Keeping your retail operation open for business when leader locations shut down

If you’re solely dependent on another business to attract your customers, you could be in big trouble without the right insurance.

It's obvious that a retail operation has to be open for business in order to sell goods. If you need foot traffic to get customers in the door, you need to be open. And, so do the larger businesses around you.

Do people stop by your store after seeing a movie at the theater next door?

Is a bulk of your sales from sports fans attending a game at the arena down the street?

Retailers are generally dependent on other businesses to be successful and keep the doors open. When one of these operations is out of business, your store may have a problem. But this is one area that is too commonly overlooked when it comes to your retail risk management program.

Your friendly neighborhood insurance professional likely talked with you about coverage that will pay for all or part of the income you would have made if you wouldn't have had to close after a loss to your business. But what about when your income stops because of damage to another business?

The insurance coverage is called Business Income from Dependent Properties. And this is another example of why working with an independent insurance agent is crucial for any business - many people don't realize they need this until their agent asks what other business they depend on to operate.

The next part might sound technical (okay, boring). But stick with me. Ask yourself, which of these types of locations is my store dependent on to stay open?

There are four types of locations that the insurance industry categorizes as "Dependent Properties":

  • Contributing Locations. You might call this a supplier. This is a business that supplies you with parts, materials or services.
  • Recipient Locations. These are businesses that regularly buy from you. This could be a corporate headquarters nearby that places daily orders for lunch.
  • Manufacturing Locations. These are your providers that manufacture the products you sell to your customers.
  • Leader Location. You might call this a driver location or anchor. Stores located in a plaza with an anchor store, event or other attraction that draws people in.

In my opinion, Business Income from Dependent Properties is not considered often enough, especially when a store depends on a Leader Location.

Mercantile risks such as a small family owned souvenir shops may not be able to sustain financial hardship if a fire damages the city's sporting arena. While the fire did not damage the souvenir shop, it has stopped the sport fans from coming in and buying their favorite team's memorabilia while the arena was being repaired.

Or, imagine high winds from a spring storm damage the roof of a large office complex that employs thousands of people. The building is closed for repairs, possibly for several months. With the office complex closed, this could drastically reduce the number of customers from stopping at the bagel shop located across the street. Events such as these could potentially put retail operations out of business due to the loss of customers. That is, if they are not adequately insured.

When reviewing an insurance program for a retail business, we have to uncover less obvious ways an insured or potential insured can sustain a financial burden. For "suppliers", "buyers" and "providers", this means figuring out if the business that depends on them can find other sources for supplies or products if needed. But when it comes to a Leader Location, damage to this business could virtually destroy a retail operation.

If you're solely dependent on another business to attract your customers, you could be in big trouble without the right insurance.  

While many insurance carriers have tailored their property coverage extensions to provide a small amount of Business Income from Dependent Properties, your agent will help determine if it that limit is enough. Then there's the decision about which coverage form to use. There are a number of standard insurance forms in the industry for Dependent Property Endorsements. I'm going to focus on the two that are best geared to benefit a retail business.
Again, bear with me while I get a bit technical. Just remember, if you're a store dependent on a Leader Location, talk to your agent right now. These are the forms your agent might recommend:

  • Business Income from Dependent Properties - Broad Form (CP 15 08). This covers the insured for loss of income as a result of a dependents property's suspension of operation by a covered cause of loss. The entire limit of business income is usually available.
  • Business Income from Dependent Properties - Limited Form (CP 15 09). This covers the insured usually for loss of income by a specified scheduled location and amount.

To my fellow insurance professionals reading this, please remember that we need to advise customers of the terms and conditions of these endorsements. This may include a waiting period that is normally 72 hours. And in order for Business Income from Dependent Properties to apply, the loss to the dependent property usually must be one that would have been a covered cause of loss if it had occurred at the insureds property.

The key thing to remember is to look outside your retail operation to the businesses around you that help you keep the doors open. Think about what would happen if they suddenly weren't there. Who would supply your store? And who would buy from you? Don't risk finding out the answer to these questions is "no one."