With a welder’s misplaced spark, Chapman’s Ice Cream saw its production facility go up in smoke. The 90,000-square-foot facility was destroyed in the Sept. 4 fire, with only about five per cent of the equipment salvageable.
But fears about employment and wages among the 350 or so employees of the Markdale, Ont.-based company were soon dispelled when they were told the insurance company would cover the wages and benefits of salaried employees in full for one year and hourly employees for four months.
That’s because, about 10 years ago, Chapman’s decided to invest in business interruption insurance that would cover all the angles should a disaster occur, said vice-president Ashley Chapman.
“It’s an absolutely lovely policy to have,” he said. “As far as employees go, we’re trying hard to provide them with every kind of safety and service we can give.”
About three-quarters (73 per cent) of small business owners have this type of coverage, according to Doug Bruce, director of research at the Canadian Federation of Independent Business, citing a 2005 study. Business interruption insurance can be added to a commercial property insurance policy and help a company survive the devastating effects of a fire, windstorm or flood that damages or destroys a property, he said.
“If you don’t have the business interruption insurance you’re basically out of luck, (if) you are closed down for a month, and that can be detrimental to any business,” said Bruce.
The insurance can compensate a company for lost income — if premises have to be vacated due to disaster-related damage — for profits that would have been earned (based on financial records) and for equipment and inventory, operating expenses and extra expenses, such as moving costs or outsourcing work. There are several forms of coverage available, depending on the needs of the business, such as gross earnings — which is paid until the property or damage is replaced or repaired or stock is replaced — or profits, which is paid until a business resumes its normal, pre-interruption level.
A company can lose customers in the time it takes to recover, so the difference in what it was making pre-loss and post-loss can be covered under a broader interruption form. Most companies use this form, said David Black, a commercial account executive at Cowan Insurance Group in London, Ont.
Smaller businesses of five or 10 people may not be as inclined to keep paying workers during the disruption, he said, and instead hire workers when business resumes. But if dismissed employees have to rely on employment insurance, they might start looking for another job.
“It’s a risk-transfer mechanism,” said Black. “So (employers) can transfer that risk of losing that employee to insurance.”
A company can also insure select groups of workers, such as executives or foremen, with an annual limit for salary paid while “ordinary payroll” workers usually see a 90- to 180-day period. But some companies insure all employees under the executive section, he said. A variety of factors influence that decision, such as the skill level of the workforce or the expertise of the insurance broker.
“Imagine if you lose your facility and when you get it back up and running six months later, you have no employees to run it — what’s it going to be like your first day?” he said. “If you have those people coming back to do their job and they do it well, and they get paid for it, they’ll be pretty happy for that.”
And when it comes to negotiating with an insurance company or insurance broker, typically the finance team is involved, as it usually deals with property and liability, said Black.
“I know for a fact the finance people purchase this coverage and the HR people may not even know it exists.”
For Chapman’s, the recovery process is underway. While a “good chunk” of the company’s workers are off, about 50 or 60 have started co-packing at a small dairy near Hamilton — about 175 kilometres away — shuttling down and staying in hotels, said Chapman. Some of the workers still in Markdale are helping with cleanup or security. The distribution centre and dry warehouse are still in operation, along with about 50 drivers. Contractors are building a small production facility in the dry warehouse and about three of Chapman’s 10 flavours are being produced in Markdale, he said, estimating up to 250 employees will be back to normal production in one month or so.
Business Interruptions Insurance
The whys and hows of insurance
Business can be interrupted by a variety of events. Here are a few
examples of the type of events that can be insured:
• Blackouts and extended power outages.
• Need to vacate and repair or rebuild premises due to disasters (such as fire, hurricanes, ice storms or vandalism).
• Fire or disaster at a supplier that provides essential raw materials.
• Staff quarantined due to an epidemic such as SARS.
• Destruction of new designs, patterns, models at or en route to trade shows.
• Denial of access to or from premises due to an ongoing peril or disaster.
If a business shuts down, it could suffer:
• lost income but continued operating expenses (such as salaries, rent, hydro or taxes)
• reduced earnings capacity
• increased vulnerability to competition
• financial strain hindering recovery or reopening
• permanent loss of important customers.
Source: Aviva Canada
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