Hurricanes Blow Away Poor RM Plans

The 2005 hurricane season has shown that you can never plan too much. Widespread human suffering, including massive displacement of a population center compounded by near total destruction of infrastructure, however, deemphasizes the catastrophic effect on businesses.

Businesses of all sizes were destroyed or completely shut down. As the most catastrophic hurricane season on record drew to a close, risk managers began to reflect upon what they could have done differently and how they might prevent or cope with a reoccurrence. Although it's impossible to avoid all the effects of a storm such as Katrina, certain lessons are valuable.

Even though natural disasters often can be anticipated, they are anything but predictable. A comprehensive disaster recovery plan prepared well in advance is one of the best means for minimizing a company's risk and damages. In the absence of a plan, responding to a disaster will require timely mobilization of resources, including employees, owners, management and business partners (such as suppliers, the community and government).

Insurance is the most common tool used to mitigate the risks associated with natural disasters. However, many businesses found themselves with insufficient coverage to protect against the likes of Katrina.

When preparing for business interruption, it is important to remember that physical damage to insured property is the primary trigger for business interruption claims. The next most common trigger is power or utility interruption.

Although natural disasters typically inflict significant physical damage, lack of power, water and other utilities might inhibit operations at properties that did not suffer physical damage. Many insureds suffered loss of utilities during the 2005 hurricanes and were not prepared for the economic consequences of this peril.

Business interruption coverage for off-premises services interruption will respond to such circumstances. Coverage, however, usually includes a waiting period, sublimits and may exclude some of the more common off-premises power losses such as those arising from downed poles, towers, and transmission or distribution lines.

The most prominent coverage extension in play as a result of Katrina is contingent business interruption and contingent extra expense. Coverage for lost income and extra expense due to physical damage to customers, suppliers and feeder type properties has been essential to many firms that normally relied upon Gulf State firms for products, supplies or as customers.

Those without this coverage extension have found themselves at the mercy of a supplier or customer's rebuilding schedule. In worst cases, they completely shut down due to a supplier or customer's physical loss.

Once a business has purchased “business interruption coverage” it will be indemnified through the period of interruption, which is also known as the indemnity period–often defined as the time it takes to rebuild or restore the damaged property to its pre-loss condition using due diligence and dispatch.

Complications arise when enhancements are made, if the rebuilding process takes place at an alternative location, or if the reconstruction period is delayed. Thus, coverage for an extended period of indemnity beyond the physical restoration of the damaged property is highly recommended for businesses in a competitive environment.

This extended period allows for continued indemnification for the time necessary to ramp up the business following physical restoration. Businesses located in the Gulf States without extended period of indemnity coverage may have a prolonged period of uninsured income losses as the region slowly returns to normal.

Executing a disaster recovery plan is the first step in mitigating the risk that businesses face when hurricanes strike. In fact, initial actions can determine whether or not a business survives.

After life and safety issues are addressed, insured businesses should make sure property is protected. Failure to take reasonable precautions to protect property before, during and after an occurrence may jeopardize the actual recovery process–this is a requirement under most commercial property policies.

Theft and looting frequently follow a natural disaster and may present coverage issues. Therefore, if possible it is imperative that businessowners secure their property and make all reasonable efforts to shield it from further damage. Expenses incurred to protect property from imminent destruction are usually covered under the “Sue and Labor” provision of the property policy.

Timely notification, either directly to underwriters or to the broker/agent, is also a requirement under property policies. Certain states deem late notice as prejudicial, which can void rights to indemnification.

Underwriters, agents and brokers are also a vital resource for identifying contractors to assist with the physical damage, and they may be familiar with government programs available to commercial properties.

In addition, insureds often overlook the value of a company's business partners when recovering from a catastrophe. Suppliers, customers, lenders and employees should be informed as soon as possible.

Many businesses have implemented call-in phone numbers and Web sites for employees and business partners in the event of a catastrophe. A disaster recovery plan should include notification redundancies to overcome any disabled communications.

Property polices require the insured to perform an inventory of damaged property. Practical difficulties often arise when the insured peril is so severe that damaged property no longer exists. When preparing for disaster, it is imperative to take pre-loss pictures of property and equipment.

Documentation including pictures, blue prints, drawings and floor plans, as well as accounting and legal records, should be kept off premises–this information can be used to recreate the inventory required under an insurance contract.

Business partners, including the property's insurance broker, accountant and general contractor, will also play a pivotal role in the claims process.

Because business accounting systems are not designed to track insurable property and business interruption losses, modification to accounting systems is necessary to record transactions in accordance with the policy's coverage. Concepts such as extra expenses, debris removal, ordinary payroll, sue and labor, and expediting expenses are alien to existing business systems.