By Bill Barbato, 2VP of Risk Control, Travelers Boiler & Machinery
The continental U.S. is in the grip of one of the worst winters on record. Snowstorms, sub-zero temperatures and other extreme winter weather is even affecting regions that typically experience only mild winters.
Agents and brokers should prepare their commercial real estate clients to mitigate losses arising from bad weather through business continuity plans. Although this discussion should include a review of the client's current business insurance policies and loss exposures, it should also include a discussion about the risk of equipment breakdown; an often-overlooked risk that cost commercial real estate companies hundreds of millions of dollars in losses this year.
Many businesses may not understand how vulnerable they are in today’s computer-driven electronic world, nor do they realize how equipment breakdowns can impact their bottom line. For example, a company’s 200-ton air-conditioning system froze last summer due to a control failure. As a result of advance planning, the company was able to rent a unit while its system was being repaired. Without a plan in place and insurance to cover unforeseen additional expenses, this event could have cost the company upward of $50,000 dollars.
Few businesses can withstand setbacks like this. Not only are they costly, but they can damage productivity and severely test client relationships.
It is important to speak with clients about ways to mitigate the risks of equipment breakdowns when establishing a business continuity plan.
Click on the following pages to see the three key points to cover:
1. Identify critical equipment exposures in your client’s business processes.
Every company has equipment functions that are critical to its core business. Agents can guide their clients through this first step by helping them identify all of the critical equipment in their business process. For each piece of equipment, the business owner should ask a few primary questions:
- If this piece of equipment breaks down, what would happen to our operations?
- How long could we tolerate the disruption?
- Who could provide a repair or replacement?
The type of equipment critical to operations will vary from business to business. For example, an office building will typically have a heating system, air conditioning equipment, computer and telephone systems and other electrical equipment, while a hospital will have these items plus high pressure boilers, transformers, medical diagnostic equipment and other specialized plant services.
2. Ensure proper routine maintenance
Failure to conduct routine maintenance is a common mistake that many building owners make, so it’s vital that agents work with their clients to verify that this critical activity is being performed. Key questions a building owner should ask include:
- Am I maintaining equipment per the manufacturers’ recommendations?
- Are my maintenance activities being documented to create an equipment maintenance history record so I can spot trends and better plan future maintenance activities?
- Have I identified qualified service providers and the availability and location of routine replacement parts?
Routine inspections and preventative maintenance in accordance with manufactures’ guidelines are the most important activities that a business owner can perform to help avoid unplanned equipment outages.
3. Include equipment breakdown contingencies in your business continuity plan
A well-developed business continuity plan helps ensure a business can remain in operation after an unforeseen event. A business continuity plan should include contingencies that consider how to recover should an equipment breakdown occur. For each piece of critical equipment, the plan should identify reliable sources for repair parts and qualified service providers that can assist in repair or replacement. Also, the plan should identify where rental equipment can be obtained; how and where that equipment can be installed; who is qualified to operate it as well as any special license or permit that may be necessary or required. The plan should be well documented and familiar to key management personnel. Finally, the plan should be tested to verify that it can be implemented within the required recovery timeframe and reviewed annually to ensure the plan remains relevant.
Although a business continuity plan is essential, it should be combined with proper insurance, including an equipment breakdown policy. This coverage typically covers repairs or replacements as needed, makes up for lost income due to a business interruption and gets the business back up and running quickly. Insurance agents and brokers who can serve as an expert advisor on insurance products and help clients to identify and manage these types of risks will increase their value to their clients and prospective clients.