Compared to recent history, natural disasters have been low the past two years, however when they have occurred, they seemed to be supercharged.
This past December, tumultuous weather swept through the U.S. with tornadoes and flooding killing dozens of people. Of the nine powerful twisters that roared through Texas, one tornado was classified as an EF-4 with 175 mph winds. In the central and southern U.S., storms produced massive flooding and threatened 13 states, putting more than 18 million Americans under flood warnings. Missouri took the brunt of the storm with the record historic river flooding.
The damage from the tornadoes will cost Texas an estimated $1.2 billion, and that could go even higher. Looking back at the past decade, weather-related disasters have been very costly. Severe thunderstorms and tornadoes alone caused $15 billion in U.S. insured losses in 2012, following $25 billion in such losses in 2011, when the industry suffered two of the costliest tornado events in U.S. history: $7.5 billion in insured damages arising out of April 2011 twisters that struck multiple states, most notably Alabama; and $7 billion in insured damages that resulted from the May 2011 multiple-state tornado outbreak.
In February 2013, winter storm Nemo dumped 40 inches of snow on Connecticut, leaving 700,000 customers without electricity and causing 18 deaths. And, in October 2012, Hurricane Sandy devastated the Mid-Atlantic and New England regions, killing 285 people and causing more than $75 billion in damage.
What is most concerning is that many of the most devastating U.S. disasters struck regions where such weather is uncommon. Based on these historical weather findings, we can safely say Mother Nature is unpredictable. Businesses need to understand that they are at risk of at least one type of natural disaster — even though it may not be common to their area.
While natural disasters cannot be prevented, businesses can protect themselves:
Your business will need a team and a team leader to draw up plans for how a disaster will be handled. (Photo: iStock)
Form a disaster recovery plan and team
The first step in preparedness is establishing a cross-functional disaster recovery team onsite that will meet at least every trimester.
This team should be responsible for evacuation planning and execution, as well as the organization's speedy recovery thereafter.
First, identify a strong leader for the team and provide explicit responsibilities for that leader, similar to a job description. Leading the team will be a time-intensive role that requires commitment throughout the year — not just in the aftermath of a disaster.
It will be necessary that the team leader be given time and flexibility throughout the course of the year for opportunities to continue to examine, hone and refine the disaster recovery plan. Also, be sure to clearly define how the CEO or other executives will interact with the team leader, as this can be a source of contention if not properly defined before a disaster occurs.
The best leaders will have a solid team supporting them, so choose the team members carefully. They should come from a cross-section of all levels and functions within the organization.
Rather than treating the disaster recovery team as an "added responsibility," engage team members on the basis that the team is part of their professional development and the organization's succession planning.
What kind of bad weather is a typical threat for your area? (Photo: iStock)
Identify your weather trends
Every state in the U.S. experiences severe weather of some kind.
The new challenge is that the weather patterns we've grown accustomed to are changing and becoming difficult to predict through "traditional" models.
Coastal areas are no longer the only ones who need to consider flood insurance, for example
If a disaster happens, how would it affect your business? (Photo: iStock)
Assess the potential impact of a natural disaster on your business
Identify the emergencies that can happen if a weather catastrophe occurs.
Ask yourself how a natural disaster could affect your employees, your property (or properties) and critical aspects of your overall business?
Investing in an insurance policy before a natural disaster can be more cost effective, than seeking to purchase one after a disaster has already occurred.
Do you really know what your policy covers? Does your policy cover all contingencies that can be caused by a natural disaster? (Photo: iStock)
Understand your insurance coverage
Review your insurance policy to determine if you have adequate insurance depending on the weather conditions that impact your area.
The swaths of disasters (from Katrina through Sandy; wildfires and tornadoes) have devastated the resources of governmental and nongovernmental agencies. Counting on them for primary aid is no longer guaranteed. The best practice would be to have coverage that enables you to quickly recover from a weather-related disaster.
It's also important to understand the covered perils and sublimits in your policy:
- Covered perils: Meet with a professional broker to determine covered perils and assess the level of coverage for wind, storm and flood. Consider expanding the policy to include some level of coverage for perils that may not be that common in your geographic region in order to be prepared for atypical events.
- Sublimits: A sublimit is part of, rather than in addition to, the limit that would otherwise apply to the loss. In other words, it places a maximum on the amount available to pay that type of loss. For example, under a commercial property policy with a $200 million blanket limit applicable to loss from all other causes, there may be a $100,000 sublimit on coverage for loss from flood, a $500,000 sublimit on loss from earthquake, and a debris removal sublimit of 25% of the direct-damage loss amount. It is critical that you understand what the sublimit is for evacuation response expenses, business interruption and remediation. Similarly, deductible levels vary for certain losses from natural disasters (such as flood, earthquake or wind) and can be misunderstood and costly following a loss.
Be aware of what your insurance policy excludes — including the breadth of those exclusions. A "flood" exclusion is much less broad than a "water" exclusion, and those differences can change your recovery costs by dramatic amounts. Also, consider the following:
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Are you eligible for National Flood Insurance Program coverage? If so, do you have it specifically for each building?
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Is your "extra expense limit" part of the blanket limit or part of the stand-alone limit?
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Does your policy make you subject to proportional spending of the extra expense limit over specified time periods, or do you have access to the whole amount up front?
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If a disaster strikes during business hours, do you know where you and your employees will be safest? (Photo: iStock)
Develop a shelter-in-place plan
While having an evacuation plan is critical, there may be many situations, such as a tornado, flood or air contamination warning, when it is best to stay inside avoid any uncertainty outside.
In these situations, a shelter-in-place plan is essential. This plan will have different elements than the evacuation plan. For example, determine what areas of the building will serve as shelters in the event of a disaster. Keep in mind that a tornado will require shelter on the ground floor or below ground, while a flood warning would require a different shelter location.
Next, develop a warning system for the location, as well as a system that accounts for who is in the building in the instance an emergency. With regularity, test the warning system, practice the in-shelter plan, and check the stock of emergency supply kits.
It's a fact that natural disasters are unexpected and can hit your region at any time. Businesses need to ask themselves, "How do I maximize my insurance coverage, to best limit my financial exposure?" The most effective way to protect your business from the damage and devastation of a natural disaster is to look into a customized insurance plan based on your business needs.
Kevin D. Smith, CPCU, ARM is vice president of the Philadelphia-based Graham Co., an insurance and brokerage. He is the leader of its real estate and international divisions, and also manages the company's group captive.
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