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Volume 31, Issue 4

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We all know that a well designed and practiced contingency plan is the best insurance against financial peril for any corporation or institution with a future. As we prepare for natural and man-made disasters we must understand that industrial and manufacturing losses have very diverse cause profiles ranging from hurricanes, tornadoes, flooding, fires and explosions, to hazardous contamination, collapse of storage racks, vehicular impact, vandalism and malicious mischief etc.

Hazard analysis, loss control and fire prevention in the industrial setting need to be carefully designed to address not only the facility, but the specific processes, equipment and hazards of each particular type of operation. The National Fire Protection Fire Analysis & Research Division latest statistics tell us that:

“Fires in industrial and manufacturing facilities account for 11.8% of non-residential structure fire, 29% of associated direct property damage, 18.4 % of associated civilian deaths, and 22.5% of associated civilian injuries.
Within the industrial and manufacturing facility category, the leading properties are metal or metal products manufacturers (21% of industrial and manufacturing fires, 11% of property damage), wood, furniture, paper, or printing products manufacturers (20% of industrial and manufacturing fires, 11% of property damage), and agricultural farm products facilities (13% of industrial and manufacturing fires, 6% of property damage).”

Quite often there is an assumption that corporate insurance programs cover the majority of any financial loss that might occur. While this is often the case for small and/or simple losses, it very rarely is the case when large losses occur that disrupt normal business operations. As such, it is important to understand what is the true nature of cost of risk to an organization. While the term cost of risk is often used by today’s risk management world, it is often less understood by disaster recovery or business recovery personnel or by their senior management. In a broad sense cost of risk is a way of measuring a company’s degree of risk by examining several of its worst possible loss scenarios. Once identified, these scenarios should be communicated to senior management so they too can begin to see and support the value of risk management and disaster recovery planning coordinating efforts. Failure to support these efforts can directly affect the company’s bottom line.

A business impact analysis is a proven method of determining this cost of risk by identifying the interdependency of manufacturing operations as well as the relationship between manufacturing and other business functions. The analysis should also identify recovery time frames and priorities, potential sources of severe business interruption and cost-effective recovery strategies.

Once this collective information is gathered, analyzed, and the results presented to senior management, agreement should be reached on the recovery strategy and plan development should begin. It will be important to integrate a planning tool with the planning process to facilitate not only plan development, but for maintainability, flexibility and viability of the plan. This automation will also result in a significant decrease in the amount of funds and personnel resources to keep the plan current on an ongoing basis, and should be able to provide instantaneous computerized reporting information at the time of a disaster.

In an industrial or manufacturing environment, a disaster recovery, business resumption and business continuity plan must include:

  • An Emergency Response Plan - addressing fire brigade, evacuation, health and safety issues and environmental concerns.
  • A Facility and Equipment Restoration Plan - addressing damage assessment, restoration /replacement recommendations, emergency procedures, corrosion control, cleanup, salvage and reconstruction.
  • A Product Fulfillment Plan - addressing meeting customers orders with replacement or alternative products.
  • A Crisis Management Plan - to expedite the decision making process during recovery and restoration, as well as addressing public affairs and stockholder issues.

Critical priority issues such as restoring manufacturing capability, recovering processes and equipment, replacing product to meet customer demand, meeting contract deadlines, maintaining specialized workforce skills, controlling environmental and security issues, adhering to regulatory compliance schedules, and insuring positive public image must all be addressed in the planning process.

Also important to business continuity are the identification and protection of customer and vendor relationships and special supplier partnerships, as well as production management and process control.

In addition, it is important to consider other strategic corporate business continuity issues beyond just getting the plant back in operation.

These could include continuing to get product to market, producing excess capacity versus just-in-time inventory, buying replacement product externally for resale, or the possibility of shifting product from other markets to protect your best market.

Recovery of the physical plant depends not only on the degree of structural damage, but the presence of any routine or non-routine contamination resulting from the cause of loss, such as the by-products of a fire.
For example, the most common routine contaminant is hydrogen chloride, generated by de-hydrochlorination of PVC plastic exposed to heat.

As stated by BMS CAT’s, Dave McDaniel, “In a fire PVC converts 60% by weight to hydrogen chloride gas, which in the presence of water, forms hydrochloric acid. If you put an acid and a metal together, metal salts will form, causing all forms of corrosion.

Electronics in a manufacturing environment are the most susceptible to damage due to corrosion because of the thin metalization paths on the circuit boards, and irreversible damage can occur within days.”
A thorough site assessment should be performed as quickly as possible to determine if there is corrosion, and what the levels are.

Emergency procedures should include the removal of the contaminants through proper and specific cleaning protocols, and humidity control.

Non-routine contaminants could include polychlorinated byphenyls (PCBs) asbestos, lead, cadmium, mercury, other heavy metals, and any combination of the combustibles and reactives consumed in the fire, explosion or loss scenario. It may also be necessary, depending upon what was in the facility, to identify those items that would require lab packing, which is the containerization and removal of like hazard classes of material such as all flammable liquids, and all corrosives.

Profiling and disposal will then be necessary. Depending upon the experience level, knowledge and certification of your internal fire brigade, it will be important to pre-qualify and identify your external emergency response resources in your plan.

With regard to your manufacturing equipment, you must give consideration to such factors as a robot operated production line.

The lead time involved in getting replacement items, your vendor required cleaning protocols for recertification, is restoration more cost-effective than replacement.

If your plant operation is driven by information systems or applications, or by a combination of people with support from information systems? Will your plant come to a complete standstill if you lose IS?

Vital records recovery is another critical planning area. Your plan must identify and address the archival records, inventory and retrieval systems, legal retention schedules and protection of such vital records as product specifications and/or formulations, including Material Safety Data Sheets, equipment design schematics, equipment operating and repair reference manuals, facility blueprints, contracts, compliance documentation for EPA, OSHA, DOT, etc., plant management and reporting data, and insurance documentation.

You must give consideration to the possibility of losing this vital information in the fire or explosion, or not having access to it because the building for example, is contaminated.

If you lose this data, how will you continue your operations, and will your insurance coverages refinance the creation of this data?

Most insurance coverage will cover the cost of the physical media format, such as blank tapes, and it will pay the cost to transcribe from the previous generation (hopefully safe in offsite storage) to the blank tapes. Most coverage stops here.

Some coverages will include the extra expense you incur to recreate or regenerate the data lost, but you must specifically request and purchase this coverage.

This example is only one of many which illustrates why it is important to coordinate insurance coverages and disaster recovery and business continuity planning.

It is also important within the planning process to understand what is normally covered within a property insurance program and what is not normally covered. The basic principle upon which property policies respond to losses follows a chain rule. This rule is as follows:

In the event of:

1) A Discreet Event of Physical Loss or Damage, ie; leakage from a tank that takes place over an extended period of time such as spillage from filling the tank up, is not a discreet event, but if the tank splits a seam and ruptures - that would be because it has a defined beginning and an end.
2) To Insured Property
3) From a Risk of Loss
4) Where No Exclusion Applies
5) Which Causes an Interruption of Business Operations.
Then the policy covers:
6) The Defined Loss
7) For the Defined Indemnity Period

In short, special attention needs to be paid to the type or cause of loss, the property involved, and the extent to which profit and continuing fixed charges (business interruption) is covered.

While the degree of coverage varies by policy, even under so called All-Risk policies, all covered losses need to be fortuitive in nature.

As such, losses caused by corrosion, deterioration, rust, wear and tear, inherent vice and the like are not covered losses.

For example, there would be no coverage for stock that is susceptible to light damage that is left in open storage and it discolors or experiences changes in its other characteristics.

Many plastics, pharmaceuticals, as well as various fluids fit into this category.

Along the same lines, loss attributable to manufacturing or processing operations which damage the materials while in process are also not covered.

Additional exclusions often include: loss caused by war, radioactive contamination, faulty workmanship, and contamination.

Additionally, most policies do not cover loss of use of the property unless there is physical damage.

For instance, loss of access / egress to property caused by flood, a government agency ordinance, damage to transportation systems usually does not constitute a loss.

Many types of property are traditionally excluded from property insurance contracts.

Some of them can be covered under specialty contracts; however, these specialty policies often do not cover the potential revenue produced by the property.

Examples of property usually excluded include: precious metals, accounts, currency, valuable papers and fine arts, land and water.

While the amount of uncovered loss may be minor under the above categories, the extent to which it can impact revenues may be significant.

Most insurance contracts, if endorsed for business interruption coverage, cover the loss of profit and fixed charges only for the period of time needed to replace the damaged property.

Therefore, the amount of loss created by the loss of revenue from cancelled contracts or contract postponement can be multiples of what an insurance contract actually covers.

There are numerous other items that can create financial loss that are not covered. They include: loss of employees, loss of management time, loss of key suppliers, loss of market share, loss of reputation, etc.
Depending on the size, complexity, and specific loss characteristics, the above referenced non-covered costs are estimated to be from 1 to 50 times greater than the covered costs.

True protection requires a thorough understanding of risk exposure, implementation of loss prevention and loss mitigation measures, proper insurance coverage, facilitating a business impact analysis, developing and implementing recovery and business continuity strategies, creating team action plans, testing and maintenance of the program, senior management support and funding for all of the above.

Saul J. Swartout is Director, Arkwright Disaster Recovery Services, and Manager, Arkwright Boiler Machinery Services in Malvern, Pa. Pat Moore is Vice President - Business Continuity Education for Strohl Systems, in King of Prussia, Pa.