With the recent devastation caused by hurricanes in Texas and Florida, and other natural disasters such as wildfires raging up and down the West Coast, business owners are looking closer at insurance for unexpected catastrophes or losses, according to experts.
The government estimates that 40 percent of companies that haven’t prepared themselves to operate after a major disaster are forced to shut down. And, of those, about 25 percent fail within two years because of inadequate post-disaster revenue or cash flow.
But insurance could help, according to Nelson Aldrich with Winton-Ireland Insurance.
From a risk management perspective, what an agent tries to do is forecast all the potential losses and use insurance as one of the mechanisms to avoid that risk, he said. “We find that a lot of companies are either uninsured or under-insured for different losses.”
This might include fire sprinkler leakage due to an earthquake or even sewer backups or other damages caused by a natural disaster.
Most small- to medium-sized businesses tend to carry insurance on their buildings, vehicles and business property (such as tools and equipment), according to Aldrich, but what insurance agents don’t see enough of is business-interruption coverage and front-end risk management.
Business interruption coverage
“Think of this as your ‘profit protection,” he said.
If, for instance, your company suffers a loss due to flooding, windstorm, hail, electrical failure and resulting spoilage, downtime, etc., then your business interruption insurance kicks into play. The policy is designed to reimburse a business for their loss of net income after a sustaining a loss that brings their business to a halt or substantially inhibits their ability to perform core functions.
Front-end risk management
Front-end risk management means taking the steps necessary to mitigate or avoid the loss in the first place.
Aldrich’s company is one of many that consults with businesses to see the losses before they happen and engineer away the likelihood of the loss happening in the first place, or minimizing the resulting damage in the event of a loss.
One example is a manufacturing client in Lodi they worked with to create a continuity plan for several loss variables including fire, flood and loss of power. This what-if continuity plan included a set of actions that needed to be made, timelines and accountable parties, to ensure that the business could be back up and running within a week of a catastrophic loss.
Aldrich advises that every business seek out a partner who will study their unique operation and design a solution that involves both a first line of defense (risk management) and a second line of defense (insurance).
“Many companies look at insurance as a necessary evil, but the best-run businesses look for ways to maximize the return on investment in their risk management programs,” he said.
Whether fire or flood, experts say insurance and disaster-preparedness plans are necessary. Storms, floods, earthquakes, fires and man-made disasters can strike anytime and anywhere, so planning for a post-disaster recovery is a good step toward protecting your business, according to insurance companies.
Here are the other ways small businesses should prepare for a natural disaster, as recommended by the Small Business Administration:
Make a reliable emergency response plan
To protect your employees and clients, business owners should know all the proper evacuation routes and ensure everyone else is informed as well. It is recommended to post escape routes and plans throughout the building and keep emergency phone numbers readily available.
Create a survival kit
Every business should have a kit with disaster-ready items, such as a flashlight, plastic sheeting and garbage bags. Consider storing a digital camera as well to take photos of the property damage for your insurance company.
Back-up all electronic data
With most business transactions conducted electronically, it is crucial that files and data are backed up and saved. A company may not be able to re-establish itself without important financial and client databases. It is recommended to save all your files — including the last few years of taxes — at least two times; store one in a waterproof container at the office and the other in an offsite facility. Anything that you are currently working on should be mailed to yourself on a Web service that can be accessed from any computer.
Determine a communication strategy
Plan a strategic and efficient way to communicate with employees and clients while your business operations are down. Also, make sure everyone understands their communication responsibilities.
For example, who is going to be responsible for contacting the insurance company? Or who will contact clients to update them? Or who will be the point person in case information needs to be relayed immediately?
Lastly, ensure that you have enough insurance coverage
Before a natural disaster is given the opportunity to blow your business away, make sure to review your insurance policies. What kind of coverage do you have on your facilities and properties? Are they enough to insure your recovery if a disaster does physically destroy your business?
Small business owners should also consider business interruption insurance in case they are forced to close their doors for a substantial amount of time.
In the end, Aldrich said the good news is most — about 90 percent of small businesses — have an insurance mechanism in place to make them at least partially restored to their pre-loss position. Far fewer (about 15 percent) are what insurance agents would consider best-in-class by taking a proactive approach to avoiding risk.
“Let’s face it, the time necessary to create a robust ‘what if’ plan can seem cumbersome or even insurmountable. The temptation to just buy insurance and forgo the first line of defense can be too enticing when you have a business to run,” the agent said.
“The good news is that there are insurance agencies who can streamline the process for business owners. This approach increases peace of mind, saves time and reduces the short- and long-term cost of doing business,” he said.