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The recent events in Japan have sent many reporters to our doors…these are our responses to the most common questions we have been asked.

What impact do you think this event (EQ, tsunami and nuclear emergency) will have on global business?

Supply chain disruptions on a global scale are very likely.  The wild card is the impact to the world economy. In 2010, the IMF reported that Japan is the third largest economy in the world as sorted by their GDP.  This by the way is a recent change.  In mid-February 2011, China became the world’s second-largest economy after the US, ending Japan’s 42-year reign in the second spot.   Japan also is one of the largest debtor nations with a  7.47 trillion dollars debt.  This will make the restoration required after this Armageddon like disaster a serious financial challenge.


How do you think the U.S. would have fared if the earthquake was just off the coast of California rather than Japan?

There would be no comparison.  Japan is hands down far ahead of the US in the area of government and citizen preparedness.  Our citizens are overall woefully unprepared.  Most national survey’s note that when asked “how prepared for a disaster that is likely for your area/region” less that 8% of U.S. citizens reply affirmatively. Governments do not fund mitigation, preparedness, response and recovery efforts to the same level as Japan.  With our military and National Guard deployed abroad in such large numbers, we would struggle to place a comparable level of resources to the response and recovery effort.

Japanese rescue workers search for missing people in Minamisanriku.

What can businesses learn from the actions and priorities of the Japanese government?

Get ready!  You must have a basic level of preparedness in place to keep your business functional after a major incident.  You should not depend or expect that the government will be able to restore services quickly enough for your business to stay afloat.  At a bare minimum, invest in the following:

People – Focus on Emergency preparedness

  • Training for all staff
  • Drills (fire, EQ, tornado, shelter-in-place)
  • Emphasis family and home preparedness

Business

  • What are your mission critical processes?  What must get done in the first 24, 48, 72 hours and the first week?  How can those be done in the light of no office space, or systems?  What are some workarounds?

Technology

  • Ensure that you have an adequate back up and recovery solution that matches your mission critical processes.  If they don’t match, improve your recovery strategies or get better work-arounds.

Facility issues

  • Conduct an assessment of likely areas of concern.  Where possible mitigate those hazards.  An example would be to secure servers to prevent them from falling over during ground shaking.

Communication

  • Telephone trees for all employees – test quarterly
  • Telephone trees for vendors – check at least every six months

Don’t wait to act.  Take this seriously – your life and business could depend on it!

We have been asked by many of our clients who they should donate to…a very reasonable question.  And, are there options other that U.S. based groups?  In fact there are…

Displaced residents after the Japanese earthquake and nuclear plant meltdown.

We have been involved with a group out of New York City for sometime called The Council on Foreign Relations.  They believe that effective dollars are best delivered directly. Japanese groups are in the best position to decide what Japan needs, and are less likely to skim organizational overhead off the top of your donations. Few Americans are familiar with the Japanese groups, however.

CIE/USA has created a Japan NGO Earthquake Relief and Recovery Fund to support emergency relief and long-term recovery efforts by Japanese organizations. Half of the funds raised will go directly to the Japan-based Center for Public Resources Development’s “Give One” initiative, which raises funds for leading Japanese organizations that are working on the ground to provide immediate disaster relief. The other half will be used to establish a separate fund to support Japanese organizations engaged in long-term reconstruction efforts, which will be critical in the months and years ahead.

http://www.jcie.org/earthquake

If this doesn’t appeal to you, we suggest you visit Charity Navigator, which has established a page on their site for this catastrophic event and look for Four Star **** rated organizations.

http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=1221

OK, by now everyone is suffering from disaster numbness. Last year Haiti earthquake. Tornado season, record blizzards, the coming spring thaws and flooding. An now, the Japan earthquake and Tsunami, culminating with the on-going reactor debacle.

Focus for a second on the last of this list—the reactor story. I’ve heard some commentators talk about lack of preparedness. “They should’ve known,” is the often delivered comment from the pundits.

Let’s take a minute and look at what turns events into unmitigated disasters.

No disaster ever has a single cause. It is always precipitated by some event that, on the surface, may actually be relatively benign. Disasters are always caused by multiple events, any one of which, if prevented, could have averted the catastrophe. Consider an airplane accident. Investigators in the aviation industry analyze accidents to determine the cause(s). There are always more than one. If the pilot had changed altitude….. If the airplane had another 300 lbs of fuel….. If the radar operator had requested acknowledgement of a direction change…. Any one of these “ifs” would have prevented the accident, since the result is that the airplane would not have been at the point in space at the time the accident occurred.

Apply this thought process to the current events. The reactors in Japan were built to earthquake standards. Since no force 9 quake had ever occurred, the standard was set to something less than that. But the quake itself didn’t cause the radiation leak. The reactors all have an automatic shutdown feature that triggers at the onset of a quake, and they all worked, despite some quake damage to the reactors.

In fact, the quake disrupted the power grid throughout the country. Electric power is needed to keep the cooling pumps running, which are required even in shutdown mode. No problem! Each reactor has a bank of backup generators that kick in if the power fails….except when a tsunami of such magnitude overwhelms their protections and the generators flood. No problem! There is a bank of battery power that runs the pumps until the generators can come back on line….. No problem! except when the generators are rolling around in the surf. A third backup existed where the local fire department sends its pumpers to provide cooling water to the reactors, even sea water, if necessary…. No problem! except where the fire departments are scattered everywhere trying to handle the disaster. The fire departments spared some pumpers and positioned them to pump sea water over the reactor cores…. No problem! until they ran out of gas because there was no electric power to fill tankers to deliver fuel through the disaster area to the pumpers.

Are we seeing a picture here? No matter what backup exists, there can always be another hiccup that prevents it from working as advertised. Risk management and mitigation can and should provide many layers of backup procedures and protection. How much and how many are determined by some actuary who creates an objective cost to a subjective probability. Costs are the final determinant. Build to withstand a Cat 8.5 earthquake. Build it on a site that is elevated 50’ above sea level, since the highest tsunami ever recorded reached 30 feet high. Site the generators on the ground, but protect them with a security wall so they can be serviced and swapped out as needed. Build battery backup to power the pumps for one-hour, since redistributing power from the other generators takes only 20 minutes. Establish a memorandum of understanding with the local fire department to dispatch a pumper if called on by the power station. Execute a contract to have fuel delivered to the site as needed in an emergency. (While the numbers in this paragraph are hypothetical, they illustrate my point.)

How many levels are enough? Obviously in this case they weren’t enough.

The earthquake and tsunami in Japan have caused loss of life, destruction, and dislocation on a massive scale.  For those who have lost friends, family, employees, homes, and businesses, and who face the continuing threats posed by damaged nuclear facilities, recovery will be a very personal and arduous process.  As the situation stabilizes and the focus turns to economic recovery, however, businesses will begin to examine their operations and assess their losses.  Obviously, businesses operating nearest the epicenter will have suffered the most severe losses.  However, the sheer scale of the disaster, combined with Japan’s critical importance to the international economy, guarantee that businesses throughout Japan and the rest of the world will face related disruption and losses.

Whenever a business faces unanticipated losses, it should immediately consider how its insurance will respond.  Insurance is critical to disaster recovery.  Specifically, property insurance, including business interruption and contingent business interruption coverages, may protect against not only physical damage to and loss of property, but also financial losses arising from an inability to conduct business (either at all or at the same levels as before); the extra expenses incurred in dealing with the effects of a disaster, including money spent to minimize any damage and losses; and the costs incurred in establishing the extent of the losses.  Moreover, contingent business interruption coverage often contained in first-party property policies may provide coverage where a business faces loss due to its suppliers’ inability to provide needed parts and resources, or its customers’ inability to take delivery.  Other types of insurance that also may respond include policies for trade disruption, event cancellation, and directors and officers.

Understanding Your Losses and Coverage

Policyholders should act immediately to evaluate both the extent of their losses and the scope of coverage for those losses.  That evaluation must not be based on conventional wisdom about the scope of the policyholder’s insurance—this is especially true in the context of property insurance, because policy forms often vary significantly.  Rather, the policyholder should examine its policies with a specific understanding of both the policy language and how its business has been, or is likely to be, impacted by events.

Policyholders also must immediately begin to carefully document all expenses incurred as a result of their loss because an insurer will demand a detailed proof of loss upon receiving notice of a claim from its policyholder.  For larger companies, special loss-related account numbers should be created within their accounting systems to make tracking these losses easier when the insurance companies raise questions.

Applicable Insurance Coverages

The tragedy in Japan has unfolded on such a massive scale that policyholders will have incurred losses from a wide variety of causes.  We have listed below a sampling of potentially available lines of coverage.

First-Party Property policies provide insurance for direct losses to or affecting the policyholder’s property.  These policies protect a policyholder’s place of operations and inventory and provide coverage for lost or damaged property.  Many property insurance policies are sold on an “all risk” basis, meaning that they cover losses to real property caused by any peril not expressly excluded.  Because of the breadth of coverage afforded by an “all risk” policy, once a policyholder shows that it has suffered a loss, the burden of proof shifts to the insurer to show that the loss is not covered.

By comparison, a second type of property insurance—a “named peril” policy—covers only those perils expressly listed.  Both types of policies usually contain exclusions to coverage.  Earthquakes and floods, for example, are often excluded from commercial property policies, and must be added through endorsements or stand-alone coverage.  It is important to carefully review all aspects of a policy to determine whether coverage for the specific loss is clearly excluded.

In addition to covering property damage, many property policies also provide some or all of the following “time element” coverages that are designed to reimburse the policyholder for financial losses.  As a senior executive at a major insurer stated with respect to business interruption claims stemming from the earthquake and tsunami, “‘[a] lot of the largest corporations have insurance programs that include coverage for these sorts of things . . . .  There’s going to be a ripple effect felt around the world.’”

In order to be implicated, policies typically require damage by a covered peril to property.  “Time element” coverage may include:

  • Business Interruption:  Reimburses the policyholder for the amount of gross earnings minus normal expenses (i.e., its profits) that the policyholder would have earned but for the interruption of the policyholder’s business.  Business interruption coverage generally requires that the “interruption” result from damage to covered real or personal property.  Policyholders, for example, have obtained reimbursement under such coverage when other widespread disasters such as Hurricane Katrina and the 9/11 terrorist attacks caused business interruption.  Coverage may be available for time element losses at interdependent properties, for example, where damage to an insured’s overseas factory cuts off supply, and therefore slows operations, at its domestic facilities.
  • Contingent Business Interruption:  Protects against economic losses caused by the policyholder’s inability to receive a supplier’s goods or services, or the policyholder’s inability to deliver its goods or services to customers, that arise due to a covered peril to the property of the supplier or customer that leads to the inability to deliver.  The term “supplier” should be read broadly, to account for the complex and interdependent nature of businesses today.
  • Utility Service Interruption: Provides coverage for losses that the policyholder incurs due to the interruption of utility services that result from physical damage to the property that supplies the utility.  This coverage usually is provided through an endorsement to a property policy and may require that the interruption of service has lasted a minimum amount of time—usually 24 hours.  Service interruption coverage also can vary widely with regard to what types of utilities are covered.
  • Extra Expense: Indemnifies the policyholder for the reasonable and necessary increased costs of conducting its business operations due to property damage caused by an insured peril at its facilities or that of a supplier.
  • Civil Authority:  Protects the policyholder from losses caused by the inability to access its premises when a civil authority denies such access because of covered damage to, or destruction of, property belonging to others.  Some civil authority coverages require physical damage to the policyholder’s own premises, but others do not.  A “civil authority” for purposes of this coverage may extend beyond national and local governments.  For example, after the 9/11 terrorist attacks, some policyholders successfully argued that the baseball commissioner’s cancellation of games constituted an order of a civil authority.
  • Ingress/Egress:  Protects the policyholder against lost business income and extra expenses when the policyholder’s premises are inaccessible for reasons other than an order of civil authority.  This type of coverage typically requires that the property damage be located within a certain radius of the policyholder’s premises.  For example, such coverage has been implicated when public transit or roads providing access to a business were closed and there was also property damage in the business’s immediate area.
  • Extensions beyond the time limits set forth in the policy:  Some policies allow the recovery period to be measured beyond the interruption period alone and will extend through the end of a period of time ending when the policyholder’s business returns to the levels that were anticipated but for the event that caused the property damage.

Most of the issues raised by the time element coverage of first-party property policies require careful analysis and forethought before the impacted entity asserts any position to its insurers. The hypothetical “what if” world measured by these policies often provides the opportunity for insurance companies to take positions hostile to the policyholder if advance planning and documentation have not been addressed at an early stage.

Trade Disruption policies are designed to protect against loss of earnings and extra expenses caused by disruption in the supply chain, even when there is no physical loss or damage to the policyholder’s assets.  This coverage was developed specifically for businesses that depend on global supply chains.  This relatively new form of insurance may help to provide consistent coverage to the insured.  As is always true of “niche” coverages, however, the insured should understand how its trade disruption insurance interacts with other forms of coverage, including standard all risk policies, and anticipate an overly cautious view of coverage from a claims adjuster.

Event Cancellation policies are designed to compensate policyholders for losses arising out of the cancellation, interruption, or postponement of specified events.  These policies typically specify that coverage is triggered if the cancellation, interruption, or postponement is caused by factors that are beyond the policyholder’s control.  They typically insure a wide range of events, for example when a policyholder incurred losses arising out of the cancellation of music concerts in the aftermath of the 9/11 terrorist attacks.

Directors & Officers policies may provide defense and indemnity coverage for companies and their directors and officers who may face claims regarding their preparation for, or response to, a crisis.  For example, claims may be made against directors and officers for failure to have proper procedures and plans in place for dealing with the crisis.

Travel Insurance policies are designed to cover costs for delays, such as extra hotel stays or the price involved in changing flight reservations, the nonrefundable costs for interrupted or canceled trips, lost or stolen luggage, medical emergencies, and even medical evacuation.

Mitigation Costs

Insurance policies may provide coverage for any mitigation costs that the insured takes to prevent or mitigate actual or imminent damage to its property.  Many policies contain clauses specifically covering such “loss prevention” or “sue and labor” expenses, and the common law in many jurisdictions may obligate insurers to reimburse these expenses.  Insurers therefore may be obligated to pay for these measures to help prevent property damage, for example the costs of boarding up a building’s windows when a hurricane is approaching.  The legal theory is simple: policyholders should take reasonable steps to minimize or reduce their losses, thus saving themselves and their insurers money, and their insurers should pay for these steps.

Additional Insured Coverage

Companies also may be able to access coverage outside of their own insurance portfolios for losses stemming from the earthquake and tsunami if the company is an “additional insured” under another company’s policy.  Generally, there are two ways to obtain additional insured status—either (a) via an endorsement that specifically lists the company as an “additional insured” or (b) via a blanket endorsement that automatically extends “additional insured” status to parties entering contracts with the named insured.  Whether your company as an additional insured will have the same coverage as the named insured varies by policy; your company may have the same rights as the named insured, or more limited rights, depending on the language.  Thus, when looking for coverage for losses stemming from the recent events in Japan, businesses should inquire regarding their additional insured status—it may prove to be another portal to insurance recoveries.

Policy Conditions and Requirements

Policyholders should be wary of potential time traps in their policy.  For example, a policy may obligate the policyholder to provide the insurer with notice of a loss “as soon as possible” or “as soon as practicable” after a loss or other insured event.  The consequences of failure to give prompt notice differ, depending on the type of policy and the jurisdiction.  Policies usually require that proofs of loss be submitted within a relatively short time—often within 60 days after the loss incepts or within 60 days after the insurer requests a proof of loss, unless an extension is secured.  Finally, many first-party policies contain a contractual statute of limitations.  Therefore, policyholders must be careful to commence a coverage suit within time limits or obtain an agreement with the insurer tolling the running of the limitations period.

Insurer Defenses to Coverage

Insurers may raise challenges to the availability of coverage for losses related to the earthquake and tsunami.  These challenges may include disputes regarding:  (a) whether coverage for claims related to earthquakes and tsunamis are barred by any policy exclusions; (b) whether physical damage to insured property is required to trigger time element coverage such as business interruption coverage, and, if so, what may qualify as property damage; (c) whether coverage exists for amounts spent to prevent or mitigate damages, even if property damage never takes place.

Companies should not assume that insurer defenses necessarily will defeat coverage.  Each policy requires a careful analysis, based on the specific policy language involved, the facts of a company’s particular losses, and the law of the applicable jurisdiction.  Careful advance planning is suggested, if time permits, before any claim is made to the insurer.

Obtaining and Maximizing Insurance Recovery

Pursuing an insurance claim following a disaster is often a complex and challenging process.  Policyholders should consider obtaining the assistance of coverage counsel, because many issues can significantly affect the existence or amount of recovery under an insurance policy.

Resolution of coverage issues may depend not only on the law of a particular jurisdiction that will be applied and the facts presented by a claim, but also on how facts are presented to the insurance company, or to a court, if litigation is necessary.  An attorney may be able to analyze coverage and help the policyholder present its claim to maximize protection under its insurance policies.

Act Now to Evaluate Your Risks

Even if your business has been fortunate enough to avoid direct losses from the events in Japan, the tragedy in that country nevertheless presents a stark reminder of the importance of aligning your business’s insurance coverage with the risks it faces.  While typical “all risk” policies are comprehensive in scope, flood and earthquake are often excluded in standard policy forms, and must be added to the insured’s coverage.  Moreover, when a catastrophic claim arises, insurers may invoke multiple policy exclusions and defenses to limit coverage.  Advance planning can help to clarify coverage and avoid disputes.

Dickstein Shapiro LLP Insurance Coverage Practice attorneys John E. Heintz, Partner (This email address is being protected from spambots. You need JavaScript enabled to view it.), Stephen N. Goldberg, Partner (This email address is being protected from spambots. You need JavaScript enabled to view it.), Geoffrey M. Long, Associate (This email address is being protected from spambots. You need JavaScript enabled to view it.), Jared Zola (This email address is being protected from spambots. You need JavaScript enabled to view it.) contributed to this article.

The earthquake and tsunami in Japan have caused unprecedented damage to a developed nation.  This is the first incident where damage on the surface and damage underground both affected an area at the same time. The surface impact of the tsunami was devastating to people, structures, above ground infrastructure, ports and agriculture.  The earthquake’s geophysical impact damaged subterranean structures under the surface – water, sewer, electric substations, and possibly nuclear reactors.

With the exception of human injury and death, damage on the surface is easier to see, record, assess, and repair.  Damage underground takes more time to assess and repair. There are multiple facets involved in the recovery.  First, the electric power grid has been impacted at four levels – generation, transmission, distribution and customer-owned equipment.  The automatic shut down at the Fukushima Dai-ichi nuclear power station required electricity to be completed. When the power went out due to the tsunami’s damaging electric transmission and distribution, the shutdown was interrupted leading to the possibility of a meltdown. TEPCO acted quickly to use a contingency plan to cool the reactor with sea water.  When a power grid loses a major source of generation (460 Megawatts from Unit 1; 784 Megawatts from Units 2 and 3), this creates an overload on the grid.  To compound the situation, the destruction of customer demand for electricity reduced the demand side, or the load, on the system.  These imbalances then affect the entire grid – other power generation facilities.

Secondly, with the grid in disarray, there is also the problem of damage to transmission facilities – the system that moves bulk power – and damage to the distribution system – the system that we are most familiar with as having utility poles and wires.  There are also underground distribution cables.

Thirdly, the property of the customers has either been seriously damaged or washed away by the tsunami.  The result is loss of generation, loss of transmission, loss of distribution, and ultimately loss of demand due to the destruction of customer property.

There is one other concern, the possible meltdown at Fukushima Dai-ichi.  Standard practice at any nuclear facility in the developed world is to activate an emergency plan when a plant is malfunctioning.  The plan includes the safety and corrective measures taken by the TEPCO personnel and the evacuation of the EPZ, a 20 kilometer radius circle surrounding the plant.  In this case, about 300,000 people due to dense populations around the plant.  This is a matter for emergency management or the military, depending on the governmental structure in the country.  Add a tsunami, and the entire process becomes extremely complex.  We normally think of evacuating an EPZ as occurring when nothing other than the nuclear plant has been damaged.  This is NOT the case in Japan.

What is the impact for business continuity across Japan?  First, the strain on the power grid will require fluctuations in the power supply.  Businesses and data centers will be impacted.  Business continuity plans will be activated and emergencies declared, possibly for months.  The global impact of businesses connected to companies in Japan will be felt.

We can follow the situation in the news, but more reliable sources should be considered. TEPCO will do its best to keep customers and investors informed. See http://www.tepco.co.jp/en/press/corp-com/release/11031507-e.html .

In the meantime, as the rescue phase continues, the recovery phase will gear up.  There will be countless lessons to be learned from this experience.  In the U.S., there are exercises underway for earthquakes across the continent.  One is the Great Central U.S. Shakeout Drill scheduled for April 28, 2011, with information available at http://www.shakeout.org/centralus/ .  Over one million participants are already registered.  It’s time to prepare.

Dr. Tom Phelan is the director of emergency and disaster management at the School of Public Safety and Health, American Public University System. You may contact Phelan at This email address is being protected from spambots. You need JavaScript enabled to view it.