An industrial plant explodes in Texas. Bombs shut down the city of Boston. A hurricane floods the East Coast with water.
All those recent disasters caused tremendous human suffering. All of them, too, brought devastation to businesses large and small. From damaged buildings to wrecked inventory to disrupted supply lines, natural and man-made disasters can tear a huge hole through profitability. In many cases, businesses close their doors for good.
Plan for recovery
What lessons can we learn from all this? Hereβs one: Business owners must design and implement disaster recovery plans designed to mitigate harm when bad things happen. With that in mind, now would be a good time to revisit your own recovery plans with a fresh look. Are you taking the right actions to minimize damage if you are hit with a wind storm, a lightning strike, a flood or a power outage?
Your answer might well be βno.β Too often, the details of disaster planning get shortchanged for pressing matters such as issues with personnel or suppliers. Thatβs a mistake. No matter how successful your operations, everything you do can come to a halt if thereβs no Plan B when Plan A gets derailed.
βA bad event can take down a company forever,β says Jeffrey Williams, president of Binomial International, a disaster planning consultancy in Ogdensburg, NY. βThatβs why itβs so dangerous for businesses to keep disaster planning on the back burner.β
In approaching a redesign of your own plan, experts counsel taking a broad view, incorporating as many βwhat-ifsβ as possible. βThere are three types of disasters,β says Williams. βThe first is natural. Think weather. The second is technical, when equipment fails. The third is a human error, what people do to other people. That can be sabotage or a fire.β Advice from Williams: plan for all three.
Offsite data
Suppose you were forced out of your building right now. Maybe you are the victim of a fire, flood or wind storm. How would you continue your business? The likeliest answer would be βwith great difficulty,β unless you have taken measures to assure the maintenance of a certain level of customer service and sales.
βBusinesses can take a number of steps to assist in getting through a crisis before the next disaster strikes,β says Chris Hackett, director of policy development in the research division of Property Casualty Insurers Association of America (pciaa.net). Perhaps one of the most important, he says, is the determination of a temporary relocation site.
Take This Disater Quiz
Score 10 points for each βyesβ answer to these 10 questions. Then total your points. If you score between 80 and 100 you are in a safe zone. Results between 60 and 80 mean you need to dust off the emergency plan. Score less than 60? Take immediate steps to get your disaster plan up to speed.
Have you β¦
- Backed up your data regularly to an off-site location?
- Identified a remote site for relocated quarters?
- Arranged for an alternative Internet network?
- Assigned key employees specific tasks in event of emergency?
- Drawn up co-worker and client call lists and assigned them to employees?
- Detailed your list of emergency responders?
- Selected vendors for emergency repairs?
- Obtained property insurance for 100 percent of replacement cost?
- Maintained regular inventory; taken photos as appropriate?
- Obtained business interruption, flood, and earthquake insurance if appropriate?
That temporary site might be a basement in your home, or a rented room in another city. Whatever the location, it must be one where you can access your critical files. That includes your accounts receivable so you know who owes you money. It also includes your customer lists to protect your future revenues. Keep a computer at this location with continually updated company data.
On the topic of alternatives, make sure you have a fallback Internet network into which you can plug your devices. And have a call forwarding plan prepared that will route incoming calls.
Finally, put together an offsite list of emergency responders. These are people youβll need to call to help solve the problems the disaster has caused. Include the following:
β’ Your attorney, accountant, and insurance agent.
β’ Any firms that can accomplish recovery tasks such as water removal, cleaning, hauling rubbish, painting, repairing electrical and plumbing systems, replacing locks and getting computer equipment running.
β’ Real estate agencies that can help you set up a remote operational base while restorations continue.
The remote location is one thing: Having people who take the right actions is another. Identify the steps youβll need to take when disaster strikes, then assign them to key personnel. βThings will go much smoother if everyone knows what they ought to do in a crisis,β says Williams.
Assign the following tasks to some key individuals: 1) Calling employees and customers to let them know what has happened. 2) Notifying suppliers and insurance companies. 3) Arranging for repair work by plumbers, electricians and restoration contractors.
Review property insurance
Do you have sufficient property insurance in place? What may be good one year may no longer be adequate several years later. So revisit your policies with a trusted advisor. βItβs always good to have regular session with your agent every year or so to review what you have,β says Hackett.
The No. 1 insurance category is, of course, property insurance that covers fire. βAs it relates to fire, policies should insure your structure for 100 percent of its replacement costs,β says Hackett. Replacement cost is the amount necessary to rebuild your structure using construction materials of like kind and quality. If you are thinking of adding an addition, or making renovations, that will substantially increase the amount necessary to repair or replace your property, you should inform your agent. If you have not done so, the settlement under the policy will be based on the replacement cost information the carrier had on file at the time of the loss.
Also, consider your deductibles. βThere are pros and cons to having higher and lower deductibles,β Hackett says. βLower deductibles mean less money out of your own pocket after a covered loss but cost more in premiums. Higher deductibles mean lower premiums but more out of pocket costs when disaster strikes. You have to decide for yourself what you prefer. Ask yourself, if a loss happens tomorrow, would I be able to come up with the deductible or not?β
Insurance is great, but be prepared to prove your losses. βItβs important to take inventory of the items in your business,β says Hackett. βWalk through your building with a camcorder and make a video. That will help expedite the settlement of your covered loss with the claims adjustor.β Store the video offsite in a safe or bank safe deposit box.
Protect your revenue stream
A disaster can interrupt sales, and that means your expected revenue stream can dry up quickly. Think about buying protection. βBusiness interruption insurance provides critical coverage for lost incomeβwhat your business would have earned but for the physical damage of a disaster,β says Hackett.
Flood insurance premiums
Why is flood insurance so expensive? βTypically, the only people who buy flood insurance are those who expect a flood,β says Michael Sapourn, a Satellite Beach, Fla.,-based attorney who has dealt extensively with flood damage insurance and litigation. βSo you donβt get the spread of risk necessary to keep premiums from escalating.β
As a result of that lack of spread of risk, private carriers generally donβt offer standard flood insurance. The federal government, through FEMA, is the ultimate underwriter for first dollar flood insurance policies. βBecause the federal government has taken major losses in this area in recent years, rates have been rising,β says Sapourn.
The federal government has set limits on how much they will write. For commercial property, those limits are $500,000 per building and $250,000 on inventory. (Coverage is half those limits for residences.) βHowever, you can get excess flood insurance through the private market, negotiating what limits and premiums you can,β notes Sapourn.
Purchasing interruption insurance requires thorough consultation with your agent. βItβs not as simple as an auto policy,β says Hackett. βThe carrier will ask you questions about the nature of your business, your employees, your typical income in a month, and whether your business is seasonal in nature.β
You might also consider βextra expenses coverage,β notes Hackett. βThis insurance covers the higher expenses you might incur by moving to a new location, such as higher rents and the costs of relocation.β You can also get coverage for payroll expenses. βJust because your business is shut down, that doesnβt mean people will not expect a paycheck,β says Hackett. βPaying them can be difficult if you are not taking in any income.β You can purchase such insurance just for the highest paid employees or for your entire staff.
Two more things. βContingent business interruption insuranceβ covers the lost income that results when a supplier is unable to deliver. You can also purchase whatβs called βextra contingency expenses insurance.β That covers the higher prices you might end up paying to an alternative supplier.
Should you get either? βIt depends on the nature of your business,β says Hackett. βItβs particularly important for manufacturers which assemble products in one location but utilize parts from elsewhere. Retailers may also need the insurance if they depend upon suppliers in different locations to keep their doors open.β
Underwater
Standard property insurance policies generally cover water damage that results from pipes bursting. Not covered, however, is flooding from causes such as tidal surges, the overflow of rivers, or water flowing down from a mountain or along the ground.
βDamage from flooding can be catastrophic,β says Michael Sapourn, a Satellite Beach, Fla.,-based attorney who has dealt extensively with flood damage insurance and litigation. βThose who own buildings located in areas vulnerable to such events should purchase flood insurance.β
βMuch litigation results from the difficulty in distinguishing between water damage caused by windstorm (which is covered by standard property insurance policies) or from other causes such a tidal surge. Carriers often litigate the gray areas where windstorm ends and tidal surge begins.β
Mortgage lenders will require you to buy flood insurance if you are located in a flood zone, as defined by FEMA. βBusinesses which have paid off their mortgage often drop flood insurance since they no longer have a lender who requires it,β says Sapourn. βThatβs a mistake.β
Finally, donβt make the common mistake of being underinsured. βDonβt try to save money by lowering limits. Get the coverage limits you need to protect you from a total loss.β
Flood insurance policies are typically not available on a replacement cost basis, so you will need to estimate what you need to rebuild. If you have an older building, you may not be able to get the policy limit you want from FEMA, so you may end up going into the private market for excess insurance.
Once you have your recovery plan and your insurance policies in place, you are in a much better position to survive should you be hit with a disaster. But donβt just toss your recovery plan in a desk file and forget about it. Advisors counsel reviewing the program annually.
βDisaster recovery planning is an evergreen issue that is never done,β says Williams. βPeople change jobs, functions change, mobile phone numbers change. Keep revisiting your plan.β You donβt want to be caught without a lifeline when a crisis hits.
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