From the January 1997 issue of Startups

These days, it's nearly impossible to turn on the evening news without hearing of some major disaster. Since 1992, we've witnessed three of the four most costly disasters in U.S. history, as Hurricanes Andrew and Opal, along with the Northridge, California, earthquake, caused billions of dollars' worth of damage. And it doesn't end there. In 1996 alone, Hurricane Fran wreaked havoc along the East Coast, more than 1,000 tornadoes spread terror across the country, and massive flooding brought much of the Midwest to a standstill.

In spite of all the press coverage, however, many business owners have yet to develop an effective disaster plan. "The overwhelming majority of business operators are simply not prepared," says Gerry Havlena, general manager and CEO of First Restoration Services in Greensboro, North Carolina. "They come into work one day and find out their property has been burned or flooded, and they panic because they haven't done any planning."

Particularly for small businesses, that lack of planning can be disastrous. "Many small businesses are not sufficiently capitalized," explains Sean Mooney, senior vice president of the New York City-based Insurance Information Institute. "If a disaster occurs, they'll quickly run out of capital and be out of business."

The key to staying afloat in the aftermath of a disaster is advance preparation, centered around a carefully structured insurance program. "Many companies don't pay enough attention to their insurance program until a loss occurs," says Vince Cali, associate national director for business consulting at Deloitte & Touche LLP, a professional services firm specializing in accounting, auditing, and tax and management consulting, in Dallas. "You can usually replace the assets of a company, but you'll have a very difficult time recovering business if you are down for an extended period of time."

In spite of a devastating fire that closed his mattress manufacturing plant for nearly a year, Joe Riney, Jr., third-generation co-owner of Riney Bedding Co. in Louisville, Kentucky, never had to worry about recovering business. Although the factory sustained $200,000 in damages from an April 1989 blaze, manufacturing was up and running again in a matter of days, due to a strong insurance program and the cooperation of other local manufacturers.

Because Riney's company carried extra expense coverage, his insurance company paid not only for restoration of the plant's Victorian-era building, but also for temporary relocation of its manufacturing operations. While the leased facility was being prepared, other bedding companies in the area granted Riney the use of their plants to help keep his manufacturing on schedule.

This kind of arrangement, formally known as a reciprocity agreement, has become an increasingly common way for businesses to deal with disaster. After 1993's World Trade Center bombing in New York City, a large percentage of displaced companies sought temporary refuge within other businesses' quarters. A nearby law firm, for example, shared its office space with H. Abbe International, a travel agency and freight forwarder usually located on the Center's 28th floor.

Owner Herb Abbe relocated his entire operation into the law office for a month while repairs were completed. Despite the arrangement, however, Abbe estimates he's still out $70,000 in lost business and relocation expenses. Business-interruption insurance would have covered his lost net profit, as well as continuing expenses, such as taxes and salaries. However, Abbe says his broker never offered the coverage, so he was in the dark about its benefits.

Abbe's not alone. Nearly half of U.S. business owners don't purchase business-interruption coverage. According to Mooney, a little homework and a well-developed business plan can help them avoid being caught under-insured.

"Business owners don't have to be insurance experts," he says. "They need to be experts on their own business and the factors that can hurt them, and be able to convey that information to their agent."

For too many business owners, however, insurance decisions are based on budget, rather than on need. They simply don't want to take money they could use elsewhere and put it toward insurance. They treat insurance as though it is a luxury. For that reason, many small businesses neglect to carry specialized coverage, such as earthquake insurance.

"Many companies today will take on the risk themselves, rather than buy all the insurance they could possibly use, because the expense to protect the company from all potential risks has gotten very high," says Cali.

Flights of Fantasy Books in Santa Monica, California, is still digging out from the debt it incurred from 1994's record-breaking Northridge earthquake, and all indications are that it will be for several years. Less than a year old at the time of the quake, the science fiction and fantasy bookstore was forced to take out loans to cover relocation costs and $30,000 in lost inventory.

"Earthquake insurance was initially offered, but we refused it because of the price," says manager Jean-Louis Wolfe. "Later on, when we're big and successful, we'll probably get it, but right now, the overhead is just too high."

Although Wolfe again declined earthquake insurance, experts say he was in the ideal position to evaluate his coverage. "We encourage our clients to assess their coverage after a major loss," says Cali. "That's usually when they'll have an excellent idea as to the responsiveness of the coverage."

Other compelling reasons for reassessment include drastic operating changes, such as acquisitions, mergers and new management.

A disaster's aftermath can also be a good time to upgrade outdated facilities. While business-interruption insurance only covers the time it takes to repair insured assets, extended period of indemnity coverage provides extra time to woo back customers or to update facilities to modern specifications.

"It's not practical to close down the entire business and just start rebuilding," says Cali. "If you have a loss, you're in that predicament already, so it's a good opportunity to take advantage of whatever insurance is available and rebuild to address the future growth demands of your business."

Another way companies can prepare for potential disasters is by practicing proper document storage. According to Havlena, the majority of business owners are unaware of the importance of an off-site back-up location for both their computer and their paper records.

"People think they won't need their old files, so they don't give much thought to where they put them," he says. "Lo and behold, they have a loss, and they need them for recovery purposes, or simply to continue running the business, but they're often misplaced or destroyed."

Although large corporations are more likely to have vast computer files, the issue of data protection may be even more crucial for small companies. While disaster-recovery specialists are often called in to provide "hot sites" for major corporations, small businesses usually cannot afford such services and must take a more grass-roots approach to data protection, such as using uninterruptable power supplies and investing in redundant equipment.

John Kreitler, partner with the Hartford, Connecticut, law firm of Shipman & Goodwin, counsels businesses on the technological ramifications of a disaster. Once again, planning is the key to survival. "You're not going to have time to think about it when disaster strikes," he stresses. "You have to have a plan in place that you know will be effective."

These few simple precautions, combined with a strong insurance program, can keep a business running rather than standing idly in the rubble. "Companies simply cannot afford to be operationally vulnerable after a major loss," says Cali. "In our competitive environment, if you can't immediately recover, you could lose your share of the market."

Key Terms

Business-Interruption Insurance--Covers continuing expenses, such as taxes and payroll, as well as loss of net profit.

Extra Expense Coverage--Pays for temporary relocation of workers and machinery, allowing a business to continue operations while repairs are taking place.

Extended Period of Indemnity--Adds on to the period covered by business-interruption insurance to allow for extra time to get revenues back up to pre-disaster levels.whereby if one suffers a loss, the other will permit temporary use of its facilities.

Disaster Recovery--Services offered by specialized firms, as well as major computer manufacturers, to help businesses avoid loss of crucial computer data.

Julie M. Cook is a Rockford, Illinois, journalist who specializes in small-business topics such as sales and marketing and human resources.

Contact Sources

Deloitte & Touche LLP, 2200 Ross Ave., Dallas, TX 75201, (214) 777-7000.

Flights of Fantasy Books, 523 Santa Monica Blvd., Santa Monica, CA 90401, (310) 917-9112.

H. Abbe International, 2 World Trade Center, #2844, New York, NY 10048, (212) 839-9211.

Insurance Information Institute, 110 Williams St., New York, NY 10038, (212) 669-9214.

Riney Bedding Company, 431 E. Market St., Louisville, KY 40202, (502) 587-8469.

Shipman & Goodwin, 1 American Row, Hartford, CT 06103-2819, (860) 251-5119.