DISASTER RECOVERY 
JOURNAL
P. O. Box 510110
St. Louis, MO 63151
(314) 894-0276 
Fax: (314) 894-7474
Internet www.drj.com 
E-mail drj@drj.com

PUBLISHER
Richard L. Arnold, CBCP
richard@drj.com

EDITOR-IN-CHIEF
Jon Seals
jon@drj.com

SENIOR EDITOR
Janette Ballman
janette@drj.com

COPY EDITORS
Richard Sandhofer
richards@drj.com
Pamela Clifton
pamelaclifton@hotmail.com

ADVERTISING 
Robert Arnold
bob@drj.com

_____________

Corporate

President/CEO
Richard L. Arnold, CBCP
richard@drj.com

Vice President 
Robert Arnold
bob@drj.com

CONFERENCE COORDINATOR
Patti Fitzgerald, CBCP
patti@drj.com

CONFERENCE REGISTRAR
Merce Knese
 mercedes@drj.com

CIRCULATION
Laura Baugh
 laurab@drj.com

EXECUTIVE COUNCIL
Jeff Dato, MBCP, KPMG
John Jackson, J Albright Advisors
Edward Devlin, E.S. Devlin & Associates
James Hammill, CBCP, JMH Consulting
Pat McAnally, SunGard Availability
Brian Turley, Strohl Systems
Belinda Wilson, Hewlett-Packard
INTERNATIONAL
CONTACTS
England: Thom Hetherington
Business Continuity 
Phone: 0161-237-1007
 thomh@tempus.demon.co.uk

Australia: Anthony J. Harvey
Journal of Business Continuity
Phone: 0011-613-953-0055-8
fax: 0011-613-953-0528
 sector@notability.com.au

Japan: Shinji Hosotsubo
Quake Japan Co., Ltd.
Phone: 03-3215-2880
fax: 03-3215-2881

 

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Small Business Case
The Possibility of Disaster Recovery For Small Businesses

By JOHN KAUFFMAN,
CSP, CBCP, ARM, ALCM

Can small businesses recover from significant disasters? The answer depends on a number of variables such as the size of the business, its location, its financial strength, and the direct and indirect effects of the event.
Did you know there were approximately 22.9 million small businesses in the U.S. in 2002? Did you also know small businesses provide approximately 75 percent of the net jobs added to the economy or that they represent 99.7 percent of all employers?
These are eye-opening statistics, but statistics can be somewhat misleading. To qualify as a small business, the Small Business Administration (SBA) has established size standards. The most common size standards for defining small businesses are as follows:

  • 500 employees for most manufacturing and mining industries
  • 100 employees for all wholesale trade industries
  • $6 million (average annual receipts) for most retail and service industries
  • $28.5 million for most general and heavy construction industries

For many of us, these numbers do not equate to our perception of a small business. For the sake of this discussion, let’s describe a hypothetical business.
Let’s assume the business is a relatively upscale restaurant located in a busy retail area of Tampa, Fla. The restaurant leases space in an historic building built in 1925. The building has been completely renovated and updated, including the addition of sprinklers. The restaurant contains typical equipment, including full commercial kitchen, refrigerated coolers, dry food storage, and wine cellar located in the basement. The business employs approximately 50 people.
What would happen if the business were to face a Category 4 hurricane that results in significant damage to property and infrastructure? Such a storm would likely involve loss of utility services and substantial flooding from storm surge and wind-driven rain. How would the business recover?
Three major areas of recovery would include recovery of people, recovery of facilities, and engaging the insurance program.

Recovery of People
As soon as possible, a business should first account for all employees. Employee contact information should be stored off-site for this purpose. The business can use a phone tree, an 800 number, or Internet site as possible ways to assess employee safety and ensure that communication takes place throughout the recovery process.
Depending on the situation, people may or may not be readily available to resume business operations. Some events may be severe enough that the business may lose staff members to injury or death. Workers may be so traumatized by the event they simply will not return to work. Even though employees may be able to work, they may be busy taking care of their own family needs and put the business’s needs secondary.
After the event, the business will need to assess the viability of personnel and facilities. In a significant event, the safety of people is primary. Determine to what extent people are available to resume operations. Consider the following:

  • How many employees are needed to resume at least part-time operations? Here you need to consider the areas of expertise and qualifications of the available staff. In the case of the restaurant, the chef and his/her assistants are critical to resuming operations.
  • Determine if there are shortfalls in critical areas. Are workarounds possible? Could the restaurant hire temporary part-time wait staff, kitchen staff and bartenders?
  • Assess the employees’ condition. How many employees are physically and mentally able to return to work? If the restaurant cannot staff appropriately, then opening at all might be problematic.
  • The business should consider providing appropriate counseling for employees and their families. For some small businesses the financial impact to provide such a service may be too high but they should at least consider referrals to outside agencies.
  • Develop and implement effective communications with employees and appropriate government agencies. Communications should address the following:
    • Status of the business and its ability to continue to operate.
    • Work status for employees.
    • Notification of insurance agent and insurance carrier to initiate the claims process.
    • Interface with government agencies to obtain available and necessary assistance and guidance.

Recovery of Facilities
Recovery of facilities will depend not only on how much damage the facility itself suffers, but also the damage to other nearby structures and to the infrastructure in the immediate area. Keep in mind that the business may not suffer any physical damage to its property but still may be unable to occupy its facilities. In the case of our restaurant, the viability of the business can be a concern even if the facility is intact. The question would be, “Where are the customers?”
As soon as practical, the business should assess the damage to, and viability of, its facilities. An event large enough to destroy one or more of the business’ facilities requires a recovery plan to determine how, or even if, operations can resume. Consider the following:

  • Determine if facilities can accommodate at least part-time operations. Facilities that have been significantly compromised require use of alternative sites.
    Ideally alternate facilities should be identified in advance. For the restaurant, renting additional space could be a significant problem, especially if equipment was severely damaged and replacement equipment had to be located and leased or purchased. This may not be feasible. Additionally, there would be costs associated with advertising the new location. If the original location relied on considerable local foot traffic, there would also be an expected drop in customers willing to travel to a distant location.
    Portable, temporary structures could be secured to permit temporary operations for some types of business. However the problems of equipment and the fire and health code issues would work against locating a restaurant in a temporary structure.
  • Determine if facilities are accessible. Even if the facility is relatively undamaged, significant infrastructure damage to area roads and bridges may prevent employees and customers from getting to the facility.
  • Determine the viability of computer and information technology systems. Ensure the following before the event:
    • Back-up data regularly and store back-up media offsite.
    • Periodically test back-up data to assure that it can be accessed and implemented properly.
    • Ensure that changes in IT applications and hardware do not materially affect the ability to access back-up data.
    • Institute a formal program for records protection, retention, and destruction.

Small Business Recovery Viability
“Recovery” is not the same for every business. Larger businesses tend to recover better than smaller ones. Common sense would dictate that larger businesses have more resources than smaller ones. A recent study, funded by the Public Entity Risk Institute (PERI), provides some interesting findings concerning small business viability after a significant event. The PERI study indicates:

  • Traditional precautions to protect structures and people against an event do not necessarily help businesses survive. The study was unable to establish a statistical relationship between the amount of structural damage businesses experienced and business survival. It concluded that traditional structural precautions are necessary to reduce loss of life and property, but are insufficient to help businesses survive.
  • Most businesses do not fail immediately after the event. Results from the Northridge earthquake in California indicate that most businesses did not fail until two, three, or four years after the earthquake. Only the weakest firms fail right away after a disaster. Most firms that ultimately fail do so after a desperate struggle to recover. SBA loans are not an adequate answer.
  • Most losses do not occur during and right after the event. Business losses go far beyond the initial damage to structure, equipment, and inventory. They include business interruption, lost income to employers and employees, and lost assets in the form of business equity.

The PERI study also concluded there are strong indications the variables that set apart those that survive from those that do not can be isolated. Important variables learned from the Northridge earthquake include:

  • Other things being equal, businesses whose customers were not affected adversely by the earthquake had a much better chance at survival than those whose customers had significant losses.
  • Businesses with more than one location were more likely to survive than those with a single location.
  • Businesses that relied on customers’ discretionary income for their sales were more likely to fail than those that provided more essential goods and services.
  • Businesses whose owners were able to adjust to changes in customer demand were much more likely to survive than those whose owners simply pursued their pre-earthquake activities in the same old way.

Firms that survived and recovered immediately or within two years after the earthquake were larger and did business in more than one location and/or had customers in unaffected areas and were financially stronger. The study also found survivor businesses typically were led by flexible and innovative entrepreneurs.
Using this measure, our small restaurant has three factors that bode poorly for survival. First, restaurant customers would be affected by the significant property and infrastructure damage, including loss of utilities. Second, it has a single location. Third, it relies on customer’s spending discretionary income.
Depending on how long it takes to rebuild properties and the infrastructure, the restaurant could be starting from square one if or when it does reopen. During the down time, no revenue is generated and customers may find a different restaurant they like as well or better. Those customers may not ever come back.
So, what is the business supposed to do?

Engage the Insurance Program
In some cases, the event is so severe and widespread the ability of the business to recover depends on a comprehensive insurance program. Although insurance is only part of a sound risk management or business continuity program, in some cases it will be the main recovery tool. Referring to the restaurant, the insurance program may become the only means of fully recovering from the event. Consider the following:

  • During the preparation phase of the business continuity plan, management needs to meet with the insurance agent/broker and the risk manager or insurance buyer to assess the insurance needs of the business and develop a comprehensive program to address them.
  • After the event, the business needs to contact the agent/broker or insurance carrier claims department as soon as possible. This can become problematic if phone service and power interruptions occur. In large events, most insurance carriers will set up emergency claim centers to assist claimants. To facilitate the claim adjustment process, the business should have record information, such as policy numbers, business financial information, personal identification, and contact phone numbers and addresses.
  • In the event of a major disaster, it could take months or even years before infrastructure and utilities are restored to usable levels. The business will have to decide if it can survive the reconstruction period. In some cases, relocation will be necessary. The insurance program plays and integral part in the business’ ability to rebuild or relocate to another site.

So what insurance coverage should our hypothetical restaurant consider to mitigate the business continuity problems after a major event? Consider these basic coverages (Note: These are not intended to be all inclusive. Before making any decisions on appropriate insurance coverage, the business should seek the advice of a properly licensed insurance professional.):

  • Property insurance – This would include building and contents (business personal property) coverage. Determine if the business needs additional property coverage such as:
    • Flood insurance – Flood insurance is provided by the National Flood Insurance Program and is not included in most standard property policies.
    • Earthquake – Earthquake coverage is not included in most standard property policies.
    • Volcanic eruption – Volcanic eruption coverage is not included in most standard property policies.
  • Liability insurance – Commercial General Liability (CGL) policies are the main liability policies that most businesses purchase. Depending on the type of business, there are special liability coverages that might be considered such as:
      • Directors and Officers Liability
      • Educators Legal Liability
      • Errors or Omissions Liability
  • Workers’ compensation – Covers workers for injuries and illnesses suffered on the job, arising within the scope of their duties.
  • Business income/extra expense – Business income insurance provides coverage for lost revenue and normal operating expenses during the time the business is not in operation. Extra expense insurance provides for expenses incurred, such as temporary relocation or rental of equipment to avoid or minimize the suspension of operations.
  • Tenants improvements and betterments – Provides coverage for fixtures, alterations, and installations a tenant makes to a building he occupies but does not own.
  • Additional property coverage – Provides coverage for items such as fences, awnings, pools, etc.
  • Ordinance or law – Provides coverage to rebuild or repair the building in compliance with the most recent building codes.

The restaurant may find that most of the above coverages are necessary to insure against the results from a significant event such as a large hurricane. Although all of these policies may be important, one of the most overlooked but often critical coverages is business income insurance. When events produce significant property and infrastructure damage to a small businesses, business income may mean the difference between reopening or starting again somewhere else.
In some cases, a small business’s insurance settlement will actually become the disaster recovery plan. While some may take the money and run, many businesses will try to rebuild and recover. This could be a viable option or merely prolonging the inevitable failure. Unless the business can adapt to the new reality after the event, the idea of recovery back to the way it was before the event is shaky at best. Our restaurant with its reliance on foot traffic may reinvent itself, at least in the interim, as a caterer for schools, businesses, and other customers.
There’s no easy way to determine whether a specific small business can recover after a significant disaster. Certainly, all businesses will attempt to recover their people and facilities, but there are just too many variables involved for a quick answer. A solid, comprehensive insurance program may provide the financial influx to make the recovery at least feasible. If not, at the very least it may provide enough capital to start over in a new location or in a new type of business.

John Kauffman is an experienced loss control professional who has worked as a field consultant and home office technical resource for major property-casualty insurance companies. His areas of expertise include general liability, products liability, and business continuity.

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