No one expects a disaster to happen to them. Yet if one does, would your company survive? Gartner Group estimates that 43 percent of businesses fail within five years following a major disaster and 29 percent fail within the first two to four months.

Ironically, being in sound financial condition doesn't necessarily guarantee long-term recovery. In fact, a study of the long-term impacts on businesses in South Dade County, FL, of Hurricane Andrew by researchers at the University of Delaware showed that well-established companies in better financial condition prior to the disaster were less likely to have recovered after 18 months than newer, less financially sound companies-perhaps because they had more to lose in the first place. Interestingly, the majority of the businesses studied also performed less than one-third of the disaster preparedness activities surveyed, and these tended to focus on safety rather than business continuity measures. Business executives with the foresight to strategize around business continuity issues know the value of asking "what if" questions. They focus on maintaining infrastructure, temporarily relocating the business, the ability to access mission-critical information systems, and other physical realities of disaster recovery. Many have response teams assigned and public relations plans in place. But most continuity plans still overlook the essential question with the most profound impact on long- term financial recovery: Who's going to pay for it all?

Many companies view the business continuity planning professional's task as one of ensuring uninterrupted "operations," with the ultimate goal of protecting the organization from financial loss. It just so happens that the risk manager or insurance professional's goal is also to ensure a full financial recovery. It's apparent that these two professionals should be joined at the hip, yet most business continuity plans don't specifically detail the insurance claim adjustment process.

Tying Insurance Into Your Business Continuity Plan

It is important to realize that various insurance coverages perform different key roles in the disaster recovery process, often funding the ability to implement vital recovery strategies, such as moving to a temporary location, setting up a hot site in the event of major data loss, providing a financial cushion while ramping back up to full business performance, or covering the extra expenses involved in expediting the recovery process. Following are a few examples of the importance of taking into account the potential roles played by insurance in the business recovery process: An animal feed processor lost its entire poultry feed market when Hurricane Gilbert destroyed most of its customers' chickens (the birds literally blew away in the storm), leaving little need for the insured's products. Fortunately, because they had purchased Customers and Suppliers Endorsement coverage, the company was almost fully covered for this indirect loss.

• An earthquake damaged a major food-processing facility, resulting in its inability to process fields of vegetable crops. Forty acres of crops rotted on the vine due to the lack of a packing-and-shipping facility. The company lost an entire packing season, which translated into lost selling space on supermarket shelves.  Their coverage didn't extend to the loss of field crops, so the company incurred extraordinary unreimbursed expenses regaining its shelf space in stores.
• A condominium association that suffered $250,000 worth of damage to an asbestos roof spent approximately $1 million to dispose of the damaged asbestos-and their loss was only partially covered. (The process of removing hazardous materials can sometimes be more costly than installing the materials themselves.)
• An earthquake-damaged building was neither wheelchair accessible nor did it possess a sprinkler system. New codes required a complete upgrade, but the business lacked Codes and Upgrades coverage, so these expenses were not payable under their policy.
• A building was partially destroyed by fire. The insurer would only pay for the portion that was destroyed, even though the municipality condemned the entire structure for demolition.
• A hotel casino, under construction, could not open on time because a hurricane delayed by four months the delivery of steel needed for its construction. The company's insurance policy did not provide coverage for materials not on the premises at the time of loss. Consequently, the late opening created by the delayed delivery of the steel caused the owners to sustain an extensive loss in earnings in addition to extra interest expenses.
• A company restored its manufacturing facility within three months of a major fire loss, but it took six months for the firm to return to its pre-loss sales volume. The business interruption loss sustained during the fourth, fifth, and sixth months following reopening was not covered (although it could have been, had an extended period of indemnity been added to their policy).
• Fire struck a high-rise office building, causing surrounding streets to be closed off. Tenants and owners in the neighboring buildings could not gain access to their property for weeks.

Where Insurance Comes In

Once your business has experienced a disaster, it suddenly becomes painfully apparent that having analyzed your insurance policy from a "claims perspective" ahead of time could save time, money, and costly mistakes in the aftermath. In addition, it is important that business continuity personnel know how to document each of their recovery activities accurately for presentation to the insurance company and that staff is aware of the pitfalls created by "common" terminology that actually has significant and specific meaning within an insurance context.

Speaking Insurance Language

Insurance language is unique,convoluted, and confusing. Your information technology, physical plant, environmental, security, and financial personnel use terms that on the surface appear similar to terms used in the insurance arena-but which, in reality, have drastically different meanings. Examples of such terms include repair, replace, usable, salvage, temporary, upgrade, pollutant, downtime, permanent, data recover, business interruption, debris, clean, total loss, depreciated value versus actual cash value, damage assessment, mitigate, business as usual … and the list goes on.

An apparently simple and straight- forward statement can impact an entire claims settlement and a company's financial recovery, as evidenced by the following story. During a meeting with The following are just a few of the terms that may appear innocent, but whose use has important meanings and consequences in the insurance arena. (Hint:use the insurance professional you now have as part of your disaster recovery team as a translator in any situation where these terms might arise.) the insurance company's adjuster, a maintenance supervisor said to the company's crisis manager, "I'd say we can make repairs and get everything working again in two weeks." The adjuster heard, "No major damage and a business interruption indemnity period of two weeks," and established the claim with this assumption. What the supervisor meant was, "We can patch things up and get partial production started in about two weeks." Temporary repairs could get operations up and running in those two weeks, but replacement of the damaged equipment would take six weeks to order, three days to install, and then some time to work out the bugs. In his mind, the total time to get back up at full capacity would be about eight weeks. Yet because his statement had already been made to the insurance adjuster, the company had a difficult time proving and negotiating the actual value of their claim to the insurance carrier.

The Importance of Documenting

Aside from language considerations, insurance policies and coverage will have an impact on almost any post-disaster recovery decision. For example, a plant manager determined that, after a flood, everything in storage that got wet needed to be disposed of before it could pose a health hazard. This debris consisted of thousands of items valued between $1,500 to $3,000 each, all of them still used periodically.  This perfectly reasonable plan of action was in the business continuity plan, and was even covered by the policy as it was written, but because the insurance adjuster was not called to view the items, determine whether they were salvageable, or authorize their disposal, the number, disposition, and total value of the items were extremely difficult to prove during the adjustment process. The burden of proof lies with the insured, and the disposal of these items compounded the adjustment process when it was time to compute the business interruption claim. If insurance requirements had been defined as part of the business continuity plan, this multi-million dollar issue could
have been avoided.

Key Insurance Coverages

It's easy to assume that insurance isn't an issue when you believe you are adequately insured, however, experience shows that the following items are often areas of concern when insurance and its application are not considered:

• Extra expenses
• Expediting expenses
• The application of law and ordinance coverage
• Debris removal
• Replacement cost options,
• Business interruption (especially the period of indemnity, as in the manufacturing fire example mentioned earlier in this article).

What You Can Do

In summary, the main issues regarding insurance that arise in a post-disaster situation revolve not around people doing something wrong, but around a simple lack of integration. In each of the examples mentioned here, each department or company representative acted on areas of their individual responsibility. They did what they believed was right, with due diligence and dispatch-however, insurance issues were not taken into consideration, and thus those companies were left open to the risk of losing tremendous amounts of money and substantial recovery time.How can this situation be avoided? By making sure your contingency plan includes basic insurance requirements, procedures, and an understanding of what your staff's options are with respect to insurance. If your team is making informed decisions, there is less likelihood that their statements or actions will carry negative financial ramifications. Including insurance professionals on your continuity planning and disaster recovery teams can make a world of difference in your company's chances for successful long-term financial recovery. 

Key BC Insurance

Questions to Ask
Start by reviewing "what if" scenarios, taking into account where the insurance claim intersects with your plans. Consider the following alternatives:

• How will operations continue in the event of a partial loss?
• Are any or all key employees covered for continuing labor costs?
• What about valuable papers and manuscripts?
• Do we have any special pollution risks?
• How will intellectual property and research be replaced?
• Think beyond the insured premises. What if the loss occurs off premises?
• Do you know the true value of your property and business interruption exposures?
• Do you know what your coverage really is and understand its limits? (Don't assume you're covered for everything.)
• Have all responsible department heads been briefed on insurance and the adjustment process?
• Do you have an insurance team leader included on the disaster recovery team?
• Have you prepared an initial policy analysis and claims strategy? Do all team members understand it?

John Marini is vice president of Adjusters International (AI), the nation's public adjusting organization. A published author, he is licensed as a public adjuster by the states of New York, North Carolina, South Carolina, and Florida, and has led numerous AI disaster recovery teams, including serving as lead consultant to the New York and New Jersey Port Authority during their recovery efforts following 9/11. He can be reached at (800) 382-2468.