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."
Content Continues Below
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."
Page 1 |
2 