Disaster Resource

INSURANCE... DO YOU HAVE WHAT IT TAKES?
As Business operations change, insurance policies must be updated to meet new demands

By Kathryn M. Rospond

Your company has spent countless hours, maybe even years, developing what you think is the perfect disaster recovery plan. But one important area may have been overlooked--Insurance. No plan is complete without the funds to implement it.

Chances are your operation is not without some type of insurance. The question remains, however, are you adequately insured?

Because of a failure on the part of an agent or corporate personnel to fully understand how your business operates (including its dependence on computers or specialty equipment), a lack of uniformity within the insurance industry when it comes to policies and endorsements, and a lack of necessary endorsements, your company may find itself unable to recover from "the Big One"-and even the not-so-big one.

"It's very typical, when we go into these claims, to see there was either not enough insurance or not the right endorsements," says Lawrie Ackerman, E.E., president, The Price-Hollingsworth Company Inc., Elk Grove Village, IL. Price-Hollingsworth is a consulting-engineering firm that investigates claims on high-tech property (computers, phone systems, office equipment, machinery) for the insurance industry.

Why the lack of proper insurance? "One reason", Ackerman says, "is that companies just tend to renew the same policy year after year without giving thought to how their businesses have changed or grown and the subsequent creation of new operating requirements."

"Take an old-fashioned manufacturing company, for example," she says. "They've got really good insurance coverage on their machinery and tractor trailers and their workman's comp. But gradually, over the years, they become computerized. Maybe they started out with one computer, then two. Pretty soon they have a whole computer network in place."

"Maybe, when they hit $10,000 worth of computer equipment, they realized, Yes, we need computer insurance.' But maybe theyve added another $40,000 or $50,000 worth since then, and that's not covered."

RISK EXPOSURE

"Sometimes being underinsured is the fault of the insurance agent, who in an attempt to lower a company's premiums, inadvertently exposes the business to more danger," Ackerman says. "Other times, being underinsured is a result of being unfamiliar with one's policy specifics."

"Most policies have clauses that require the policy holder to insure their property to 80, 90 or 100 percent of its value," says Linda Dinick, claims specialist, Crum & Forster Insurance, Oak Brook, IL. "If this is not done, it results in a penalty that reduces the amount recoverable under the policy. This can be solved, however, by having a professional appraisal of assets and insuring to the recommended value or requesting an 'agreed amount' policy, which waives the requirement and will not penalize the insured for not insuring to value."

Another reason for being underinsured is the lack of uniformity in the industry. When changing insurance companies, don't ever assume "standard" coverage under one insurer's policy is the same under another's. This is especially true with named perils, such as natural disasters, says Doug Baird, president, Southwest Florida Chapter, Risk and Insurance Management Society (RIMS).

"Earthquake protection in Florida is free, but in California, they would never do that; it's very expensive," Baird says. "The same is true with hurricane insurance here in Florida; it's either very difficult, and almost impossible to get or it's outrageously expensive."

"If we went six or seven years without a major storm or hurricane, coverage would perhaps become available again-until the next disaster. Insurance companies are very reactive in nature. They drop lines, decrease the amount covered or make [coverage] more expensive as circumstances dictate."

SELECTING ENDORSEMENTS

With business computerization comes a new way of insuring operations. And without looking at special considerations for computers, recovery could become increasingly more expensive. For example, while an actual-cash-value (ACV) endorsement would be acceptable for a piece of industrial equipment, because of its long life, an ACV endorsement would be unacceptable for computers.

"The value on high-tech assets, like computers, declines so rapidly in the marketplace," Ackerman says. "A computer that's 18 months old is maybe worth half what you paid for it."

Rather, the insured would be better served with a replacement-cost endorsement, which covers the expense of buying new equipment.

OTHER ENDORSEMENTS TO CONSIDER

Valuable Papers and Records Coverage. This pays the cost of recreating documents, re-entering data (including payment for temporary help) and restoring damaged items. Processes, such as freeze drying after water damage occurs, are effective at minimizing damage, but they also are expensive.

Breakdown Coverage. This provides coverage for system crashes and normal equipment failure. According to Dinick, breakdown coverage has been available for a long time, but many insureds do not have it.

Software. Some policies specially exclude software unless a separate endorsement is requested.

Equipment Rental or Lease. Often considered added expenses, rental or lease of such equipment as computers, printers, photocopiers and fax machines is not necessarily covered. Yet, contract terms generally require a specified coverage level. If the equipment is not insured and damage occurs from a flood, for example, subsequent replacement costs could run into tens of thousands of dollars.

Business Interruption with Extra-Exposure Coverage. While it certainly can be applied to 24-hour data centers, business interruption coverage is by no means exclusive to a company's computerized operations. It can be applied to manufacturing processes or building equipment, such as a boiler, that might be damaged and cause a facility shutdown for an extended period. Business interruption coverage is intended to protect against not only loss of immediate business, but also future business if repairs cannot be made quickly or arrangements have not been made to continue operations at other sites. Overtime for equipment repair is one example of extra-expense coverage that can save considerable money.

PREPARING FOR THE UNEXPECTED

At what point can a company say it is adequately insured? The question is easier asked than answered!

Selecting insurance coverage is not like ordering a family meal from a Chinese menu: one item each from columns A, B and C, and everyone is satisfied. The process is very much dependent on company operations and requirements.

"Take a worst-case scenario and ask, 'What would happen if my business burned to the ground?'" Ackerman suggests. "How many dollars would it take to get back up and running? Would I buy new; would I buy used; can I get this on a shoestring? What would it really take to return my business to 100 percent operation, or 70 percent, or 50 percent? You have to decide on an acceptable level of risk."

Having a well-educated insurance agent to help answer these questions is very important. A company also should have its lawyer review the insurance policy and its endorsements to verify the company is insured for all items thought to be covered. The services of risk managers or certified disaster recovery planners also can be obtained to review a company's needs and policy coverage.

But one of the most important items is to never say never. "Between the floods, hurricanes, fire, earthquakes, the World Trade Center and Oklahoma City bombings it's a foolish business person today who says, 'That can't happen to us,'" Ackerman says.

GETTING THE BIGGEST RETURN ON YOUR CLAIM

When a disaster occurs -- be it flood, fire or earthquake -- and property is damaged, an insurance company does not simply issue a check based on an insured's claim. Outside adjusters and engineering consultants are sent to investigate the site, determine cause and evaluate how much damage resulted from the disaster.

What the insured may not realize is that actions taken both before and after the occurrence can greatly affect the outcome of a claim and how much money is issued as a result.

• Late reporting of a claim, according to Linda Dinick, can be costly to the insured. In one of Dinick's claims, lightning damage to the company's voice-mail system was not reported until three months after it occurred. The system had been replaced for $23,000 at the vendor's suggestion, but analysis of the system showed the equipment could have been repaired for $3,000. The company only received the money it would have cost to repair the system.

• Lawrie Ackerman, recommends updating a list of assets at least twice a year, more often if the company has done a lot of expanding.

"If I insure the contents of my business for $10,000, and then, over the next three years, I've added another $25,000 worth of equipment, I'm not automatically covered," she says. "Insurance companies just go nuts when you do that, and they can penalize you for it."

In the case of Ackerman's business, she updates her assets list regularly and sends it to her insurance agent. A copy is stored off site with other valuable items. In general, items stored off site should include computer backup records, policies, endorsements, backup documentation for accounts payable and receivable, and training and compliance records.

• Ackerman also recommends annual policy reviews by the company's chief financial officer and bank loan officer to prevent items from falling through the cracks. In addition, she requires her agent to send her a letter on the agent's company stationery explaining in clear and concise language the exact extent of her coverage. This letter also is stored off site.

• Continued losses and flagrant safety violations, such as overloaded electrical plugs, are other areas affecting claims. They also can result in policy dismissal. "Usually business insurance is a lot more liberal in attitude than, say, car insurance," Ackerman says. "But if you keep having losses due to negligence or poor judgment, at some point the insurance company is going to say 'Get out of here.'"