Getting Back to Business
Whether it’s fire, lightning, explosion, earthquake, riot, vandalism, storm, flood, broken pipes or theft, no business -- small or large -- is immune from disaster.
Best advice: be prepared
While you can't control if and when a disaster strikes, you can be prepared. A proactive plan with backup copies of company records and adequate property and business interruption insurance coverage will go a long way toward protecting your company.
Vital records may include:
Financial and insurance information
Engineering plans and drawings
Product lists and specifications
Employee, customer and supplier databases
Formulas and trade secrets
Preserving vital records is essential to the quick restoration of operations. Analyzing vital records involves:
Classifying operations into functional categories, e.g., finance, production, sales, administration
Determining essential functions for keeping the business up and running, such as finance, production, sales, etc.
Identifying the minimum information that must be readily accessible to perform essential functions, e.g., maintaining customer collections may require access to account statements
Identifying the records that contain the essential information and where they are located
Identifying the equipment and materials needed to access and use the information.
Next, establish procedures for protecting and accessing vital records. Among the many approaches to consider are:
Labeling vital records
Backing up computer systems
Making copies of records
Storing tapes and disks in insulated containers
Storing data off-site where they would not likely be damaged by an event affecting your facility
Increasing security of computer facilities
Arranging for evacuation of records to backup facilities
Backing up systems handled by service bureaus
Arranging for backup power
Review your current insurance coverage. Is it enough to get your business back in operation? Will it cover the replacement cost of vital facilities? Make it a regular annual procedure to review and update insurance. Also remember that insurance on mortgaged property probably only covers the lender with nothing left over for you.
Be aware of your contents insurance. Does it cover the replacement cost of critical equipment?
Know what your insurance does not cover. Most general casualty policies do not cover flood damage. Many require additional riders for windstorm, sewer backup, or earth movement. Consider adding coverage for likely perils, especially flood insurance.
Consider business interruption insurance that assists you with operating needs during a period of shutdown. It may help you meet payrolls, pay vendors, and purchase inventory until you are in full operation again. Also be prepared for the extraordinary costs of a disaster such as leasing temporary equipment, restoring lost data, and hiring temporary workers.
Don’t assume that, just because it never happened before, it never will. Flooding patterns are changed by development: water, which runs off new streets and parking lots, may overwhelm nearby streams and surrounding land. Landslides and sinkholes may develop because of distant earth movement, natural or man-made. The creek by your building may be a tiny, placid stream that has never flooded, but a downpour may change it into a destructive torrent that destroys your building foundation. Plan for the worst.
Business owners may already have property insurance, but that pays just for damage repairs. What about the income lost if the company has to close down for a few days, a few weeks or even longer? Business interruption insurance, also known as business income coverage, protects the profits that an owner would have earned had there been no problem. The insurance is generally bought as a package with property insurance.
There are two types of business income coverage policies:
Named Perils -- This less-popular option provides coverage only for specified perils, such as fire, windstorm or vandalism. If damage occurs due to any unnamed peril, the policy will not provide coverage.
All-Risk Policy -- This option covers damages caused by all types of perils except those specifically excluded. Perils typically excluded are flood and earthquake coverage, but even these can be added on for an additional fee (flood coverage is underwritten by the federal flood insurance program).
Business interruption coverage
Business interruption insurance provides for two financial loss scenarios: Loss of income due to interruption of operations, and additional expenses incurred as a result of efforts to continue business operations.
The owner may face paying for:
Lease or mortgage payments and ongoing utilities.
Relocation to a temporary building.
Quick replacement of materials from vendors, who may charge higher prices and delivery charges.
Overtime to keep up with production demands.
Securing the products and/or services of competitors to help manufacture or supply orders.
Advertising to confirm the business is still operational.
Re-compiling business records, financial and legal documents lost as a result of the fire.
Business interruption insurance can also provide paychecks for key salaried employees that an owner does not wish to lose while the business is shut down.
Business interruption premiums
Business owners will have to shoulder some of the post-disaster costs. It's inordinately expensive to get 100 percent coverage; the insurance company generally requires that the business owner assume responsibility for some part of the loss.
An 80/20 policy is typical, and generally provides for lower premiums while paying for 80 percent of the loss. The business owner picks up the tab on the other 20 percent.
Business interruption claims
One of the most important disaster preparations you can make is to secure your business documents offsite so you can get your hands on them quickly should a disaster occur. Financial records are necessary to verify the value of claims made. Indeed, it may be difficult for a new business with no history to establish its actual loss of income; every enterprise should have business income coverage.
Even if profits cannot be reimbursed -- either because you don't have any or you cannot prove a history of making money -- you are still likely to incur additional expenses while trying to keep your business buoyant.
Home Based Businesses
Those who operate a business out of their homes face an extra challenge: loss of equipment, records, inventory and tools, loss or interruption of business as well as being displaced. Many home-based business owners find that their homeowner policies do not cover things like business equipment and computers, tools, inventory, samples, or loss of income. They need to have a second policy to cover the business.
Homeowners who live in flood plains need to purchase flood insurance to cover their home and contents. Normal flood insurance still does not cover the business being run out of the home. A second policy is needed for business contents as long as the incidental occupancy is less than 50% of the total structure or square footage. If it's more than 50%, it's all a non-residential flood policy coverage.
Further steps home-based business owners can take to avoid disaster include back-ups of records for computer dependent businesses stored off-site. A safety deposit box is recommended. A fireproof safe is another way to store records used daily. Consider where business equipment is located and whether it is near a hot water tank or pipes that could burst in an earthquake or flood, on the floor, or where things could fall on it. If your business is telephone dependent, a voice mail system could be a benefit if electrical service is interrupted and telephone service is lost, so that calls could be redirected to another number.
The Federal Emergency Management Agency (FEMA)
U.S. Small Business Administration (SBA)