By Jennifer Carter
Just three days after Easter Sunday in 2011, a colossal storm system tore across the country, spawning 359 tornadoes in 21 states. In addition to property destruction, churches faced business interruption on a massive scale – and many were unprepared to recover from it.
Fortunately, there is an insurance product that could help mitigate a church’s financial loss due to an interruption in giving.
“Churches are particularly vulnerable to business interruption because they depend so heavily on giving for income,” says Gaelen Cole, Property and Casualty Program manager for GuideStone Agency Services. “Even if the church’s property is properly insured, lost giving can make a loss’s impact that much more profound. Business interruption insurance is crucial, as it helps churches recoup losses while continuing to serve their communities in times of crisis.”
Two parts of a whole
Comprehensive business interruption insurance includes two main components: (1) standard coverage for lost income and ongoing operational expenses and (2) extra expense coverage. To be able to file a business interruption claim, the church must first have had a covered cause of loss specified in the church’s property policy.
“Churches need to review their policies thoroughly with a knowledgeable agent,” Cole says. “‘Named perils’ coverage only covers loss from a specified event, like fire or storms. ‘Special form’ or ‘all risk’ insures against all causes, but often with many exclusions. It’s important to know what’s covered.”
Standard business interruption insurance includes lost income and ongoing expense coverage. Extra expense coverage is often optional, so churches must ask their agent to add it. Both are crucial to keeping ministry protected during times of interruption.
Lost income and ongoing expense coverage protects just that: the revenue the church is likely to lose while the doors are closed, and the expenses the church incurs keeping even the most basic operations going. These might include rent or mortgage payments, utilities, payroll, health insurance premiums and the like.
Extra expense coverage helps cover the additional expenses churches face while recovering and rebuilding. This includes things like the cost of renting an alternative meeting place or putting in another phone line. It can also mean the difference between a quick recovery and a lengthier one.
Know the specifics
“Because budgets are often tight, churches are always looking for ways to keep premiums as affordable as possible,” Cole says. “Churches can be hurt by limits, deductibles or coinsurance that seemed like a good idea when they were trying to lower premiums. In the event of a claim, these decisions can cost them serious money.”
Deductibles. Business interruption deductibles are measured in time rather than dollar amounts. The deductible is the amount of time that’s allowed to pass before the church’s coverage kicks in, usually 24-72 hours. In general, the longer the deductible, the lower the premium, making longer deductibles attractive to churches looking to control costs. However, deductibles can have huge and potentially unforeseen impacts in the event of a loss.
“If possible, churches should have a 24-hour deductible. This helps them manage costs while providing protection for their most important operational days,” Cole says.
Limits. Business interruption coverage has a limit that’s separate from other policy limits. Typically, the amount covered is based on the previous 12 months’ documented income and expenses. Because churches are rarely out of operation for 12 months, they will not need the full amount covered. “It’s critical to keep good records of income and expenses, and have backups in a secure place,” says Cole.
Many church insurers offer a flat limit of $150,000 in coverage. For smaller churches with annual incomes below $500,000, this limit is generally adequate.
Churches with annual incomes greater than $500,000 will need to consult with their agents to figure the right amount of coverage.
Coinsurance penalties. For larger churches that need higher limits, coinsurance penalties may become an issue. Insurance companies require the church to carry a certain percentage of the potential total value of their loss, based on 12 months’ worth of documented income and expenses. If the church does not carry that percentage, they will incur a coinsurance penalty, and only a portion of their total claims will be paid. “These things are complicated,” says Cole.
Protection is in the details
“Under the umbrella of ‘business interruption coverage,’ there are a few more coverages churches should consider,” says Cole. “The two that are most common are utility interruption and equipment breakdown.”
Utility interruption coverage reimburses a church for ongoing expenses and lost income resulting from a disruption in utilities – even if the church property itself isn’t damaged. Equipment breakdowns such as heating or air conditioning failure must first be covered by the church’s property policy. “If they have that coverage, the church should also specify that they’d like the resulting business interruption covered. Without it, their lost income and ongoing expenses aren’t covered.”
“Aside from insufficient or the wrong kinds of cover-age, disorganization and poor record-keeping are two things that really hurt churches when it comes to getting claims paid,” Cole says. “Churches should focus on three main areas: (1) have a good relationship with their agent, (2) keep thorough and secure records, and (3) make sure everyone knows their role: who to contact for accounting, for property info, for disaster response, etc. Without all three, they are likely to run into trouble.”
Jennifer Carter is a senior marketing communications editor for Dallas-based GuideStone Financial Resources. www.GuideStone.orgThis article is for informational purposes only and is not intended to be construed as legal, tax or other professional advice specific to you or your ministry.