Risk Management & Insurance
Safe, not sorry
Unforeseen catastrophe doesn’t have to spell disaster for your business.
By Chelan David
Smart Business Los Angeles | June 2007
John E. Watson
Executive director
Higher Education Practice Group
Arthur J. Gallagher & Co.
Disasters, both man-made and natural,
can occur at any place, any time. If
unprepared, a business could be faced with devastating consequences.
John E. Watson, executive director, higher education practice group for Arthur J.
Gallagher & Co., says creating a disaster
plan is essential to ensuring a company’s
well-being in the wake of a catastrophe. “A
disaster preparedness plan, or a crisis management plan, is intended to establish policies, procedures and an organizational
structure for an effective response to emergencies,” he explains.
Smart Business spoke with Watson
about how to craft a disaster preparedness
plan, the importance of business interruption insurance and what other types of coverage should be in place.
How should a business go about creating a
disaster preparedness plan?
A well-designed plan will describe the
roles and responsibilities of each of an
organization’s operating units during exigent situations. This includes natural and
man-made perils, as well as domestic and
overseas situations. A plan should define
actions that target a safe, effective and
timely response and recovery. The overar-ching focus of the plan should be to protect
lives (the primary goal) and other assets of
the firm.
What are the potential consequences of not
being prepared for a disaster?
The absence of a response plan increases
the losses from every angle and extends
the length of a business interruption considerably. If employees are well-educated
in response scenarios and feel that they are
a vital part of saving the business and their
livelihoods in the event of a crisis, the
responses are much more effective. This
can lead to improved shareholder value,
community standing, brand image, customer satisfaction and employee confidence.
An example of a success is Wal-Mart; following Hurricane Katrina they were able to
bring 70 percent of their stores back into
operations within 48 hours. This wasn’t the result of having a crystal ball and being
able to anticipate a Category 5 hurricane. It
was because they had a well-defined crisis
response and recovery plan in place.
Why should a crisis communication plan be
implemented?
Employees are critical to the success of a
crisis response and business continuity
plan. Therefore, having alternatives to the
traditional communication methods such
as e-mail and other data systems is important, especially if those systems are taken
out as a result of a disaster. Without clear
direction from senior management and the
crisis management team, it is impossible
for employees to know exactly what direction they should be taking.
How important is it for companies to back up
their computer data frequently?
The more frequent the backups are, the
less likely that you’ll be presented with a
loss of critical data. Not only should you
make frequent backups, but you should
also store them appropriately so they do
not become damaged during the crisis situation. If a company is located in an earthquake zone in Southern California and they
store their backups at a site that happens to be on the same earthquake fault, then
they haven’t created the security they need
for that data. They need to find a way to
locate the backups off the same earthquake fault.
What is business interruption insurance and
why is it so important in the event of a disaster?
Business interruption insurance is a time-element coverage that pays for loss of
earnings and extra expenses that a business incurs due to a disaster. It is a property insurance form so there must be damage
that would be covered under the property
insurance policy. An extension to that coverage is off-site time-element coverage.
Let’s say a firm relies heavily upon electricity for the operations of their infrastructure
and doesn’t have an on-site generator. If
their off-site power grid goes down, and
stays down for the required length of time
for the deductible, then they are eligible to
collect from their property insurance the
resulting income loss from not being able
to provide their services. The extra
expense provision would allow them to
bring in portable generators or other equipment to help reduce the size of their overall financial loss.
As related to disaster preparedness, what
other types of insurance coverage should a
company have in place?
To some extent that is dependent on the
type of operation. If a firm has overseas
operations or has employees traveling
extended distances, executive assistance
programs can help them be repatriated if
they are impacted by a civil disturbance in
a foreign country. Similarly, kidnap and
ransom coverage can help firms with overseas operations. Obviously, anywhere in
Southern California there is the potential
need for earthquake coverage or other
financial models to prevent a loss from
earthquake damage. Flood insurance is
also something that should be considered.
JOHN E. WATSON is executive director, Higher Education
Practice Group for Arthur J. Gallagher & Co. Reach him at (818)
539-1445 or John_Watson@ajg.com.
