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Volume 27, Issue 4

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October 30, 2007

In Three out of Four Cases: Business Interruption Can Be Fatal

Written by  Nelson Bean
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In today's competitive environment, a business must achieve continual improvement just to stay even in the market place. Any interruption in one's presence in the market place is devastating. It is, therefore, incumbent upon management to respond immediately to any catastrophic event which interrupts the business and restore its operation as quickly as possible.

Subsequent to a catastrophe, many executives become distracted by the challenge of getting the building and equipment repairs completed rather than continuing their business function. This distraction may be challenging, but it is deadly. Businesses, large or small, begin dying the moment a catastrophe occurs. Restoration of business must proceed at the highest level emergency. After a serious catastrophe at a BASF Corporation facility, director of insurance Karl Heinz Jaeger, stated, “Business interruption losses can be a major threat to a company and in the worst cases could lead to bankruptcy for even the biggest of companies.”

Focus on the Customer

Customers, be they retail, wholesale, or service-oriented, must continue their supply from some source. Even if the damaged business can maintain a continued supply by virtue of partial operations, the customers feel it necessary to look for secondary sources of supply in case their now-damaged primary source of supply fail. If supply is interrupted, these customers must go elsewhere immediately, and their orders may be difficult to regain.

Beware of Hidden Costs

In addition to the strong potential for loss of business, there are other hidden, and often uninsurable costs which combine to create a devastating effect on the business. These hidden costs begin accumulating immediately after the disaster occurs. Some of these costs include:

  • Vastly increased unemployment compensation premiums resulting from the layoffs in the work force.
  • Substantial increases in advertising and special promotions expenditures necessary to rebuild the volume of business.
  • Often underestimated and significant cost of training new employees or eliminating the “rust” from old employees who have been idle for a period of time.
  • Increased production mistakes inherent in a restart with new or rusty former employees.
  • Overall lowered level of efficiency in the operation which adds significantly to the cost of production.

These hidden costs may sound innocuous; however, they are deadly in 71% of catastrophes which produce a “temporary” facility closure.

Even when the damaged business regains its pre-catastrophe volume, generally there will be a significantly reduced profit. In a worst case scenario, after a catastrophe there will be a net loss where that same volume during the pre-catastrophe period would have resulted in a reasonable profit. This is due to the combined effect of the hidden losses which accounting systems are generally not set up to track. Consequently, the business person is often unaware of the problems which are causing cash flow difficulty.

These circumstances contribute to statistics cited by BASF/Wyandotte which show that 43% of businesses closed by a catastrophe never reopen. Twenty-eight percent of those that do reopen, experience financial failure within three to five years. Those that never reopen simply do not have the financial resources to weather the period of time they are closed due to the catastrophe.

These numbers include those which are well insured because many of the hidden costs are not insurable expenses. Those that are insurable are often under-insured due to underestimating the maximum foreseeable loss. Clearly, immediate action must be taken if a business is to have any chance of recovery.

Act Immediately

After a catastrophe, the insured should immediately concentrate on the health and continuation of the business. Sales staff should contact customers, thank them for their past loyalty, and assure them an aggressive effort is being taken to restore the business and, therefore, the supply. Appropriate management staff should have immediate and frequent communications with the employees so they are available when the business reopens. Accounting staff should follow through on collections, billings, payables, and vendor communications. Furthermore, management should focus on locating additional inventory, preparing reopening advertising, and developing new promotions to restore the business.

The restoration of a facility should be left to professionals capable of doing so at a high rate of speed, while working closely with the insurance provider. It should be obvious by now that the fastest restoration of the facility and equipment is crucial for a business unable to relocate.

Utilizing a team approach, with the insured focusing on the continuation of the business, a reputable high-speed specialist restoring the building and equipment, and rapid funding of the restoration by the insurer, the facility should be back into operation in the least amount of time. Anything which shows the process can be devastating for the business.

Conclusion

Other alternatives that take additional time will, with rare exception, prove to be devastating to the business regardless of advantages they may appear to have.


Nelson Bean is president of The Evans American Corporation, Houston, Texas.

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