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The Risks Of Extreme Weather

May 22nd, 2013 No comments

iiThe insurance industry is still reeling from our most recent natural disasters, exemplified by the Iowa storms, the Mississippi Valley floods, Japanese Tsunamis and the Florida wildfires. It is increasingly clear, however, that catastrophic risk involves much more than such great natural disasters, the dramatic news of which flashes across the airwaves into our nation’s living rooms.

Less publicized events can be just as disastrous to individual businesses and business owners. This includes everything from fires in a distribution center to an angry employee scorching a company’s computer records; from an out-of-control truck that rams a nearby power transformer to a major embezzlement.

In this era of extraordinary claims exposure, the insurance industry is re-examining its underwriting policies and seeking alternative methods to protect itself against loss. At the same time, individual businesses are adopting formal catastrophe planning in greater numbers.

For example, many companies – sensitized to a loss in the case of their computer data systems – are now taking the next step to have a complete catastrophe plan. Until now, it was mostly large companies that recognized the need for planning ahead, even though they were perhaps better able to weather business losses than a midsize or undercapitalized company. However, all midsize companies now are quickly becoming aware of their inept, pre-loss preparation and realize they should move to a better position themselves.

A catastrophe plan identifies and quantifies the physical and financial resources necessary to maintain operations after a catastrophe. The plan will set forth the specific steps required to appropriately avoid, reduce or transfer loss exposures. As part of the process, insurance recovery will be carefully analyzed under various loss scenarios. This catastrophe planning bridges insurance industry concerns and practices with the specifics of a given business. Long-term risk planning makes businesses better consumers of insurance.

Should catastrophe strike, the insurance policy – a business owner’s most important but least-read document – does become the executive’s most critical document. It is too late, however, to assure that coverages are adequate. Without prior planning, business recovery is always difficult and sometimes impossible.

Catastrophe planning secures the type of insurance coverage required to meet the range of reconstruction and business interruption scenarios that often occur after a loss. Speed and enforcement are essential. In a competitive world with few loyalties, customers lost temporarily soon are lost permanently.

It is to your company’s benefit and peace of mind to hire your own consultant. This professional will assist in developing a catastrophe plan, which will allow you to immediately restore operations in the event of a catastrophe while having the type of insurance coverage that will reimburse all of your post-loss recovery expenses.

Having a public adjuster represent your interest is now even more necessary as the insurance industry changes and becomes more regionalized. When disaster strikes, the insurance company will send out its own team of adjusters, appraisers, forensic accountants and consultants. They will comb through the site and company records. Your claim will not be handled by your agent or broker, but by the impersonal professionals dispatched directly from the insurance company.

A public adjuster has the expertise to recover damage losses in an expeditious manner. Companies can perform admirably under trying circumstances. With the proper coverage and representation, some companies end up expanding business after a catastrophe, having so impressed both customers and competitors.

Catastrophe planning should be an ongoing process. Typically, it would be as simple as an informal checklist to determine if any significant changes are to take place. Often, paperwork is easily forgotten once a business is set into motion and begins to grow. This planning is no different from a family’s periodic reviews of its financial plan.

iwfCatastrophe planning is also a team effort that can include risk managers, business owners, insurance brokers and agents, public adjusters and claims consultants, accountants and attorneys. It begins with contemplation of the unknown, and ends by addressing practical, everyday legal, financial, personnel and competitive issues.

Business planning is a process that sets out a specific course of action for various marketplace scenarios. A catastrophe plan is no different.

The first step in catastrophe planning is a thorough evaluation of the existing business and future business forecasts.

Insurance companies are rigidly enforcing their policies, even with longtime clients. Tough claims practices seen during the recent run of major disasters only highlight a well-established trend, where insurance companies attempt to offset competitive premiums with more restrictive interpretations of coverage.

In many instances, public adjusters or attorneys are engaged to help find ways to fit a company’s loss “into” the pre-existing insurance policy coverages. With proper catastrophe planning, the insurance policy is tailored to your potential exposures. Surprisingly, this does not necessarily mean higher insurance premiums, just a better distribution of coverages to meet your actual needs.

This process may include: purchase of additional types of insurance, such as errors and omissions liability policies; changes in rating plans or premium payment plans; elimination of unnecessary coverages; consolidation or amendment of policy limits and conditions; reconsideration of methods of valuation; and changes in practices regarding insurance and hold-harmless requirements from lessors, suppliers or other contractors.

The catastrophe plan considers both interim and long-range strategies. Factors might include whether to relocate temporarily or outsource to fill existing orders; whether multiple locations should be consolidated; whether equipment and facilities could be modernized or expanded; even whether the business should move to a new location. This is also the time to confront competitive issues that have been mounting up, such as the need to revamp products and services or make adjustments in the workforce.

Without the proper type of coverage, businesses will be exposed to unrecoverable losses, as demonstrated by the standard business insurance forms. And, without an adequate recovery plan, it is impossible to know what you are insuring against.

Consider a manufacturer with a plant that burns down. In some cases, this manufacturer may be able to arrange production and shipment from another location; or it may have sufficient inventory on hand so no potential sales are lost. An insurer might claim no income loss had occurred, as sales never stopped.

Although sales at the time of the disaster may not be lost, the plant later realizes a decrease in forecasted income or inventory. In addition, the plant incurs a reduction of efficiency to maintain operations after the disaster. This type of spending by companies to stay running after a catastrophe is not always recognized by insurance companies as a collectible loss, or by an owner as recoverable under a business interruption claim.

Companies are encouraged to establish partnership agreements that secure assistance in the event of a business interruption. It doesn’t make sense to go to a competitor when faced with contract penalties or the loss of a major client. On the other hand, when negotiated in advance from a position of mutual strength, such arrangements are increasingly successful and even welcomed within industry groups.

Business owners must understand that insurance policies do not provide complete protection, unless they are modified to meet the specific needs of the company. Unless refined, policy exclusions or limitations will prevent complete indemnification.

Consider another example: Disaster strikes; the risk manager pulls out his catastrophe plan, then calls his insurer. Coverages have been carefully tailored to a catastrophe plan, but now the risk manager must work with the insurance company’s professional adjuster from its regional headquarters. Now that a loss has actually occurred, the adjuster does not agree on the “intent” of the existing coverages. Unfamiliar with the policy, the home office is bureaucratic.

Thus, an important step in catastrophe planning is to establish, in writing, that the policies can actually be enforced as intended. This supplement, kept on file by both the policyholder and the insurer, helps bridge the gap between the specific needs of a business and the structured language of most standardized insurance policies.

Now the risk manager knows that satisfactory coverage and an action plan for recovery are in place. This helps deflect the initial emotional trauma of a loss, lessening stress during the recovery process. Although the business owner knows how to respond to the disaster, there are two major obstacles to overcome: restoring the business and the preparation of a claim in accordance with the insurance contract. The risk manager must work with the insurance company’s team of professionals to assure proper damage assessment and claim evaluation. Rarely do companies employ individuals with the expertise to match that of the insurance company’s claim specialists. Public adjusters are commonly retained by a policyholder to prepare recoverable damage claims, consult on available options or alternatives and to recover losses after the disaster.

Here are a series of questions to answer before disaster strikes:

* Where would you relocate? Can you relocate? Could you consolidate locations? How long would it take to set up a temporary facility?

* Would you need extra help or have to lay off employees? Would you work more overtime, incurring extra expenses?

* How would you replace your inventory? How quickly could you replace it? Would there be extra costs? Or is it seasonal and likely to be irreplaceable?

* How long would you be out of business? Consider that costs to operate would likely increase as overall efficiency decreases.

* How would you deal with your customers? Do you have any of their property on your site? Are you contractually obligated for delivery dates? Are there penalties for non-compliance?

* What type of advertising or promotion would be needed to maintain business?

* Could you use outside contractors to outsource production?

* Would you have any union problems at a temporary facility?

* Are your sales or services seasonal? If you missed your season, what would you do?

* Do your book values differ from your actual values on hand?

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