Margin Of Safety: Don’t depend on luck the next time disaster strikes
Did you dodge a bullet during this summer’s floods? Lucky you.
by Marzena Czarnecka
A completely unfunny story: a panicked Calgary business owner, her downtown premises underwater, inaccessible and unreachable by clients or herself, is trying to reach her insurance broker to find out what the heck she’s covered for (or not) and what she should (and shouldn’t) be doing to stay in-line with her policy. But she can’t reach him. Because his premises are underwater, too – including his servers and all other lines of communication.
It happened more than once this summer throughout southern Alberta, as the June floods ravaged the province and affected hundreds of businesses, from the multinational corporations headquartered in the towers in flooded downtown Calgary to mom-and-pop shops in rural Alberta and every type and size of enterprise in between.
As provincial and municipal governments continue to tally the cost of the disaster (and debate how to be better prepared for the next one), all Alberta entrepreneurs, affected or not, should be taking a hard look at their businesses’ insurance policies and disaster plans. Because, as too many of them learned the hard way this summer, planning for disaster isn’t a hypothetical thing.
“Many, many businesses impacted by the floods did not have a plan and did not have the capability to respond as effectively as, with the benefit of hindsight, they ought to have,” says Craig Burkart, national leader with Deloitte’s business-insurance-claims practice. That’s understandable, given that even those with a disaster plan and thorough insurance coverage weren’t expecting something of that scale. But then, that’s the thing about disasters, right? They aren’t planned. They whop you upside the head and turn best-laid plans, financial and otherwise, upside down.
Still. “The pain of failure is a good teacher,” Burkart says. Clients across Alberta, directly affected or not, are learning from the experience. And the biggest lesson isn’t “have insurance.” It’s make sure you have the right type of insurance. Most importantly: have the right type of business interruption coverage. Your premises, your contents – you go through all of that with your broker each time your policy comes up for renewal (you don’t? Baby. Review that policy. In detail. Every year– especially if you’re in growth mode). You probably have some type of business interruption coverage as part of that package. But odds are good it’s not sufficient to carry you through a massive disaster. “Many small businesses in particular are not aware of the difference in nuance between the different types of coverage,” Burkart says. And in a case like the June floods, such ignorance could cost you your business.
There are two main types of business interruption coverage: gross earnings coverage and gross profit coverage. Gross earnings coverage kicks in the day of the disaster, and ends the day you’re repaired. “Sounds good,” you might be thinking. “Sign me up!” Not so fast. Think it through for a minute. Whether you’re running a restaurant, a manufacturing plant or a service fleet, what are the odds that after a week, a month or more of interrupted operations, you’ll be running and earning at 100 per cent pre-disaster capacity? Zero, really.
Which is why what you want, almost always, is gross profit coverage. That insurance covers you and carries you through until you are “back to normal.” Operating at pre-crisis levels. Talk to your friend with that restaurant in Calgary’s Inglewood or Mission districts. Even if they “only” lost nine days of operations, when they started up again clients were not lining up at the doors in pre-flood numbers. It takes a while to get “back to normal.” Make sure you have the coverage that will keep you alive until then.
But even with stellar coverage, take note. The longer it takes you to get back to normal, the worse the prognosis for your long-term viability and survival. Research on business survival rates during the recent hurricane disasters in the U.S. – and on closer-to-home events such as the 2012 Slake Lake fire – underscores the fact that the longer a business is out of commission post-disaster, the lower its chances of survival are. “The disruption of normal business for a small business of anything more than a few days – even a few weeks – can be absolutely catastrophic,” says Richard Truscott, Alberta’s director of provincial planning for the Canadian Federation of Independent Business. “The faster businesses are able to return to a somewhat stable state, the more likely they are to survive.”
Gross profit-based business interruption coverage is a critical component of that return to stability – the “right” policy will cover your losses, replace your lost earnings and help you retain your employees for the post-incident period during which they cannot work. (But labour coverage is not automatic. Read the fine print. Odds are, laying off your people is not an option if you want them back the moment you’re operational again. So, you need to keep them and keep on paying them– make sure your insurance policy covers this.) Head spinning? Of course. Insurance is a ridiculously complicated field. But as you now know first-hand – or, if you’re lucky, second-hand – it’s a field you need to become an expert in. Or, at the very least, retain someone to navigate its mines and tripwires for you.
“Before a disaster occurs, people typically are not asking enough questions of their brokers when they obtain their policy,” Burkart says. “And, quite frankly, when it comes to disaster coverage and business interruption coverage, this is frequently an area in which brokers are less comfortable. But you, as a business owner, need to be proactive and ask the hard questions and find out precisely what you are and what you are not covered for.” And plan for the unplanned accordingly – as many businesses across Alberta already are. “The silver lining here is that although a flood affected so many of our businesses, it was also a wake-up call for many that they need to have a disaster plan in place,” Truscott says. “They need to get their heads around the fact that there could be a disaster coming out of left field at them. They need to think beyond their daily operations and plan for contingencies – give some of their focus to reviewing their insurance, crafting disaster plans and business continuation plans in the face of unplanned interruptions.”
Not that he blames any of the affected businesses for being unprepared for what Mother Nature threw at them this past June. “If you had told me six months ago the Bow River would flood the entire east part of downtown Calgary, I would have said you were crazy,” he says.
Oops. “And now we all have in-our-face evidence that businesses need to be prepared to see their way through an event such as this if they are to live to see another day,” Truscott says.
So. Here’s your homework. Pull out your insurance policy and read it very, very carefully. If you aren’t clear on what you are and aren’t covered for in case of another epic flood/fire/tornado/insert disaster of (un)choice here, call your broker and ask questions until you know. Still don’t know, and think the broker doesn’t know? Hire an expert to go through it with you. I know. Money’s tight, and you’re reluctant to write that cheque … but insurance companies aren’t anxious to cut big cheques either unless your policy says they have to, so make that investment. And then, when you have a solid grasp of how you’re covered, sit down and draft a disaster plan. What are you going to do when something big, bad and scary comes at you and shuts you down? What do you do when your systems go down, your assets are destroyed, your customers suddenly can’t reach you? What’s your contingency plan? Your communication plan? Prep it. Know it. Pray you never have to use it. But have it all the same.
A business struggling with the recent flood or other disaster fallout? The Canadian Federation of Independent Business www.cfib-fcei.ca has a variety of support services