THE DISASTER RECOVERY PLANNER AND INSURANCE
By Ed Jones
One of the many areas which should be reviewed by the disaster recovery planner when conducting a business impact assessment or developing the disaster recovery plan is the organizations insurance program. This review is to serve two entirely different goals.
Business Impact Assessment (BIA)
One of the primary goals of a BIA is to quantify the potential losses the organization may incur as the result of a disaster event. Having identified the potential losses the disaster recovery planner is expected to provide recommendations to mitigate the losses. The organizations insurance program is part of this loss mitigation program.
Equally important to the disaster recovery planner, however, are those exposures (Causes of Loss, in insurance terms) for which the insurance does not provide protection. These exposures and the unmitigated potential losses (both quantitative and qualitative) are the basis for the recommendations which will be provided to Executive management.
To be prepared to review the organizations insurance policy, the planner should understand how the policy is organized. Todays commercial insurance policy is a package composed of a Common Policy Declarations and Conditions section and one or more coverage parts. The coverage parts which may be found are:
1. Commercial Property
2. Commercial General Liability 3. Commercial Crime
4. Commercial Automobile
5. Commercial Inland Marine
6. Boiler and Machinery
As a general rule the planner will only be concerned with the Common Policy Declarations and Conditions section and the Commercial Property, Commercial General Liability; Commercial Automobile, and Boiler and Machinery coverage parts of the policy.
Declarations and Conditions
This section is of interest to the planner since it specifies which business is insured, the policy period and which coverages are being provided. The common conditions is of little interest to the planner, except as it specifies how changes to the policy are made.
The Declarations Page of this part will provide a description of the premises being covered, a listing of the coverages provided and specify the optional coverages which have been obtained. A number of different coverages are offered under this form. The most common, and those which the planner will normally be concerned, are:
1. Building and Personal Property
2. Business Income
3. Extra Expense
The planner should review the Declarations Page to determine which premises are insured, the limit of insurance, covered causes of loss, any coinsurance requirements which exist for each coverage being provided, and any options/limitations applicable to the property, business income or extra expense coverage.
Causes of Loss
For your insurance to provide payments as the result of an event, the event must be a covered cause of loss. There are three different forms of cause of loss.
1. Basic - covers 11 specific perils. These perils are fire, lightening, explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; sprinkler leakage; sinkhole collapse; and, volcanic action.
2. Broad - covers the same perils as the basic form and adds breakage of glass; falling objects; weight of snow, ice or sleet; and, water damage.
3. Special - All Risk - covers all events except for those which are specifically excluded. Common exclusions are predictable losses; dishonest acts; voluntary parting with property; rain, snow or ice damage to personal property left out in the open; theft of building materials; and, inventory shortages unless evidence of theft is found.
In addition to the exclusions mentioned above for the All Risk form, some exclusions are common to all three forms. These exclusions are building ordinance; earth movement; government action; nuclear hazard; power failure which occurs off the insured premises; war and military action; flood, mudslides and sewer backup; artificially generated electrical current; boilers; indirect losses; and, leakage or seepage.
When reviewing the covered causes of loss the planner should keep in mind that, unless the policy specifically states otherwise, the coverage is limited to the declared premises and the property contained therein or within 100 feet of the building. Thus, some events which could cause the organization to suffer considerable losses may not be covered by the policy. For example:
*Loss of communication services. If the loss is the result of a cut line off your premises or a central office failure/loss, the organization may not be covered. There have been a number of events of this nature in the last five years (Hinsdale Central Office fire; severed fiber optic cable serving Manhattan; telephone switch serving parts of New York City and its airports lost power).
*Loss of an outsourcing facility. If your organization has outsourced your data processing operations and the facility processing your data suffers a disaster event resulting in the loss of your ability to conduct business, your normal insurance policy would not provide any protection since the event did not occur at a facility covered by your policy.
Commercial Property -
Building and Personal
The areas within this coverage area that a disaster recovery planner should look for include:
Some policies may provide coverage for property which is temporarily at a location you do not own, lease or operate. Such coverage would probably cover the documents and media which you have rotating to/from an off-site storage facility. Whether or not this provision would also provide coverage for your archival data files, however, would probably be dependent upon the frequency with which they are rotated.
Duties In The Event Of Loss or Damage.
Contained within this section the planner will find a number of actions which must be incorporated into the plan which will be developed. This may include a requirement to protect covered property from further damage, retention of the property for examination; the requirement to provide a signed sworn statement of the loss; and, a record of expenses for emergency and temporary repairs.
The planner should also ensure that the requirements of this section can be met. For example, a requirement may exist to provide the insurance company a complete inventory of the damaged and undamaged property, including quantities, costs, values and the amount of loss. Without an inventory prior to a disaster event, it may not be possible to provide a complete inventory after the event.
New Property or Disposal of Old Property.
Changes in property coverage are addressed using two different methods. One method used is to automatically cover the property for a limited period of time following its acquisition. During this time period the insured is expected to notify the company of the change and the insurance company will issue an amendment to the policy to provide coverage for the remainer of the policy period and adjust the premium. (Under this method the insured is also responsible for notifying the company of equipment which has been disposed of and the company will issue an amendment dropping the equipment from coverage and adjust the premium.)
The other method which is often employed is for the insurance company to automatically cover the equipment for the policy period. At the end of the policy period, or within a few months of the end of the policy period, the insurance company will audit the company records and based upon equipment additions/deletions adjust the premium.
In the first instance, the recovery planner will want to ensure that the company has procedures in place to notify the individual responsible for communicating with the insurance company of equipment changes in a timely manner. If these procedures are not in place, the company could find itself with a major asset uninsured.
Coinsurance is the method by which the insurance company uses to encourage policy owners to insure their property for amounts which are close to the value of the property. For partial losses the insurance company will look at the total value of the insured property and multiply that value by the coinsurance percentage.
If the insurance you carry meets or exceeds this amount the company will pay the full claim. However, if you do not meet or exceed this amount the company will determine the amount to be paid by first dividing the amount of coverage you carry by the amount of coverage you should carry. This percentage will then be used to multiply the loss and the deductible will be subtracted from the result. This is the amount the company will actually pay.
The recovery planner needs to know if management has made a decision to underinsure the organizations assets. This decision can then be factored into the analysis and recommendations to be provided by the BIA.
Commercial Property - Business Income Coverage
This form is designed for businesses which would have to close for a period of time following a covered cause of loss and provides coverage to reimburse the business for lost income resulting from a covered cause of loss or action by civil authorities. Income in this case is defined as net income plus continuing operating expenses.
The coverage comes with four different alternatives:
1. Coinsurance. This alternative requires the insured to purchase coverage equal to the coinsurance percentage multiplied by the insureds business income. Thus, if your company does $1 million dollars in business (net income plus continuing expenses plus payroll) per year you would be expected to purchase $500,000. In the event of a covered loss the insurance company would pay your actual losses up to $500,000.
2. Maximum Period of Indemnity. Under this option the insurance company will pay your actual losses for the first 120 days following the event up to the policy limit for a covered loss.
3. Monthly Limit of Indemnity. The company will pay up to the limits of the insurance but will pay no more than a specified amount each month. Thus, if the declaration page indicates that Monthly Limit of Indemnity is 1/4 and you purchased $500,000 of coverage, the insurance company would pay no more than $125,000 per month for your losses per month for the first four months following the event.
4. Agreed Value. The insurance company and your organization have agreed in advance what limits are to be carried and what the company will pay.
Commercial Property -
This form pays for the extra expenses a business incurs during the period of restoration following a loss caused by a covered cause of loss or action of civil authority. These payments are limited by the amount of coverage purchased and by the length of time required to complete the restoration. The percentage limits are 40% for a period of 30 days or less; 80% for period of 60 days or less; and, 100% for a period of more than 60 days.
This reimbursement schedule needs to be factored into the recovery alternatives being recommended to management. Following a disaster event the initial expenses which are incurred will probably exceed those for continuing operations while the restoration is being accomplished. Since the majority of disasters which have used recovery facilities have lasted one week or less, the expenses which may be incurred may exceed the limit being applied to the extra expense coverage.
The first thing a recovery planner should remember when looking at liability coverage is that it only pays for the Other Guys losses. Thus, it does not pay your organization or your fellow employees.
In reviewing this coverage with the responsible insurance contact the recovery planner only wants to know that neighboring businesses were considered when the limits were established. For example: Assume your business is located in a downtown area; a covered event occurs; the neighboring businesses are unable to conduct their business; and, the event was caused by your negligence. Were the policy limits set with this type of situation being considered?
To most of us this type of situation may seem far-fetched. However, these types of situations are finding their way into our court systems more and more frequently. As an example, most of us recall the Meridian Plaza fire a few years ago. In 1991, the widow of a fire-fighter that was killed while fighting the fire sued the building owners alleging that her husbands death was due to their negligence.
If you are considering having employees use their personal automobile for business use following a disaster event, you need to check the commercial automobile policy for an Employers Non-Ownership Liability endorsement.
This endorsement will defend your company and pay any claims for which the company is found to be liable as the result of the employee becoming involved in an accident while using their personal automobile for company business.
Todays Boiler and Machinery policy has been expanded from its initial purpose to cover equipment with gases and liquids under pressure (e.g. air conditioning systems, refrigeration systems (chillers), and pumps), mechanical, electrical and production systems. This applies to most of the equipment found in a computer room as well as computers now being found on our desks.
This policy needs to be reviewed for the same parameters as your Commercial Property Policy. One difference which may be noted when reviewing the coverage is the use of the term accident. An accident is defined as the sudden and accidental breakdown of an insured piece of equipment resulting in physical damage to the equipment that necessitates repair or replacement.
Care should be taken to ensure that it is understood that, according to this definition, deterioration, corrosion, wear and tear, etc. are not included. Thus, if an archive tape is found to be unreadable and the data must be recreated, a claim for the expenses to recreate the data would be rejected unless it could be proven that the loss was a covered accident and not the result of deterioration.
Workmens Compensation Insurance
The Workmens Compensation Insurance policy is not part of the normal commercial insurance policy but is required of most businesses.
The recovery planner considering the utilization of a commercial recovery center in another state should review this policy with the companys insurance specialist to determine whether or not it would be in force where the commercial recovery center is located.
Care should be taken to not only consider the primary recovery center location(s) being considered but all of the recovery locations which may be utilized.
Recent geographical disasters (e.g. the great Chicago Flood of 1992) have resulted in subscribers to commercial recovery centers being diverted to other locations to accomplish their recovery as a result of their primary center being fully occupied.
One of the most overlooked areas within disaster recovery plans is the area of insurance. Very few, if any, plans include information regarding insurance coverage nor do they address the interface with the person(s) responsible for the companys insurance program.
Insurance needs to be addressed in the Response, Recovery and Restoration phases of the modern recovery plan.
When trying to determine the appropriate course of action to be taken the management team needs to be able to access information summarizing their insurance coverage and the covered causes of loss. This information assists establishing the costs (actual non-reimbursable costs) which the organization will incur should they determine the correct course of action is to declare a disaster and implement the recovery plan.
As part of this section of the plan, guidance should also be provided to management on the appropriate actions to be taken to safeguard damaged equipment and furnishings from sustaining further damage as a result of the disaster event.
During the recovery phase, depending upon the nature and extent of the disaster event, the company may have to obtain temporary offices for some or all of its staff. These offices will have to be furnished and equipped for the personnel to conduct business.
Additionally, the company may have to equip the shell site at a commercial recovery facility to initiate or continue data processing operations. These are all events of which the responsible insurance person needs to be advised so that adequate insurance coverage can be obtained.
One of the first major activities to take place to restore a damaged facility is a detailed assessment of the damage sustained. The insurance company adjustor, or their designated adjustor, should be part of the team which accomplishes this assessment.
Using the results of the assessment as well as the contents of the governing insurance policy, the insurance adjustor will be needed to provide guidance to the company regarding when funds will be made available, the replacement of damaged equipment, the repair of damaged equipment, and instructions for the disposition or salvage of equipment damaged beyond repair.
As part of the restoration process, the company may need to obtain a space on a temporary basis to store equipment and furnishings. This would include damaged equipment and furnishings awaiting repair, disposition or salvage as well as equipment and furnishings which are to be installed in the restored facility.
The person responsible for insurance coverage needs to ensure that this facility is covered by the insurance policy and that equipment within this facility is covered.
In addition, the person responsible for the insurance coverage will need to know when equipment in the temporary facilities (shell site, offices, storage) is disposed of or moved so that the coverage can be terminated.
Furthermore, during the recovery and restoration effort records are going to be generated/received which detail travel expenses, telephone expenses, shipping expenses for equipment, furnishings and reports, rental of additional facilities, etc.
Copies of these records need to be provided to the person responsible for the submission of the insurance claim in order for the company to be reimbursed for their extra expenses. Additionally, this person may have to coordinate with the Chief Financial Officer to detail losses for the submission of a claim under the business income coverage form.
When conducting the BIA, the disaster recovery planner needs to review the insurance program which the organization has put into place to mitigate its exposures should a disaster event occur. The purpose of this review is to determine the organizations duties should a covered loss occur and to identify areas of exposure which are not afforded adequate protection by the existing coverages.
Edmond D. Jones is a manager for Phoenix Consulting Services.
This article adapted from Vol. 6 #2.
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