Business Insurance: Will Your Policy Pay Off?12:00 PM EST Thu. Sep. 20, 2012
When Network Computing Architects suffered a catastrophic fire that destroyed its headquarters in 2001, CEO Tom Gobeille wasn't worried at the time about rebuilding because the solution provider carried a $2 million business interruption insurance policy.
But Gobeille quickly found out that having a policy and receiving a benefit are two different animals. Network Computing Architects eventually settled for $300,000 because the insurance company attributed the loss of business to the macroeconomic downturn and not the fire, Gobeille said.
Here are the final two steps in disaster recovery planning, Nos. 9 and 10.
No. 9: Closely Examine Business Interruption Insurance
Business interruption insurance compensates for lost income if a company is closed for a period after a disaster. Even shutting the doors for a brief period during a power outage or other scenario is a major cause of economic injury to small businesses, according to the Small Business Administration. Solution providers should keep detailed records that can validate that they lost business due to an emergency situation.
For Network Computing Architects, it was difficult to prove the fire caused the loss of business, particularly with documents lost in the fire, Gobeille said.
Solution providers should keep accurate records that they can access after a disaster, Gobeille advised.
"If you have a ball-bearing manufacturing plant, you can prove your assembly line is gone. But when you sell consulting services and do what we do for a living, they came up with a hundred reasons why the loss of the building was not the reason," he said. "Whether in good times or bad, people need to look closely at their coverage for business continuation. Make sure in a loss you can defend it."
Now Network Computing Architects carries only a $200,000 policy, which didn't make the insurance company happy, but Gobeille doesn't care.
"They were upset, but there's no point in having extensive business continuation if you have a VAR profile and there are many instruments they say can affect the business," Gobeille said.
Likewise, Louisiana Technology Group's Tony Romanos cautioned solution providers to look very closely at the clauses in their insurance policies.
"A lot of them omit necessary clauses that you need. Right now, the policy we have today is much weaker than one we had previously [to Hurricane Katrina]," he said.
In particular, clauses on time limits and financial caps for individual items should be scrutinized, Romanos said.
"The one we had before [Katrina] was a little more liberal. We had to fight for every dollar, every expense, every receipt," he said. "In the chaos of the situation, you just pay for stuff and move on. But keep track of every expense you do. Document it and try to fight for it."
NEXT: Practice, Practice, Practice
Louisiana Technology Group found out the hard way that added travel expenses due to employees having to leave their homes to come to work and customers leaving voluntarily were not covered under his original policy.
"There are all these little intricate things that do not apply in a disaster. Like if your building does not flood but you can't operate because you lost electricity. It only kicks in if you lose the facility itself," Romanos said. "And nothing is cheap anymore down here. We used to pay $6,000 or $7,000 a year for all our insurance. Now we pay $14,000 or $15,000 and it's not as good as it was before."
Louisiana Technology Group regularly has lawyers read the insurance policies before signing anything, Romanos said.
"It was the policy we bought. Nobody is going to give you something. We learned a lot with that," he said. "Now we have people on retainer just to read lots of fine print everywhere. I would highly recommend having a contract person in-house to review it initially. And before you sign the final review, get an attorney to make sure all the t's are crossed and i's are dotted."
Solution providers need to be very clear on not just business interruption insurance policies, but all contracts and documents on who is responsible for what after a disaster, said Bradley Gross, an attorney based in Weston, Fla., who specializes in solution provider contracts.
"From a legal perspective, you have to make it very clear on what you can provide and what you cannot provide and what you expect and what you do not expect," Gross said. "Managing expectations such that they should never think they're getting something that they're not. That goes for both [solution providers] and their customers."
Many insurance companies have differing views of solution provider businesses, Gross said, because many people are entering the business without experience or discipline. Of course, there are many successful solution provider businesses but others open and shut their doors quickly, making it difficult for insurance companies to judge them, Gross said.
"Insurance companies are probably aware of companies shutting down. I call those companies the 'let's give it a shot' type people. That's not going to help solution providers with insurance companies," he said.
No. 10. Practice, Practice, Practice
Perhaps the most important preventative tip to handle a disastrous situation is to practice your business continuity plan in as much a real-life situation as possible, according to the SBA.
Like muscles in the human body, emergency plans should be exercised to stave off atrophy and make sure they stay strong. It's a good idea to put the preparedness plan on paper, share it with staff, test it annually and update as needed.
It's important to replicate a disaster as closely as possible because people react in different ways compared to when they know it's just a test, said Semel Consulting's Mike Semel.
"They don't think through the idea of it's not just their employees [impacted] but their employees' families and pets. You're not coming to work if you don't know your family is OK. These things need to be considered," Semel said.