No Physical Damage, But No Customers Either
A small bomb exploded outside an apartment building on Manhattan’s Upper East Side over the weekend. Newspapers reported that residents were unnerved by the blast and the nearby Starbucks coffee shop sustained moderate physical damage. Unfortunately, this is not the first small explosive device to detonate in a residential neighborhood in Manhattan. The police are looking for clues before the bomber strikes again. But the lesson that the small businesses in the affected area are likely learning now the hard way concerns the increasing disconnect between physical damage and economic losses and the nature of everyday disasters. The old insurance paradigm correlated economic losses with physical damages and provided commensurate benefits. If your office building became a giant smoking hole in the ground, you would likely have commercial insurance to indemnify the loss. But in a service economy, economic losses are becoming less and less correlated with physical damages. Apart from the Starbucks coffee shop, no other retail business in the neighborhood where the bomb exploded sustained physical damages and thankfully, there were no injuries or loss of life. But all of those businesses will lose revenues as pedestrian access to their storefronts and restaurants will be resticted for some period of time as the cleanup work is done and the police gather evidence. This is why business interruption insurance is so important; it replaces revenues lost during a period of disruption. But most storekeepers lack this important coverage. Don’t learn this lesson the hard way. Have a conversation with your insurance broker about whether business interruption insurance is appropriate for your business.