Recent fire and windstorm catastrophes that caused extensive building damage are widely reported in the media. Costs are in the billions. Each report seems to set unprecedented levels. However, data reported are limited to “direct costs” for:
• Debris removal
• Reconstruction of buildings
• Replacement of business personal property
Direct costs obvious to all are only the tip of the iceberg because indirect costs are incalculable at this stage and not reportable. Yet each is very real.
Indirect costs are incurred during the reconstruction period. The duration of this period will vary, yet always seems to last longer than initially expected. For example, debris removal may take a month or longer depending on supply and demand of contractors.
Moreover, drafting plans and specifications can take months to complete to your satisfaction. The plan approval process follows with the city or county. If these departments are already behind in such processing today, how long will it take following a conflagration?
Construction itself will take months to complete, so planning should be based on at least a full year for resumption of operations at the original location in most instances. Construction costs can be expected to be higher in a disaster simply because of supply and demand.
During this period, these are some of the unpublicized indirect property risks to be expected — and addressed — in advance of any catastrophe:
• Upgrading to current building code standards.
• Business income will reduce, if not “evaporate,” yet fixed costs continue.
• Long-term employees need to be retained — but at what cost?
• Customers will shop elsewhere during the shutdown, but will they return?
• Your building may be undamaged while one or more other structures in your shopping center or office complex are severely damaged with the overall area cordoned off so your customers or clients cannot enter your business.
• One or more of your key supply chain sources anywhere in the world can be totally shut down and unable to deliver product to you. (Remember Fukushima?)
• Service businesses need to incur costs well above normal operating expenses to continue customer service from a temporary location.
What are the solutions?
For building code upgrade, an endorsement for building ordinance coverage should be added and the amount of insurance adjusted accordingly.
For example, if your building is 10,000 square feet or larger and not equipped with an automatic sprinkler system, you’ll be required to add this costly installation. (Fortunately, your fire insurance will cost much less in the future.)
ADA requirements may be a factor as well.
Business interruption and extra expense coverages are the primary solution. However, coverage enhancement endorsements may still need to be added. For example:
• Such insurance fund’s profits that otherwise would have been earned as well as pay fixed expenses that continue even though the business is shut down. However, continuing expenses typically include salaries only of key employees. To cover ordinary payroll, an extension endorsement is needed.
A manufacturer on the East Coast was widely publicized and hailed as a hero for continuing payroll of all employees while his plant was totally shut down. His secret? Extended business income coverage to include all employees, not solely key employees.
In addition, when operations resume, revenue is inevitably lower than at the time of loss. An extended period of indemnity endorsement for six months (at least) should plug this gap.
For businesses that cannot shut down, extra expense coverage is available to fund added costs incurred for rental of a temporary location, overtime for employees and other marginal costs to keep customer services uninterrupted and keep revenue flowing. (Advance payments from your insurer should be requested if not offered.)
Where buildings are not damaged — nor even within the disaster zone — customers may not be permitted to access the business, or a remote supply chain may be shutdown. Contingent business income coverage is available.
These scenarios apply not only in wildfires and hurricanes but also in the overdue catastrophic risk confronting us in Kern County: a major earthquake. “Major” means 8.0 intensity and shaking for 120 seconds (instead of 7.3 and 20 seconds here during our lifetimes).
Get earthquake proposals from your broker for both an extension of your current policy and for a separate earthquake (DIC) policy where premiums and deductibles typically are lower.
Finally, draft a disaster plan (to save lives) plus a business continuity plan (to save your business).
Once you have taken these important steps, you’ll enjoy the key benefit of risk management, viz., a quiet night’s sleep.
John Pryor is a local risk management consultant and author of “Quality Risk Management Fieldbook” published by International Risk Management Institute in Dallas for business owners.