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.