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The Basics of Business Insurance for Retail Operations
By Matthew Liew, CPCU

From department stores to mom-and-pop operations, Hawaii retailers must continually adapt to market demands and trends to remain competitive. By doing so, Hawaii retailers also are changing their exposure to liabilities, which may or may not be covered under their business insurance. When a business undergoes a dramatic change - whether it's with operations or inventory - the existing insurance coverages should be reviewed to ensure the business is adequately protecting itself. Some of the most common risks that businesses face include peak season inventory, crime, business interruption losses, and bodily injury and property damage claims.

Peak Season Inventory: Many types of retail stores experience higher sales volumes during certain times of the year and increase their inventories accordingly. A classic example is a toy store that dramatically increases its inventory during Christmas, when the vast majority of sales are made.

Under the traditional method of setting policy limits, the insured that purchased adequate limits during its peak season would be over insured for the remainder of the year. A peak season endorsement, which falls under property insurance coverage, is a tool to avoid overinsurance during non-peak season and conversely, underinsurance during the peak season. The endorsement provides differing limits for differing time periods during the policy period, as indicated by specific dates shown on the endorsement. Using the example above, the toy store would use the endorsement to provide higher limits during the months of November and December to properly insure its increase in inventory.

Crime: Crime is another exposure most retail operations face. Crime encompasses exposures to loss from the dishonest acts of people within or outside the company. Crime losses may involve money or property such as stock and inventory. Although a property policy typically covers theft of covered property, money and employee dishonesty are virtually always excluded.

Crime insurance can protect a store against burglary, robbery and employee dishonesty. Burglary occurs when property is stolen by someone who forcibly enters the place where property is kept. Robbery involves the use of force against the person from whom property is taken. Robberies may occur at and away from the premises, for example, during night deposits. Employee dishonesty consists of any dishonest act committed by an employee and can pose a serious threat because losses can take place over a prolonged period before it's detected.

Loss of Business Income: Another concern for retail operations is the loss of business income, which may result from the interruption or partial suspension of business caused by damage to real or personal property.

Business Income insurance can protect against these types of losses. The insurance company would pay when a business interruption causes a loss of business income. Business interruption losses can even result from damage to a business facility upon which the insured is dependent. For example, a retail-clothing store may suffer a loss if its supplier's factories are damaged and cannot complete or deliver an order for inventory. A business interruption loss can also occur when there is damage to an unrelated business. For example, a retail store located in a shopping mall may suffer a loss if the mall is shut down due to a fire in another store. There is no relationship between these two stores, but the loss of business income is just as real.

Extra expenses may also be incurred during a temporary or permanent shutdown of business. For example, a store may decide to move to a temporary location to continue its operations. The store may also need to rent new equipment or storage space for undamaged goods. For these types of losses, Extra Expense coverage can be included in a Business Income policy.

Bodily Injury and Property Damage: Another common exposure for retail operations is property damage and bodily injury that may occur on the premises. For example, a customer slips and falls while the floors are being mopped, and later files a claim for her medical expenses resulting from a sprained ankle and twisted back. Accidents occurring at an insured's premises are covered under the Premises and Operations liability coverage, the most basic component of General Liability insurance. Essentially, this provides coverage for third party bodily injury and property damage claims arising out of its operations.

Retail businesses should review their business insurance policies to find out what risks are covered and if there is adequate coverage. When reviewing insurance policies, it is always best to consult an insurance professional who can answer questions and tailor a program to meet your needs.

By Matthew Liew, CPCU, with Hawaii Insurance Consultants, Ltd., a member of the AIG Hawaii Family of Companies. He can be contacted at 543-9706. # # # 36457