorb on its own.
Consider this question: If your business had to close for a month, how would you cover rent, payroll, and other ongoing expenses?
Review that scenario with your insurance agent or broker. Understand what events your policy covers, what it excludes, and how long your business could operate without normal revenue.
Insurance planning is not separate from capital readiness. It is part of protecting the financial strength that lenders evaluate.
Although these findings focus on natural disasters, revenue interruptions can arise from many causes. Not all are covered by business interruption insurance, making it especially important to understand your policy.
Our Becoming Bankable program helps owners protect the financial strength lenders look for before a disruption tests it. Learn more, or book a free discovery session.