Business insurance and climate change: what you need to know
Climate change has been happening for decades, but the world is feeling its effects more than ever today. That includes businesses—large and small—that are being impacted by storm damage, supply chain disruptions, resource scarcity, and other factors intensified by climate change. To be successful, business owners need to recognize and adapt to this new challenge, including understanding the link between business insurance and climate change.
This article explores the impact of climate change on businesses, especially regarding their insurance coverage. There are plenty of hurdles ahead, but it’s not all bad news. You can take specific steps to protect your business from climate-related risks and others to help reduce your company’s environmental impact. Continue reading to learn more.
Understanding climate change’s effects on business
The term “climate change” is used a lot today. But it’s used so much that it’s easy to gloss over it, so let’s start by considering what it means. According to NASA, climate change refers to long-term shifts in temperatures and weather patterns.
Even a small rise in the planet's temperature can have big consequences. That’s because a few degrees of temperature rise represents a huge increase in the amount of energy in climate systems. The availability of additional energy then leads to more and more powerful storms, among other consequences.
As the National Oceanic and Atmospheric Administration (NOAA) explains, using events surpassing $1 billion in costs as the benchmark: “The NOAA National Centers for Environmental Information (NCEI) has released the final update to its 2023 Billion-dollar disaster report, confirming a historic year in the number of costly disasters and extremes throughout much of the country. There were 28 weather and climate disasters in 2023, surpassing the previous record of 22 in 2020, tallying a price tag of at least $92.9 billion. This total annual cost may rise by several billion when we’ve fully accounted for the costs of the December 16-18 East Coast storm and flooding event that impacted states from Florida to Maine.”
So, that’s a quick overview of the science and impact of climate change. But what’s the effect of climate change on businesses specifically? That’s a crucial question for business owners, and we answer it below.
How environmental factors affect businesses
If climate change only meant that average daily high temperatures throughout the year were a few degrees warmer, it wouldn’t be a major concern. But the added energy in the environment can have a powerful impact and affect companies in several ways.
Businesses face different climate-related challenges based on their location, the type of work they do, and other factors. But here are some ways climate change can be a problem for companies:
Increased property damage
Hurricanes, tornados, floods, wildfires, and severe storms with high winds and hail seem to be increasing both in number and intensity. With that rise comes an increased risk of property damage.
More business interruption
Damage to buildings, supply chain disruptions, and other factors can force businesses to cease operations temporarily.
Higher risk of employee injuries
Working in challenging conditions, from storms to extreme heat, increases the risk of employees getting hurt or experiencing medical emergencies like heat stroke.
More vehicle incidents
Workers driving company vehicles in difficult weather conditions are more likely to be involved in accidents.
In short, climate change is posing many new challenges to business operations. The next question is how companies can respond to the growing crisis.
Reducing your risk of climate-related insurance claims
What can you do to minimize the impact climate change has on your business? These actions can help:
Assess your risks and insurance coverage.
Ensure your insurance policies adequately cover climate-related risks, such as storm and fire damage. This includes the business interruption insurance in a business owner policy (BOP), which can protect your company from specified revenue losses due to a covered event.
Keep in mind that flood insurance isn’t included in business insurance policies by default and often must be purchased through the National Flood Insurance Program (NFIP). Even then, there are coverage limitations. Business insurance may also be hard to get in areas with a high risk of wildfires. Also be aware that many companies mandate windstorm or hail percentage deductibles, particularly in storm-prone areas. These deductibles are typically a percentage of the coverage limit. For example, a 5% deductible on a building worth $1 million (and insured for that amount) would be $50,000.
Invest in risk mitigation.
Be proactive about reducing your business's vulnerability to climate change. This might involve enhancing your building's structure to withstand high winds, implementing wildfire prevention measures, or taking steps to make your property less vulnerable to flood damage.
Develop a business continuity plan.
Being ready to respond to severe weather disruptions and other consequences of climate change helps minimize their impact on your operations. Be sure your employees are familiar with the plan and understand their roles.
Review your supply chains.
Consider obtaining the resources needed to operate your business from suppliers closer to your location or from sources in multiple locations to make your supply chains more resilient.
Taking these steps puts your business in a better position to respond to the effects of environmental factors.
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