Insurance Information Institute

110 William Street

New York, NY 10038

(212) 669-9200









INSURING YOUR BUSINESS AGAINST A CATASTROPHE





A violent windstorm blows the roof off your building 

An explosion in your building knocks out the electricity for  five

weeks

An employee drops a lighted cigarette into the trash can     

before he leaves at night



Tornadoes, riots, fires, sabotage ...



Could your business survive a major emergency?



Businesses that recover quickly are those that have planned in

advance.  They know what they need to do as soon as a disaster

strikes and, most importantly, they have purchased the right

insurance to finance their recovery.



It's also important to develop and maintain an adequate recovery

plan to protect yourself against legal liability for the losses

that might result from a disaster.



Here's a 4-point catastrophe recovery strategy



o  Minimize the risk of damage in advance of an emergency.



Reduce the chance of fire:  Train employees in fire safety,

particularly those responsible for storage areas, indoor and

outdoor housekeeping and maintenance, and operations where open

flames or flammable substances are used; ban smoking or limit it to

designated areas; and modernize the electrical system -- a large

percentage of nonresidential fires are caused by faulty wiring.



Prevent a small fire from becoming a big one.  Make sure you have

the appropriate fire extinguishers on hand and in working order. 

Locate your business in a fire-resistive building -- a structure

made of non-combustible materials with fire walls that create

barriers to the spread of fire -- and in a building with a fire

alarm system connected to the local fire department.



Limit storm-related damage:  There's no way to lower the risk of a

natural disaster, like a violent windstorm or earthquake, but

buildings can be strengthened to reduce the physical damage they

cause.  Make sure your building conforms to damage-resistance

building codes.









o  Develop a disaster recovery plan.



Keep duplicate records.  If your accounts receivable or other

business records are damaged, revenue will be lost and recovery

will be slower.  Reconstruction of data is difficult, sometimes

impossible.  To avoid such problems, back up computerized data

files monthly and store them off the premises.  Keep copies of

important records and documents in a bank safe deposit box and make

sure they're up-to-date.  Compile lists of equipment you own or

lease, by type, model and serial number.  Under several federal

laws, if you fail to maintain accurate business records and to

safeguard those records, you may be held liable.  



Identify critical business activities and the resources needed to

support them:  Many businesses can't afford to close down while the

premises are being repaired because the people who once depended on

their services or products will quickly find a replacement.    



Decide what you must do to retain market share.  If you need to

continue operations, determine what you require to run the business

at another location.  Which activities would be continued and which

employees would be needed to carry out the work?  What equipment,

machinery, tools and supplies would be required?  Are your

employees highly skilled?  Could you easily rehire workers if you

were forced to lay off a part of your workforce?   



Find alternative facilities, equipment and supplies, and locate

qualified contractors:  Plan for the worst possible scenario and do

your research before a disaster strikes.



If you're dependent on computers, contact your computer hardware

vendor.  The vendor may know of a service that provides equipment

in the event of a disaster.  Some will allow you to test out the

emergency plan.  If you need other specialized equipment or a

special environment, consider a reciprocity agreement -- making

arrangements to share facilities with someone in the same business

in a different community.  Sometimes two businesses can make

arrangements to help each other get back into operation in the

event of a loss by lending space and equipment or selling part of

their merchandise.  You should also look into the possibility of

leasing equipment and machinery or buying used items.  



If your business can be operated from almost any empty office or

store, you may not need to make advance arrangements for

alternative facilities.  





Make lists of firms that can supply equipment, tools and raw

materials, and, if you own a store, the merchandise you'll need. 

The more specialized the item or service, the more important it is

to locate a dependable source in advance.  



Contractors are in great demand after a widespread disaster.  Even

if the damage is on a small scale, you'll get back into business

faster if you've identified the kinds of services you'll need to

renovate your damaged premises and the reliable firms that can

provide these services.  Don't forget that the site has to be

cleaned up -- water and debris removed, for example -- before

renovations can begin.  Try to get an advance commitment from at

least one contractor to respond to your needs.



Set up an emergency response plan and train employees how to carry

it out:  The first steps that must be taken after a disaster are

emergency measures.  Knowing what to do when a disaster strikes

reduces panic reactions.  



Make sure employees know whom to notify about the disaster and what

measures to take to preserve life and limit property losses.  These

should include whom to contact for medical assistance, how to call

the fire department and evacuate the building and any special

precautions that should be taken before leaving the premises. 

Different types of disasters may call for different kinds of

measures.



Consider the things you may need initially during the emergency. 

Do you need a back-up source of power? If you're dependent on

computers, find out whether a generator can be used to run your

computer system.  Do you have a back-up communications system? 

When the electric power is knocked out, telephone lines may still

function but electronic phones will not.  If you're likely to have

cash-flow problems, check into the availability of loans and

extensions of credit.



Keep on hand a first-aid kit, a supply of flashlights, batteries,

candles and candleholders and matches.  Are you likely to need food

and water?  Businesses in hurricane-prone areas of the country

should plan to get cash from the bank if there's a storm warning in

case damage to local banks shuts down automatic teller machines. 

Decide how to secure the premises after the disaster and the

building supplies you might need to cover holes in the roof and

windows to prevent rain damage.   



Write out each step of the plan and assign responsibilities to

employees in clear and simple language.  If you employ workers

whose native language is not English, assign someone to make sure

these workers understand what they're required to do.  Distribute

copies of the plan to each employee.



Practice the procedures set out in the emergency response plan with

regular, scheduled drills.



Compile a list of important phone numbers and addresses:  Make sure

you can get in touch with key people after the disaster.  The list

should include local and state emergency management agencies (they

may also provide help in planning for natural disasters), major

clients, contractors, suppliers, realtors, financial institutions,

insurance agents and insurance company claim representatives.  The

list should also include your own employees and company officials. 

Keep copies off the premises -- at home and at a more remote

location in case the disaster is widespread.  

     

Decide on a communications strategy to prevent loss of

clients/customers:  Whether you decide to wait out the

reconstruction period or relocate to temporary premises, current

clients and those who use your services or products regularly

should know how to get in touch with you, and when and where you

expect to reopen for business.  Otherwise many will assume that

you'll be out of action for a long time.



Among the possibilities to explore, depending on the circumstances,

are posting notices outside your premises or elsewhere, contacting

clients by phone or by mail, placing a notice in local newspapers

and asking your friends and acquaintances in the local business

community to help you disseminate the information. 



Consider also the role the media may play in a crisis.  If your

company is likely to be interviewed, have a written plan for

dealing with reporters.  To improve your media skills in a crisis,

watch talk shows and news programs to see how other people handle

such situations.  



    

o  Review your insurance program.  Make sure you have sufficient

coverage to pay for the indirect costs of the disaster -- the

disruption to your business -- as well as the cost of repair or

rebuilding.  

   

For a business, the costs of a disaster can extend beyond the

physical damage to the premises, equipment, furniture and other

business property.  There's the potential loss of income while the

premises are unusable.  In addition, if you 

can't afford to close up shop during the repair period, there's the

extra expense of keeping the business going at a temporary

location.  Your disaster recovery strategy should include a

detailed review of your insurance policies to ensure there are no

gaps in coverage.



Property Insurance:  Take a look at your property insurance policy. 

Is your property -- the building and its contents -- insured for

current replacement prices?  Don't forget to insure any

improvements you've made to the property, such as new storage

cabinets and carpets.  There may be limitations on what the policy

will pay for certain items.  If you need higher amounts, discuss

this with your agent.



Typical property insurance policies exclude coverage for flood

damage.  If you're located in a flood zone (check with your local

municipality or bank about this), you'll probably have to buy a

separate policy from the National Flood Insurance Program.  



If your building is damaged beyond repair, you may have to tear it

down.  In addition, the federal government requires buildings in

flood zones that don't conform to flood plain building codes to be

torn down if the damage exceeds 50 percent of their market value. 

Consider purchasing ordinance or law coverage to help pay for the

extra costs of tearing down the structure and rebuilding it.



Business Interruption Insurance:  After every disaster, some

businesses are forced to close their doors because they didn't plan

for the costs of a disruption to their operations.  Business

interruption insurance compensates for income lost when you have to

vacate the premises due to disaster-related damage (you must be

covered for the physical damage that caused the disruption).  



Like other kinds of insurance, the price is related to the risk of

a fire or other disaster damaging the policyholder's premises.  For

the typical restaurant, for example, the annual premium would be

about $750.  For other types of businesses, it could be less.



Business interruption insurance covers the profits a business would

have earned, based on its own financial records, had the disaster

not occurred.  It also pays for the operating expenses that

continue, such as payroll, even though business activities have

come to a temporary halt.  Make sure the policy limits are

sufficient to cover your company for more than a few days.  After

a major disaster, it can take much longer than many people

anticipate to get a business back on track.  





Extra Expense Insurance:  For some businesses, the cost of

relocating can be greater than the revenue loss.  Extra expense

insurance reimburses you for what you spend, over and above your

normal operating expenses, to avoid having to shut down during the

restoration period.  As with business interruption insurance, the

price of extra expense insurance varies with the industry and the

likelihood of disaster-related damage. 



o  Review on a regular basis all the components of your disaster

recovery strategy --  fire safety and emergency preparedness

measures, business continuation and building repair plans, and your

insurance program.  Communicate changes to key employees.  

     

If you need help in identifing hazards and assessing risk or more

information on how to develop a disaster recovery plan, call your

insurance company and ask for loss control services.