(FORTUNE Small Business) – Once a week for the past year, Mark Kalan, co-owner of Maud Borup Chocolates, has made the three-hour drive from his tiny company's headquarters in St. Paul to the small town of Perham, Minn., where the warehouse and factory are. There he'd don a hair net and check inventory as workers placed fudge balls, nougat, and other confections on conveyor belts leading to tiny waterfalls of chocolate.

But when he neared the factory Oct. 7, Kalan, 35, found his workers standing outside. He thought they were on a breakfast break until he saw the fire trucks and police cars. The factory looked okay, but he couldn't see the warehouse in back. When he asked the workers what had happened, he could hardly believe the answer.

Ten minutes before he'd arrived, the 23rd car of a 53-car freight train traveling from Fargo, N.D., to Minneapolis had jumped the track and rolled 1 1/2 blocks, smashing about 30 vehicles in a nearby parking lot before careening into the warehouse and leveling it. Had Mark not stopped for coffee, he would have been inside when the 60,000-pound railcar hit. Miraculously, none of the employees in the adjacent factory had been hurt. "If the back two wheels hadn't snagged on our foundation, the train would have plowed through the entire building and come out the other side," says Kim Kalan, 35, Mark's sister-in-law and the majority owner of Maud Borup. "It would have killed our staff."

The disaster might yet kill the company. Mark and Kim carried property insurance of $260,000, but an adjuster is still calculating the physical loss from the accident, and Mark says it could exceed that. Worse, he says, the company didn't have enough business-interruption insurance, which would account for its lost profits while it recovers from the disaster. Maud Borup's policy was for $500,000 in coverage, but he says that's about half of what will prove necessary.

Business-interruption insurance is something most entrepreneurs have heard of but might not know they need. In a national survey of 500 small businesses, Safeco, a Seattle-based insurer, found that 55% of respondents did not carry such insurance, and that 63% didn't know how it worked. (Some people bought coverage without understanding it; see box.) The Kalans, both of whom had started companies before buying Maud Borup, knew about business-interruption coverage, but they were operating on a shoestring, and they figured $500,000 in coverage was enough. As it was, their total premium, including property and liability coverage, was $19,000 a year. As Kim says, "What good is it to have an enormous policy and not be able to afford to stay in business?"

Maud Borup chocolates was launched in 1907, when the eponymous founder started making candy on her stove with a sister and selling it through a flower shop in downtown St. Paul. Borup counted Queen Elizabeth II as a regular customer--the Queen bought gift boxes each year after receiving Maud's chocolates as a gift herself--and Borup ran the company for 53 years, until her death in 1960. After that it went through a series of owners before being put up for sale in 2001, when Kim Kalan first heard of it.

At the time Kim owned a lucrative electronics manufacturer, but she was bored. She decided to start selling a line of candies on the side--"All I did was buy some and repackage it under my own label," she says--which she hoped to parlay into her next career. Someone in her local networking group told her about the chocolate business. The owners were six months late on their lease payments. "He thought they'd be willing to sell because they were in such dire straits," she says.

In August 2001, Kim chipped in the proceeds from the sale of her electronics firm, and Mark, the brother of her then boyfriend, who is now her husband, put up the profits from a mortgage brokerage business he ran, and together they bought Maud Borup. It had a single retail store and a factory with outdated equipment, both in St. Paul, along with Maud's recipes, still on her original index cards.

Right away Kim and Mark made changes to grow the company. They remodeled the store in St. Paul and opened two new locations in Minneapolis. In 2002 they bought a wholesale chocolate company called Nelson's, which came with a factory in Perham, Minn., three hours northwest of Minneapolis, and new machines. That acquisition paid off almost immediately, enabling the owners to start filling large orders to corporate clients such as Caribou Coffee and Borders Books. Soon the wholesale division (same recipes, different packaging) was contributing 80% of the company's revenue. Chocolate in the three retail stores sells for as much as $30 a pound, but a single business customer placed an order worth nearly $100,000. With 42 employees and projected revenues of more than $1.5 million, the business was expected to turn a profit in 2003 for the first time since Kim and Mark bought it.

The morning of the train wreck, chocolatier Linda Neppl, 43, was standing over a kettle of caramel when she felt a rush of air rip the hair net off her head. "All I remember was this sound that hurt my ears," she recalls. "The next thing I know, we're running out of the building. Someone opened the door and I saw stuff flying through the air."

The incident was a railroad anomaly. Burlington Northern Santa Fe, which owns the train, averages about 2 1/2 derailments per million train miles traveled, according to Steven Forsberg, general director of public affairs for Burlington. Most of them occur in rail yards at slow speeds--not at 54 mph in the middle of a town. When Kim got the phone call from Mark and drove to Perham, she arrived to find a mess of packing peanuts and jagged metal. "It wasn't like, 'Oh, there's a dent in your building,' " she says. "The building was destroyed." The railcar obliterated 10,000 square feet of the 18,000-square-foot building and all of the company's packaging, ingredients, and inventory, worth hundreds of thousands of dollars. The car itself was wedged in the building. A forklift buried underneath wouldn't be found for a week.

About a dozen employees gathered at a local tavern that morning to contemplate the company's future. They asked Mark about their paychecks. "I couldn't tell them anything besides 'Don't come to work tomorrow,'" he recalls. The only bright spot came in the form of a scratch-off ticket one of the workers purchased at the bar. It paid out $150--about the cost of the frazzled employees' tab.

Immediately Mark and Kim shifted into crisis-management mode. Their factory was still intact, but all their ingredients were gone. (Most of what wasn't destroyed in the crash was condemned by the Minnesota Department of Agriculture, including 412 pounds of nuts, 192 quarts of cream, and 15 pounds of dried egg whites.) To get production rolling again, the owners started calling in frantic orders to suppliers and even made emergency trips to the supermarket to buy armloads of graham crackers. They temporarily closed their three retail stores in stages, shifting inventory until it ran out.

They also appealed to local businesses, whose holiday gift box orders had been a big source of revenue before the crash. The company sent out 83 boxes with a single piece of chocolate, an article from the local paper about the wreck, and a letter asking for help. As of press time about 15 sympathy orders had come in, including one for $5,000.

While all that was going on, Mark and Kim still had the insurance paper work to deal with. It proved to be a far bigger headache than they could have guessed. Before the accident Mark had never read their policy line by line (it's 400 pages), and when he did, he realized their losses might not be covered. The timing of the accident couldn't have been worse, as Maud Borup does about 80% of its annual sales in the fourth quarter. "If this had happened in the summer, we probably wouldn't be underinsured," Kim says.

Part of the problem was that they simply underestimated how much it would cost to recover. Mark initially bought $500,000 in business-interruption coverage, which cost just $700 for a 12-month policy. Given the opportunity, he says, he would have doubled the amount to $1 million--making the premium about $1,400, not including any discounts.

But another problem arose from a simple mistake: A feature in the property coverage called a "seasonal adjustment" is designed to expand the company's insurance during its busy season. The Kalan's seasonal adjustment was for an extra $100,000--probably not adequate to solve all their problems, but enough to help. When Mark read the policy more closely, he realized that the dates covered were December to May rather than the company's true busy season, September to February.

"That may have been just a typo that he and I missed," admits John Hall, the independent agent who sold the Kalans a policy from a company called Acuity, based in Sheboygan, Wis. Considering that Maud Borup had far more inventory than usual in the warehouse when the train hit, the mistake could be a costly one. The agent says it's up to an adjuster whether the correct dates will apply, but Mark isn't hopeful. Jamie Loiacono, vice president of claims at Acuity, says the company is responsible for handling a claim based on the policy that was "in force at the time of the loss." He says, "To start back-dating a policy or adding coverage after a loss because of a mistake not of our own volition is something that we would not normally do. I can't even think of an exception."

Another problem came from Mark and Kim's record keeping--or lack of it. As part of their settlement process, an insurance company accountant had to build a trend line showing what the company's sales could have been if the warehouse hadn't been wiped out. To support their claim, Mark printed out two years of monthly sales reports--logging on to an accounting system he hadn't used since they purchased Nelson's--and annotating the pages with highlights of the company's history, such as the opening of a new store or a major client signing a contract. Meanwhile Kim collected proof of canceled orders and missed sales after the accident, printing out e-mails from customers about caramel labels, reconstructing verbal conversations with buyers, even photocopying pages out of her planner indicating a meeting with a customer. "We'd only been in business with Nelson's for a year in June, so we don't have a history," Kim says. "It's not like we can say, 'In October we always do x amount of dollars,' because our fourth quarter is so heavy and we were on such a high growth rate. We were going to grow Nelson's 200% since we bought it, but the insurance company is saying, 'Prove it.' "

One month after the crash, Kim and Mark gathered their five top employees for a meeting. "Mark and I have no more money to put into this business," Kim told them. "If we don't hit our numbers for next year, we'll either be sold or shut down. That's how serious this is." As of early January they had received a $255,000 advance from the insurance company, but the final claim wasn't likely to be settled until at least late winter. The city of Perham, hoping to keep the company and its jobs in town, had arranged for the Kalans to use a local warehouse rent-free. It's a generous gesture, but it has brought a new set of hassles. The warehouse is a mile from the factory, so completed inventory has to be shuttled back and forth. And when workers run out of, say, peanuts for the peanut clusters, they now have to wait 15 minutes while someone drives over to get more. Moving to and outfitting a new factory and warehouse will eat up more than $100,000 of their business-interruption coverage, and the lost inventory will just about max out their property policy of $260,000. All three retail stores reopened in mid-November 2003, but Kim and Mark anticipated lost revenue from the holidays of $400,000. Valentine's Day is another peak selling time they'll mostly miss.

In the meantime Kim has made it her personal mission to educate her husband, who owns a landscaping business, another brother-in-law, who owns an industrial-cleaning business, and anyone else who will listen about the importance of understanding their insurance policies. So far no one in that group has increased his coverage after hearing about her disaster. Of course, the odds are that something like a train derailment won't happen to someone she knows. But then, the odds were that it wouldn't happen to her either. "I would have had a better chance," she says, "of winning the lottery."