Long Island small businesses trying to rebound from Sandy are confronting a harsh reality: The money they need from their insurance policies may not be coming.
As they work with insurance brokers and claims adjusters, some small companies are discovering a chasm between the protection they thought they purchased and the coverage their insurers say their policies provide. Some owners are finding that they didn't buy the right policies. Others are realizing the fine print may have limited their coverage.
And many small-business owners, restricting expenses in a tough economy, skimped on coverage -- including doing without flood insurance.
"With the economic times, they are saying, 'I can forgo business insurance, and I have to think about other things,' " said Loretta Worters, vice president of the Insurance Information Institute, an industry trade group. "It's unfortunate, because you could actually be put out of business because you . . . didn't have business insurance."
In addition, insurance brokers say many owners don't realize that standard business-interruption insurance does not cover economic losses from a general power outage -- one in which the failure occurs off the premises. The loss of electricity plagued the Island for weeks after the Oct. 29 superstorm, and that gap in coverage could hurt small businesses that depend on monthly cash flow to stay afloat.
The length of time it takes for these companies to recover could threaten "their very existence, and affects the tax base," said Gregory Serio, former superintendent of the state insurance department and now a partner at Manhattan consulting firm Park Strategies. "The longer it takes to get these businesses up and running because they don't have insurance money and government assistance, the greater likelihood there will be a disruption in the normal flow of taxes."
On Long Island, about 65 percent of businesses employ fewer than five people. They support the fabric of the area's communities and help fund everything from Little Leagues to local charities.
$10 billion cost
As government officials try to tally the number of Long Island businesses affected by Sandy, IHS Global Insight, an economic forecaster working for the state, estimates the storm may cost the region's economy as much as $10 billion -- one month's worth of the Island's gross domestic product. The storm caused the Island to lose jobs in November, economists said. Leisure and hospitality jobs, down 6,500 from the previous month, were especially hard hit.
Now business owners, like many homeowners, are poring over confusing insurance policy language and discovering gaps in coverage.
"What a lot of us are finding out is that typical contents insurance does not cover stuff damaged by flood," said Rocco Morelli, a Long Beach dentist who has read his policy line by line and remains confused about what it may or may not cover.
Morelli is waiting to find out if his insurance will pay for the $200,000 worth of equipment ruined by the storm. Unlike individual homeowners, businesses do not have the support of grants from the Federal Emergency Management Agency and can only apply for loans from the Small Business Administration for financial relief.
More than two feet of water rushed into Morelli's West Park Avenue dental practice, causing his pipes to back up with raw sewage and leaving moldy walls. His landlord had flood insurance for the building and is paying for the interior renovation. Morelli had insurance for his practice's contents, business interruption and sewer backup, but all that might be invalid because the cause of the damage was floodwater.
Morelli filed his claim more than a month ago but has yet to meet with an adjuster. Determined to return to business, Morelli said he decided to forge on without knowing the outcome of his insurance claim. He has worked out a partnership with another local dentist who wants to downsize his practice. Morelli will buy all of the dentist's equipment at a discount, and in return the dentist will be able to use Morelli's practice to see patients on a part-time basis.
Reed Fedner, co-owner of the East Rockaway Tutor Time day-care franchise, is waiting to find out whether his landlord's insurance will cover the renovation of Fedner's 14,000- square-foot space, which was inundated by 31/2 feet of water. Meanwhile, he and his wife are investing about $325,000 of their own savings to renovate the facility and replace damaged equipment by Jan. 7.
Competition in day care is intense, and a quick return to business is crucial for the families that depend on the school, said Fedner, who is a partner in three other day-care facilities.
Forced into coverage
Flood insurance rates for his business are "astronomical," Fedner said. But he now has little choice but to buy it.
"It would be crazy for me to put this kind of money into the business and not have coverage," Fedner said.
Often, small businesses find the federal government's National Flood Insurance Program doesn't cover all the risks they face. Some of that gap can be filled through private insurance policies -- but at a cost many companies say they can't afford.
Federal flood insurance for businesses offers coverage up to $500,000 for structural damage to a building and as much as $500,000 for contents. It does not provide business-interruption or loss-of-income insurance, which companies must purchase in the private marketplace.
Still, many small establishments forgo any flood insurance because of the expense, experts said.
Barrie Kolstein, owner of violin maker Kolstein & Son Ltd. in Baldwin, could not afford flood insurance -- and he hadn't had flooding in his 32 years at that location. He bought business insurance to cover damages caused by other perils.
Yet, Kolstein's business suffered flood damage when the storm sent water from a nearby lake up an old drainage ditch and into Kolstein's two buildings. At the same time, wind battered the roofs, pipes broke inside the buildings and sewage backup ruined the interior, as well as machinery and the musical instruments.
Kolstein said he was verbally denied for claims he put in for business interruption and contents because his insurance policy does not cover flood damage. Kolstein argues that his loss was a result of multiple causes and not solely flooding, and he is awaiting an official ruling from his insurer.
"I hate to say it, but one of the options I am going to have to face is moving," said Kolstein, 63. "And moving is not something I am looking forward to, not at this stage of my life."
The company has been closed since the storm but is operating "on a shoestring" as employees work to restore instruments and contractors rebuild his destroyed facilities.
Even in cases where flooding hasn't complicated matters, many business owners are finding surprises in their standard business policies.
Brian Keegan, owner of the Long Island Auto Find dealership in Copiague, did not know he needed to buy separate coverage for the business' large signs until it was too late. The winds from Sandy pushed in the plastic covering on the signs, and Keegan said he will have to pay about $1,000 to fix them.
Mike Nelson, co-owner of surfing gear store Unsound Surf, said he learned the importance of the fine print when his insurance company denied his claims after Sandy.
Nelson's two shops -- in Long Beach and Oceanside -- were both flooded, damaging about $250,000 in inventory. His policy for contents and business interruption had flood exceptions written in, which he did not realize until filing his claims.
Nelson said he's in the market for a new policy but will change the way he shops for and decides on coverage.
"In the future, my questions to an insurance carrier are going to be different," he said. "Instead of asking what's covered, it's going to be 'What's not covered?' . . . It'll make things a lot more clear."
With James T. Madore