Published by: Rough Notes
Written by: Randy Boss
RISK MANAGEMENT: FOREWARNED IS FOREARMED
Imagine you are sound asleep, your phone rings and the person on the line says, “Your business is on fire.” That’s the call the owners of Allegan Metal Finishing got in March 2015. The family-owned business that started in 1958 was burning to the ground, putting more than 80 employees out of work and no longer able to provide for their families. They all went to bed on Saturday with a job and woke up Sunday suddenly faced with having to hunt for one. A worker who started with the company in 1985 said, “I worked 30 years at the same place, and now I’m trying to find a job the day after it dies.” According to news reports, another worker asked, “What am I going to do? How am I going to support my family?” This employee said that he worked at the company for more than six years, and with two children and another child on the way, he thought he’d finally caught his break. But in an instant, everything changed. “I was awoken at 5 o’clock in the morning to be told that I don’t have a job anymore,” he said.
That was in 2015, and over a year later all that remains is a pile of rubble and lots of broken hearts and dreams. No plant, no jobs, no more business. Why is that? They had insurance, and maybe they just decided to take the money and call it quits. But it’s also possible they didn’t have enough coverage for loss of income and the extra expenses needed to rebuild, leaving them with no other options.
Despite seeing reports in the news like this, which seem to occur almost every week, many businesses never consider the impact of what it would be like if something like this happened to their business.
According to a study by the U.S. Small Business Administration, up to 60% of small businesses fail following a significant loss. Even though large companies are more likely to address these exposures because they have dedicated risk management departments, many smaller companies still have inadequate insurance limits.
We also know that soon after the initial shock wears off, one of the first calls made will be to their insurance agent, asking the question, “Are we covered?” Now think about your clients and ask yourself these questions: “The last time I reviewed coverage with them did I do my best to make them aware what it would be like if there were a major fire at their place?” or, “Did I use examples of other business enterprises that were not prepared?” or, “Did I take the time to explain the importance of completing a business income worksheet?” or, “Did I encourage them to be realistic about the length of time it takes to rebuild their business?”
To manage risk, you need a process. I adopted the five steps of risk management which I learned while completing my Certified Risk Managers designation from the National Alliance for Insurance Education & Research. I like it because it forces us to manage risk before rushing into the financing of risk and the insurance policy. Here is a simple example to illustrate how to manage the risk of a business interruption.
Identify–What are the risks to our business if we have a major fire? We would lose our customers and the cash flow we need to run our business. We would lose our employees because, if we can’t pay them, they will move on.
Analyze–What will it take to keep us in business? We need to complete a business-income worksheet and consider a realistic worst case scenario timeline as to when we will be able to resume operations.
Control–What can we do to control the loss and damage to our business? We need to develop a disaster plan. We need to consider methods to service our customers by collaborating with similar businesses, in order to help one another if either of us needs it.
Finance–How do we survive financially? We survive by purchasing adequate insurance coverage based on thoughtful analysis. But we don’t just “wing” it because we are in a hurry.
Measure–How do we measure results? We can only accurately measure our results by reviewing the plan regularly so it stays fresh and current.
Business interruption insurance replaces lost net income, as well as ongoing regular operating expenses. Extra expense coverage covers costs beyond lost business operations, such as relocating the business, expedited shipping, overtime pay and other expenses that minimize downtime. It’s also important to have clients consider how they will serve their customers, so they don’t lose them if they can’t get service. Once gone, they rarely return.
When helping clients evaluate business interruption coverage, there are several key factors we need to consider:
The type of business: The need for business interruption insurance for a manufacturer, for example, will likely look very different from the policy designed for a contractor.
Policy limits: Make sure the policy covers the right expenses and length of time it would take for a business to get up and running.
Financial impact: Consider total business expenses if there is an interruption. Business interruption insurance is divided into two coverage parts: first, business income that would have been earned based on past financial performance; second, extra expense πfor costs that are beyond the normal operating expenses.
Review exposures: The example I used was a fire, but many other perils, such as a tornado or hurricane, also need to be considered. Organizations should determine if they have the appropriate insurance coverage and controls in place. This process includes completing and updating a business interruption worksheet. Don’t overlook supply chain logistics and how a disruption might impact the business.
Every organization should have an effective business continuity plan that: identifies risks; conducts an analysis of the impact on the business; adopts controls to prevent and mitigate risk; and prepares employees for emergencies by testing and improving procedures regularly. Proactively addressing business interruption risks and ensuring that the business is protected can be a tough task, but it could be the difference between surviving and closing a business after a disaster.
Recently we began working with a manufacturer by taking them through the five steps of risk management. When they completed the business income worksheet, we found they were grossly underinsured. They had bid out their insurance at least twice over the past 10 years, and both agents just copied the previous limits and never took the time to take them through the business-income worksheet. Fortunately for them they have not had a loss. Knock on wood.
John F. Kennedy once said, “The best time to fix the roof is when the sun is shining.”
That is great advice … and good risk management.
Randy Boss, CRM, CRA, SHRM-SCP, is a Certified Risk Architect at Ottawa Kent in Jenison, Michigan. As a Risk Architect he designs, builds and implements risk management and insurance plans for middle market companies in the areas of human resources, property/casualty and benefits. He has 39 years of experience and has been at Ottawa Kent for 34 years. He is a lead instructor for the Institute of Benefit & Wellness Advisors, training agents in how to bring risk management to benefits, and co-founder of OSHAlogs.com, an OSHA compliance and injury management platform. You can reach Randy at firstname.lastname@example.org.