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[2010; R-2013 | Keywords: Business, Disaster]

Midwesterners often joke that if you don’t like the weather, wait five minutes. It seems like weather across Iowa and Nebraska is always changing. The winter months feature below-zero wind chills, blizzards and ice storms, while the warmer spring and summer months bring tornadoes, floods, flat line winds, hail and severe thunderstorms. While these forces of Mother Nature are part of living in the Midwest, any one of them can wreak havoc on a business.

Already this year, Iowa and Nebraska have both experienced crippling ice storms, floods and several tornadoes – and there’s still six months to go! In addition to these seasonal, “natural” disasters brought on by Mother Nature, other “man-made” disasters, such as fires, can destroy a business as well.

While you can’t prevent disasters like these, there are steps you can take to minimize the loss to your business. First, create a written action plan with some of your key employees to deal with a natural disaster. Federated Insurance Company recommends the plan address two areas: loss prevention and disaster recovery.

A loss prevention plan is designed to minimize potential risk to your business in advance of an emergency. This plan involves:

  • Connecting the fire alarm system to the local fire department.
  • Meeting damage-resistant building codes.
  • Keeping duplicate records of both computerized and written records.
  • Identifying critical business activities and resources needed to support them.
  • Compiling a list of important phone numbers and addresses. (Keep copies off the premises.)
  • Determining a communications strategy to prevent loss of customers.

A disaster recovery plan should be documented and communicated to all employees. Depending on the size of your business, you may want to establish an emergency response team to develop and maintain a disaster recovery plan. The team’s responsibilities could include:

  • Accounting for all employees and extent of injuries.
  • Determining the extent of physical damage.
  • Categorizing systems critical to business continuation.
  • Evaluating damage to each system.
  • Re-establishing systems in orderly sequence.
  • Keeping employees informed of progress.

According to Lesley Sifers, of Tax Favored Benefits, Inc., communication remains a key component of these plans. “While it is very important to have a policy in place, it’s even more important to communicate this policy with your employees,” exclaimed Sifers. She recommends developing calling procedures in the event of a shutdown. “Compile a list of every phone number for each of your employees. Then, if a shutdown occurs, have management call and check on employees so they understand when to return to work.”

Next, develop a plan that includes appropriate insurance coverage. For example, property insurance typically excludes coverage for flood damage. So, if your business is located in a flood zone or is prone to flooding from nearby creeks or ditches, you should make sure you have a flood insurance policy.

In addition, business interruption insurance is another vital piece of the puzzle when a disaster renders a business premises temporarily unusable. Business interruption insurance compensates for lost income when a business has to suspend operations due to disaster-related damage that is covered under its property insurance policy. It covers the profits the business would have earned, based on its financial records, had the disaster not occurred. In addition, business interruption insurance covers continuing normal operating expenses, like electricity, that continues even though business activities have come to a temporary halt.

“Business interruption insurance is well worth the money if your dealership experiences a disaster, such as a tornado or a fire,” stressed Sifers. “It’s a wise investment.”

While commercial insurance policies typically contain business interruption insurance coverage, do not assume that you have it. Ask your business insurance agent if you have business interruption insurance coverage and, if you do, determine the exact dollar amount of coverage and the length of time the business interruption insurance will pay.

How do you determine the proper amount of coverage for your business? First, take a close look at your business income. Business income is defined as the net profit or loss of a business, before taxes. Business interruption insurance provides for the replacement of lost business income which would have been earned had there been no loss.

Next, look at the expense history of your business. Your policy should cover everything necessary to continue business operations, including: mortgage or rent payments, utilities, employee salaries, equipment lease payments and all other operating expenses that will continue after the loss. You may be required to prove your claim by submitting business records, such as financial statements, income and expense reports or other business reports.

In addition, make sure your policy provides extra expense insurance to provide for necessary expenses that may be incurred to minimize the suspension. This includes things such as costs incurred to rent, move and equip a temporary location, or overtime wages to decrease the time operations are down.

Sometimes business owners procrastinate about purchasing business interruption coverage because it is difficult to determine the ‘right’ combination of coverage to give needed protection at a reasonable price. However, neglecting to plan properly for a business interruption can be a serious risk management mistake.

Effective risk management before a loss occurs not only helps you prepare for business interruptions, but possibly reduces the costs as well. However, it may prove difficult to accurately estimate how long it will take to get back into business. For instance, alternate building sites may not be available or materials needed to repair your building may take longer than expected to reach you. Even the time of year affects your business income loss and expenses.

Some important things to consider when researching business interruption insurance include:

  • How much income will you need to continue operating your business in the event of a shutdown of your premises?
  • How quickly will the policy become active after you report an incident?
  • Will you need additional coverage for extra expenses, such as leasing temporary office space, computer equipment or office machines?

In addition, you should make sure policy limits are sufficient to cover your business for more than a few days, since it often takes more time than anticipated to get a business back on track.

Sources: Federated Insurance Co., Insurance Information Institute, Tax Favored Benefits, Inc.