Insurance Aspects of Disaster Recovery

1. Insurance Aspects of Disaster Recovery

2. Insurance Aspects of Disaster Recovery

3. Insurance Aspects of Disaster Recovery Natural disasters such as earthquakes, fires, floods, and severe weather can cause a business to close temporarily. But just because the business cannot make deliveries, take orders, or perform its other basic functions does not mean that the business will not have to pay taxes, salaries, and other expenses. Business Interruption Insurance can help a business avoid disaster at such times.

4. Insurance Aspects of Disaster Recovery Do I need Business Interruption Insurance? Answer these questions: 1. Does your business have a viable plan and the capability to manage the business if a fire or other disaster damaged the business premises so that they were temporarily unusable? 2. Does the plan cover paying for consequential as well as direct losses?

5. Insurance Aspects of Disaster Recovery Business interruption insurance keeps your business running • Business interruption insurance can keep capital flowing through your company in the event of such disruptions. It can help you: • Maintain your business continuity strategy • Keep your business afloat if a loss forces you to close for a short time • Pay for lost net income and continuing expenses such as mortgage, advertising, taxes and salaries • Pay your relocation and advertising fees if you set up shop at a temporary site

6. Insurance Aspects of Disaster Recovery • Direct Losses = actual physical damage to or destruction of property • Consequential (indirect) Losses = losses which result from the disrupting effect of property damage

7. Insurance Aspects of Disaster Recovery Indirect CostsNon-Time ElementUsually Obscure and apply only to special risks Accounts Receivable – destruction of records Loss of value of pairs or sets (partial loss)Time ElementLimited to the time it takes to repair, rebuild or restore the damaged property Most popular coverage – Loss of Income and Extra Expenses

8. Insurance Aspects of Disaster Recovery I’m covered! - I have a Disaster Recovery Plan… OK!… what expenses does that plan cover? Alternate site costs (what is included)?Continuing expenses (old and new sites)?Loss of Income?Loss of Profit?Salaries?Taxes?

9. Insurance Aspects of Disaster Recovery What is Business Interruption Insurance? It is commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time that a business may stay closed (completely or partially) because of a covered peril, such as a fire or other insured hazard.

10. Insurance Aspects of Disaster Recovery Five variables to consider when purchasing business interruption (or any) insurance: Price Coverage offered Specialization of insurance company Reputation of the Insurance Underwriter Size of the deductible

11. Insurance Aspects of Disaster Recovery Types of Business Interruption Insurance Business Interruption Insurance Extra Expense Insurance Extended Business Income (net income) Alterations and New Buildings Civil Authority

12. Insurance Aspects of Disaster Recovery Business Interruption Insurance Compensates for: Lost income if the company has to vacate the premises due to disaster-related damage that is covered under a property insurance policy, such as a fire The profits the company would have earned, based upon financial records, had the disaster not occurred Operating expenses, like electricity, that continue even though business activities have come to a temporary halt

13. Insurance Aspects of Disaster Recovery Policy cost considerations: Ensure policy limits are sufficient to cover the company for more than a few days. There is generally a 72-hour waiting period before Business Interruption coverage kicks in The price of the policy is related to the risk of the disaster damaging the premises (based upon the type of business)

14. Insurance Aspects of Disaster Recovery Business Interruption Insurance Forms Coverages are based upon: Gross Earnings Profits Business Income

15. Insurance Aspects of Disaster Recovery Gross Earnings Basis: Mercantile/Non-ManufacturingManufacturingThis form is intended to cover the repair period during which destroyed or damaged property is restored with due diligence and dispatch and provide coverage based on loss of sales or loss of sales value of production less variable costs and other saved costs

16. Insurance Aspects of Disaster Recovery ProfitsThis form provides coverage during which the results of the business are affected following a loss, rather than just the repair periodThe basis for the Profit Form is lost net profits plus continuing standing charges (expenses)

17. Insurance Aspects of Disaster Recovery Business IncomeIn essence,the intent of this form is to provide combinations of the elements of the Gross Earnings and Profits Forms Business Income coverage is usually written with a coinsurance requirement. It only applies to business income coverages – it does not apply to extra expense coverage

18. Insurance Aspects of Disaster Recovery Business Income coverage covers actual loss of business income which is net income (net profit or loss before income taxes) plus continuing operating expenses. Gross revenue is not covered because many expenses (i.e., electricity, heat) may be discontinued while the business is shut down. Continuing expenses (taxes, rent, debt payments) are covered because the net profit or loss is what is left after continuing expenses are paid, and if the revenue to cover continuing expenses was not replaced it would reduce the net income.

19. Insurance Aspects of Disaster Recovery Extra Expense Insurance Extra expense insurance reimburses the company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period.Usually, extra expenses will be paid if they help to decrease business interruption costs. Note: In some cases, extra expense insurance alone may provide sufficient coverage, without the purchase of business interruption insurance

20. Insurance Aspects of Disaster Recovery Extended Business Income After a period of restoration, there is coverage for an extended business income loss for a period that begins on the date property is actually repaired, rebuilt or replaced and operations are resumed. This extended period ends on the earlier of: (1) the date 30 consecutive days after it begins, or (2) the date the insured could have restored the business to the condition that would have existed if no direct loss or damage had occurred. This coverage reflects a recognition of the fact that a business may lose customers and markets during a shut­down, and that revenues may not reach previous levels immediately when operations are resumed.

21. Insurance Aspects of Disaster Recovery Alterations and New Buildings Actual losses of business income due to direct physical damage to new buildings or structures, or alterations or additions to existing buildings or structures, or machinery, equipment, supplies or building materials located on or within 100 feet of the described premises are covered. The direct loss must result from a covered cause of loss. Losses resulting from damage to machinery, equipment, supplies and building materials are covered only if such items are being used in construction, alterations or additions, or are incidental to the occupancy of new buildings. If a direct loss delays the start of the insured's operations, the period of restoration under this coverage will begin on the date operations would have begun if the direct loss had not occurred.

22. Insurance Aspects of Disaster Recovery Civil Authority If business is interrupted because a civil authorityprohibits access to the described premises as a result of direct physical loss or property damage at a location other than the described premises due to a covered cause of loss, coverage will be provided for actual losses of business income and necessary extra expenses. Both coverages are available for up to three consecutive weeks, but the business income coverage is subject to a time deductible. This coverage is provided on the following basis: • The business income coverage begins 72 hours after the action taken by the civil authority, and will apply for a period of up to three consecutive weeks after coverage begins • The extra expense coverage begins immediately, and will continue for up to three consecutive weeks or until the business income coverage-ends, whichever is later

23. Insurance Aspects of Disaster Recovery Business Interruption Insurance Financial Concepts Claims preparation requires certain financial statements Income Statement or Profit and Loss Statement Additional detailed information as requested

24. Insurance Aspects of Disaster Recovery For example: a business having monthly revenue of $500,000 and total expenses of $200,000 has a monthly net income of $300,000. But the insurable business income amount is greater if there are continuing expenses. If $100,000 of the expense continues during a shutdown, the insured would need to recover $400,000 to be indemnified — $400,000 minus $100,000 for continuing expenses, equals $300,000 of net income.

26. Insurance Aspects of Disaster Recovery Claim Checklist (guide, not all-inclusive) 1. Immediate Steps a. Notification of appropriate parties as required in the policy b. Protection and preservation of damaged and undamaged property 2. Initial Procedures a. Investigation of loss and video/picture evidence b. Steps to mitigate loss

27. Insurance Aspects of Disaster Recovery Claim Checklist (continued) 3. Insurance policies Obtain and review 4. Business and Operations a. Familiarize with business and its future plans b. Determine how the business is and will be affected

28. Insurance Aspects of Disaster Recovery Claim Checklist (continued) 5. Claim Calculation components a. Indemnity/Loss Period b. Production c. Sales (Turnover) Revenue d. Actual Loss Sustained/Principle of Indemnity e. Costs/Expenses/Standing Charges f. Ordinary payroll g. Expenses to Reduce Loss/Increase in Cost Working h. Extra Expense i. Co-insurance

29. Insurance Aspects of Disaster Recovery QUESTIONS????