When it comes to extreme weather, 2018 was a doozy. Weather disaster costs exceeded $155 billion for U.S. homeowners and businesses. This total was only slightly behind 2017.
According to a report issued by the Federal Emergency Management Agency, 40 percent of businesses impacted by an event do not reopen following a natural disaster. On top of that, another 25 percent fail and go out of business within one year. According to Business Insider, a small business probably won’t survive if it does not resume operations within 10 days following a natural disaster.
Pennsylvania home and business owners are particularly vulnerable to flooding. We live and work in one of the most flood-prone states in the nation, with approximately 83,000 miles of rivers and streams and nearly 2,400 local governments enrolled in the National Flood Insurance Program. Part of what makes Pennsylvania special and a great place to live and work is the general proximity of water.
Pennsylvania businesses can guard against natural disasters with careful planning. They can protect themselves further by having effective property coverage, including business interruption insurance coverage.
Here are steps to create a disaster action plan for your business.
1. Identify your critical business purpose
In 50 words, describe all the things your business does. What consequences will result if your business is temporarily shuttered? What can you do in advance to mitigate these consequences? You may discover different priorities as you plan.
2. Identify critical business functions
Ask department heads to identify and analyze critical business functions, and develop alternative processes or capacities in the event of a disaster.
3. Prepare for risks
Which risks could potentially put your company out of business in the event of a disaster? These risks could include spoiled inventory, lost data, ruined machinery, broken supply lines and unhappy customers. What can you plan to do in advance to mitigate these risks? Once your plan is in place, practice the plan to uncover areas to improve or modify.
4. Enlist the assistance of disaster experts
The American Red Cross Ready Rating program offers free business preparedness training. For-profit businesses are also available to help plan for a disaster.
5. Choose a recovery team
Identify key personnel who are most likely to respond well to a disaster. These individuals should be at a location and have the organizational skill and knowledge to provide an important contribution to the recovery process. Assign roles and responsibilities to your recovery team.
6. Be aware of your surroundings.
Are you in a high-risk flood zone? Do woods surround your business and a drought is ongoing? Plan for these risks accordingly.
7. Plan to protect crucial parts of your business
Manufacturers should create a list of alternate suppliers before supply lines are broken. Vital company inventory can be stored in multiple locations. Contact key customers and employees via text messages, social media or email.
8. Plan to protect your data
Have a data backup and disaster-recovery system in place prior to a disaster. This is particularly important since 90 percent of businesses experiencing a data center outage lasting more than a week close permanently. In all likelihood, your business will need professional support from a service provider. Look for one with a good reputation and 24-hour support.
9. Inventory your equipment
In order to file an insurance claim following a disaster, you will need details. Ideally, you will have a list with photos of your property, plant and equipment. This includes computers, office furniture, machinery, motor vehicles and all other physical assets used to run your business. This list should be readily available and in more than one location.
10. Test and test again
Test your plan in advance to iron out any kinks. Don’t wait for the next thousand-year storm to hit before putting your plan in practice.
11. Keep your plan current
Update your plan every year to account for changes in your business and the business environment.
Even with careful planning and preparation, your business will still be vulnerable to a natural disaster. This is why it is so important to protect your company with business interruption insurance coverage.
What is business interruption and extra expense insurance? Let’s start by describing standard property insurance, which covers physical damage and losses to a business.
Standard property insurance coverage can help a firm recover from damage and loss by paying the costs of rebuilding or replacing damaged tangible property.
What about losses resulting from a business’ inability to operate following a disaster? For this type of loss, your business will need business interruption insurance.
Generally, business interruption insurance will cover three types of losses:
- Revenue lost due to a business closure
- Fixed ongoing expenses including rent, utility and payroll costs
- Extra expenses resulting from a shift of operations to a temporary location
To determine a business interruption loss, the affected firm must be able to establish what the business would have earned had the covered business loss not occurred. Insurance companies will take into account past tax returns, profit and loss statements, projected sales and non-continuing expenses. In order for the business interruption losses to be properly projected, the affected firm should keep accurate records on file.
It is important to note business interruption coverage cannot be purchased as a stand-alone policy. It can be purchased only as part of property coverage.
It is also important to note business interruption coverage must be related to the underlying policy, as the coverage will only extend to causes of loss (events) outlined in the core coverage. For example, business interruption coverage for a cyberattack can only be purchased with an underlying cyber insurance policy.
As in all insurance policies, there are limitations and exceptions. The policy must be carefully written according to the unique needs of your business. The best place to start is with your trusted broker. He or she will understand both your business needs and your present coverages, and have wide access to the insurance marketplace to support your goals.
Kevin McPoyle is president of KMRD Partners Inc., a risk management consulting and insurance brokerage firm in Warrington. He can be reached at [email protected].