An orthodontist cannot get into his offices for 2 weeks after a fire completely destroys one of three wings of the professional complex where his practice is located. A tornado severely damages all buildings in the downtown area where a pediatric dental surgeon practices, and she spends nearly a month setting up a temporary office in a suburb. A widespread flood forces the dentists in a small town to abandon their practices for 10 days.
While the above examples are hypothetical, the potential situations they illustrate are distinct possibilities. As the events of September 11th showed us, business interruptions do happen, though not always on such a large scale. The location where a livelihood is earned can be destroyed or rendered temporarily unusable in an instant and without any warning.
Professionals such as dentists, whose sole or major source of income depends on an office being open for business, have to consider the likelihood that circumstances could compel them to shutter their practices. How then would they make up that lost income?
It’s possible to be financially prepared for this kind of business crisis through a little- known type of coverage called business interruption insurance. This insurance usually is sold in tandem with property coverage at pretty much the same level of cost. For example, dentists who pay 15 cents per hundred dollars of replacement value property insurance for their business property will pretty much pay the same rate for their business interruption coverage.
Reimbursement under business interruption insurance is usually triggered by some kind of damage to the property where the business is conducted. Usually there is a deductible either in a flat dollar amount or a waiting time. If it is a waiting time, it is at least 24 hours, meaning that payments do not begin until the business has been disrupted for a day. Those looking to buy business interruption insurance must purchase additional coverage in the form of special endorsements for the policy to pay for certain emergency events. For example, most business interruption forms do not include coverage for perils such as emergency evacuation by civil authority or a major utility disruption. If these coverages are needed, they must be added by endorsement.
In essence, business interruption insurance functions to protect a lost earnings stream, with earnings defined as revenues minus expenses. This is a key point for professionals to keep in mind when weighing the pros and cons of this kind of business coverage. Dentists just starting out in a practice probably do not need to consider business interruption insurance precisely because they have little or no earnings to protect. The amount of reimbursement under any interruption policy is directly based on the business’s level of earnings.
The buy/don’t buy decision is much more complicated once a practice begins to generate an income stream. In fact, the more income the dentist’s business produces, the greater the argument in favor of business interruption insurance because there is so much more potential for loss. A high-income practice may well be a prime candidate for business interruption insurance.
That being the case, there are still other factors to consider. Among these is the actual probability of a practice being affected by something that could shut it down. For example, dentists should consider the predominant weather patterns in their region. How common is the incidence of tornadoes, hurricanes, or floods where they work? The higher the probability of these kinds of disasters affecting a practice, the better the case becomes for some kind of business interruption insurance. A practice located in “tornado alley” in the center of the country or along the Gulf Coast is probably more likely to need business interruption insurance than one situated in Chicago, for example.
A big city practice, however, has its own concerns and risks. Dentists whose offices are located in high-rise buildings should investigate whether or not the property has adequate sprinklers or other fire-retarding features such as fire doors and walls. Building codes are not uniform throughout the country, and some structures have been granted compliance waivers even though regulations have tightened for new buildings. The presence or absence of these features could make the difference between minor damage from a quickly contained blaze, and widespread destruction that shuts down all the businesses in the high-rise and triggers the need for income replacement.
Other factors to evaluate carefully when making the business interruption insurance decision are how long it would take and how much it would cost to get a disrupted business back into operation. Is suitable office space away from the shutdown area plentiful and reasonably priced? Or would a dentist have a real problem finding and affording equivalent space for a temporary practice? Don’t forget the time and expense of notifying patients of the temporary office location.
In some respects, dentists are in better shape than a retail establishment if a short-term change of business location becomes necessary. If a dry-cleaning shop has to move even just across the street, it may lose a good deal of customers to a more conveniently placed competitor. Dentists’ patients by and large go with them across town, especially in these days of prepaid plans that make it harder to change designated dental providers.
But because of the nature of their business activities, dentists are not as well off in other ways as professionals like attorneys. With the advent of electronic law libraries and e-mail, if they have to, lawyers can temporarily move their work to their computers at home. The dentist, however, has radiographic and other equipment that simply cannot be placed in such an environment. Moreover, it is very costly to move this kind of equipment, and business interruption insurance is designed to cover the kinds of extra expenses involved in setting up a temporary place of business elsewhere.
Last, but by no means least, dentists should determine how much income they can afford to lose if their practice comes to a halt. One month? Three months? Typically, when business interruption insurance is purchased, the time frame for coverage is a year because that is how long it might take to relocate a factory temporarily. Because a dentist won’t need that long to find a temporary office, this reduces the amount of coverage required, and thus the overall cost of business interruption insurance.
It’s not at all enjoyable to contemplate the types of situations that trigger the need for business interruption insurance. But it is especially relevant for dentists to be prepared for such contingencies. After all, it isn’t just their income that’s at stake. Patients are also affected by the continuity of dental care, especially in procedures such as orthodontia, which usually requires regular, frequent office visits. The prudent practitioner takes that factor into consideration as well.
A veteran of the insurance industry, Mr. Henry is chief executive officer of McQueary Henry Bowles Troy LLP, ranked among the nation’s top 100 commercial insurance brokers.