Expecting the Unexpected Part of the Unexpected or Surviving Disasters; Natural and Otherwise!
By Ronald A. Cuccaro
For a company struck by disaster, whether it be natural causes like a hurricane, flood, tornado or earthquake; or unnatural causes such as fire, explosion, equipment failure or theft, an ingredient crucial to survival is preparedness. Traditionally, thats known as expecting the unexpected.
However, if it was as simple as that, far fewer companies would be as severely divested by such losses. There is much more to the process. In fact, because there are aspects of catastrophe losses that even the most seasoned managers would not believe possible, were convinced that one of the most important keys to survival is expectation the unexpected part of catastrophe!
Although most firms accept the need to pay insurance premiums, they too often rate their coverage on its cost rather than by taking the claims perspective of how the policy would actually perform in the event of a loss. The most important part of establishing a comprehensive disaster recovery program should be adopting the philosophy that you can best protect your firm not just by assuming that youre covered, but by digging deeper into potential problems and exposures and by expecting the unexpected part of the unexpected!
For a better idea of what the unexpected can entail, here are some examples of actual disaster experiences with which some companies around the world have had to deal:
Some Actual Catastrophes
-A hotel fire claimed many lives, resulting in the owner ownership of the property because they lacked adequate liability insurance. In this case, the owners lost the involved property because enormous liability claims threatened to pierce the corporate barrier.
-A warehouse holding $1.5 million worth of merchandise was broken into in the midst of Hurricane Gilbert, with hundreds of people literally carrying the stock away. Because the looting was not a direct result of the harridan, it was not covered under the companys insurance policy. Coverage could have been obtained, however, had this type of exposure been anticipated.
-Another Hurricane Gilbert story, but with a happy ending. An animal feed processor lost its entire poultry feed market because most of its customers chickens were destroyed by the hurricane. The birds actually blew away in the storm, leaving little need for the insureds feed products. Fortunately. because they purchased an unusual insurance policy endorsement called the Customers and Suppliers Endorsements beforehand, the company was almost fully covered for this indirect loss.
-Another hotel lost the majority of its tourist business due to publicity surrounding a recent hurricane. Because the hotel itself was not damaged, their income loss was not covered. Rarely is coverage found for indirect losses like this. But this case drives home the joint that when you assume your business is covered for all losses, you could be in for a surprise!
-A U.S. companys European facility producing metric standard products suffered a total loss and management decided to fill its sales orders with nonmetric machines produced in the United States. The firm was eventually able to restore normal sales levels, but then discovered that in order to comply with its service and warranty program, it had to stock nonmetric repair/replacement parts at the European location for an extended period of time.. The resulting loss for these warranty parts was unanticipated and one the which the company was not covered.
-A U.S. firm relies heavily on a foreign supplier for parts critical to its domestic production. A major earthquake destroyed the plant of the supplier. Because the U.S. company did not have coverage for this type of contingent business interruption loss, they were devastate. The fact that the insured didnt anticipate this type of indirect business interruption loss ended up costing them a great deal!
-A condominium association that suffered $250,000 worth of damage to an asbestos roof spent approximately $1 million to dispose of the damaged asbestos - and their loss was only partially covered. The process of removing hazardous materials can sometimes be more costly than installing the materials themselves. We can expect to see more incidents like this in the future.
-A hotel casino, under construction, could not open on time because a hurricane delayed by four months the delivery of steel needed for its construction. The companys insurance policy did not provide coverage for materials not on the premises at he time of loss. Consequently the late opening - created by the delayed delivery of the steel - caused the owner to sustain an extensive loss in earnings as well as additional inters expenses. These indirect losses were never anticipated.
Heard enough? Unfortunately, most of these are not "happy ending" stories. But they are valuable in demonstrating some of the unexpected things that can and do happen to companies as a result of catastrophes.
Now, in a more positive vein, lets look at some of the things you can do to help minimize your companys exposure. Well begin by examining the first process you should undertake - preloss planning. Following that, well review several important, general postloss considerations, including a number which relate specifically to the insurance claim process.
-First of all, select a competent broker - one who understands your business vulnerabilities, whos in touch with your growth, and with whom you can communicate. Make an effort to help him/her understand your business, so you can work together to identify possible exposures and solutions.
-Understand the valuating clauses of your insurance policy - and dont rely solely on historical records for valuations. Also make sure that you understand the terminology used in the policy. Actual cash value, for example, isnt the cost to rebuild or replace the property, its that cost less depreciation (or it may be the market value, depending on the jurisdiction youre in).
You can purchase replacement cost coverage, which would pay you the replacement cost of the property. However, almost all policies will compensate you for the full replacement cost only after you rebuild or replace. So, youll receive the depreciated amount first, and the balance after you rebuild or replace.
On the same subject, in many cases you can replace the destroyed property with property of a different type and/or at a different location. Remember, the policy will specify its limits on replacement. Know up front what your policy says because it could have major impact on your operations later on.
-Understand selling price clauses. Under some policies, if you lose your stock, you can collect most of the full selling price. Other policies reimburse you only for your cost, so youll need business interruption insurance to recover nay losses in excess of your cost.
-How will production continue in the event of loss to your facility? Would your labor costs for employees be covered in such a situation? Fatten, these costs are not covered, resulting the loss of a valuable workforce.
Other Points to Consider
-In addition to knowing the true value of your property and business interruption exposures - from a claims perspective, allow for inflation and your companys growth. If your policy was taken out two years ago, it was probably based on your earnings at that time. Today you may need more protection.
-Be aware of any coinsurance requirements of the insurance policy which require you to carry a prescribed level of coverage or face a penalty at the time of a loss. Also, be careful of inventories that fluctuate widely from period to period, alternately peaking and diminishing.
-A partial loss to stock can result in damaged products - carrying your label - being sold on the open market by a salvage company on behalf of the insurance company. You can normally obtain a Brands and Labels clause which will give you protection in this area!
-Pollution risks are a very real possibility nowadays; does your company have any?
-Who is responsible for insuring leased items? What about tenant improvements and betterments?
-In valuing your equipment, have you expensed many equipment expenditures? Does installation labor show on your records?
-How will a LIFO (Last In First Out) versus a FIFO (First In First Out) method of accounting affect your inventory valuation?
-Thinking beyond the insured premises, how would a catastrophe loss to a critical supplier or customer, or to another of your locations affect your business?
-What will happen if current building codes require substantial improvements over the building that was lost? Those additional costs are not covered unless special protection is provided.
-Understand the limits of your coverage. Dont assume that you have coverage; look beyond the standard coverages to provide for your companys special needs. As mentioned earlier, start thinking from a CLAIMS PERSPECTIVE. Nows the time to develop what if scenarios, to consider alternatives if a loss should strike.
-Consider the services of a profes-sional loss consultant and valuation expert to assist you and your broker when conducting a preloss review.
The following recommendations, which apply to the postloss situation, can help you mitigate the loss, protect your property from further damage, and expedite the claim process.
They can also help ensure an adequate recovery. Remember -each loss is different and many require additional action. - To begin with, notify your broker of the loss. - You are obligated to protect the property from further damage and to mitigate your losses. - Establish a loss management team, with a leader designated to be the spokesperson for your company. Make sure all of those involved in the claim process understand and are prepared to follow your claims management plan. Have all of your communications flow through the designated claim manager. Let your claim manager interact for you. Carefully control access to the premises. - Be sure to document your activities on a log and maintain accurate records. Keep a separate fire loss account to track loss-related expenses. - After assessing the potential scope of damage, set up a postloss business plan to protect your market. (Its surprising how fast your competitors will try to secure a better position!) Notify your customers, banks and suppliers of the loss, and prepare a public relations program to protect your market position. Youll need to let everyone know youre still around!
-Integrate your claims program with your other business operations, including all temporary repair activities. Remember that property damage, business interruption and the business recovery plan are all tied together.
-Make decisions that are best for the survival of your business. This point cannot be emphasized enough! Too many managers expect the insurance company to tell them who to do to save their business. You must make the prudent business decisions necessary for your recovery. The insurance company is responsible for producing the financial solutions provided under your policy; it is not responsible for running your company for you. While the insurance settlement is very important, it could be many months down the road.
-Explore extra-expense coverage with your broker. It can provide reimbursement for many business recovery expenses not normally allowed under standard business interruption coverage. Extra-expense coverage can provide a program to help save a business by allowing it to make critical expenditures outside the usual areas of indemnity.
-Be careful when using existing raw material inventories to make up production. Its full effect may not be felt until after the claims indemnity period.
-Be sure to track the increased cost of operations during a postloss recovery period. It will eventually affect the bottom line.
-Know the players! Understand what staff adjusters, independent adjusters and their forensic account ants are. They will be working for your insurance company - and you can be sure they will understand their roles! Know what your brokers role will be throughout the claim process.
-Understand your own duties and requirements under the policy contract. For example, its your responsibility to file and support your claim. YOU should present your own claim - the insurance companys experts should not do it for you. Take a proactive position, not a reactive one.
Hire your own experts to prepare your claim, and do not rely solely on historical records! Consider employ-ing a property loss consultant to work on your behalf. Management should concentrate on saving the business, not the details of preparing claims. Leave that to the experts!
-Realize that your claim must be verified. It will be audited by the insurance companys adjusters and/or accountants - so prepare accordingly. Be comprehensive and detail-oriented. Dont expect your insurance company to immediately write a check for your claim just because you believe thats what youre entitled to receive.
-Work with the insurance companys representatives to agree in as many areas as possible early in the process. Try not to polarize! That will only lead to two widely separated ideas of what the loss amounts to, making subsequent negotiations more difficult. Try to agree on the general scope of the loss early on. Find as much common ground as possible.
- Request advance payments from the insurance company to ease your firms financial burden. While your carrier doesnt have to perform this service, most insurance companies will. It helps the recovery process when you are not operating from a position of financial weakness.
Like all successful businesspeople, youve worked hard to achieve and maintain the prosperity your company enjoys. You can hope that your firm never suffers a disaster that would interrupt or threaten that prosperity. And you can try not to think of the risk of loss that is an inevitable part of doing business. But you can be sure that if such a loss does come, there will be a lot more to it than you might expect.
By no means have we been able to identify all of the ways in which a company might be affected by a disaster, nor have we attempted to present every possible solution.
But we hope the preceding has stimulated your thinking about what could actually happen to your company during and after a disaster, and that by considering these possibilities now or the next time your insurance program comes up for renewal, you will be better prepared to deal with the - unexpected part of the unexpected!
Ronald A. Cuccaro, SPPA in president and CEO of Adjusters International.
This article adapted from Vol. 6 #3.
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