CFO Studio Magazine, Fall 2011
By William A. Cilente II, Vice President, Marsh & McLennan LLC
Hurricane Irene has exposed a flood of insurance and financial issues that businesses must address.
WHILE NO ONE could have predicted the severity, duration, and breadth of devastation that Hurricane Irene wrought on businesses and residents, one thing is clear: Hurricane Irene is a sign of more frequent and severe storms to come, extending to inland areas. Businesses impacted by Hurricane Irene have encountered a host of insurance and financial issues that are making it difficult or impossible to collect on and/or file claims with insurance carriers. Companies located in and outside of flood zones should take note and address these issues before the next disaster erupts.
Lack of Proper Insurance Coverage
“One of the biggest problems mid-size businesses face is the inability to recoup operation losses caused by Hurricane Irene,” notes William A. Cilente, II, Regional executive Vice President and Property and Casualty insurance Practice Leader for middle-market insurance broker marsh & McLennan Agency LLC. “That’s because a significant number of businesses are either uninsured or underinsured for lost income and/or property damage resulting from flooding.”
Flood Insurance Underutilized
Flood insurance, like earthquake insurance, is not generally covered in standard property policies. Yet, according to the New York-based insurance information institute, only 5 percent of flood insurance policies issued by the National Flood Insurance Program (NFIP) are purchased by businesses.
Flood Insurance – Not Just for Businesses in Flood Zones
Unlike most other storms, Hurricane Irene’s damage extended to regions outside of designated flood plains, catching these businesses by surprise, and in many cases without flood insurance. “Companies located in non-designated flood areas that have foregone flood insurance through the federal National Flood insurance Program, should reconsider their decisions,” says Cilente. “The monthly premium paid pales in comparison to a large loss that could be incurred by flooding.”
Companies can purchase the coverage through the NFIP or through select commercial insurance carriers on a primary, excess or difference-in-conditions basis.
There are drawbacks to the NFIP product. For instance, NFIP policies are written on an “actual cash value” basis, instead of “replacement cost,” and property damaged from flooding inevitably will be depreciated. NFIP also does not provide business interruption coverage. However, there are options, such as a difference-in-conditions policy, excess flood, and/or inland marine forms that provide limited business interruption coverage for flood, but these alternatives can be costly.
“Since Hurricane Irene, business inquiries for flood insurance have increased, especially from businesses affected by Irene that are determined to protect themselves against future losses,” says Meg Errickson, Director of Claims for Marsh & McLennan Agency. “However, there is a 30-day waiting period before such coverage becomes effective; businesses looking to protect themselves against flood damage caused by winter storms should consider purchasing flood insurance now.”
Unlike large businesses, most middle-market businesses choose to purchase standard business insurance policies, which may provide business interruption coverage on a limited basis and with high deductibles. Often, these policies exclude lost revenue resulting from flooding. Other issues include long waiting periods before coverage is triggered.
“Your insurance broker can negotiate some issues, like waiting periods, with your insurance carrier,” says Cilente, “It is important to note that insurance is for catastrophic events—not incidental claims—and a high deductible, which can lower premium costs, can work to your advantage.”
Business Continuity Plan Can Ease Financial Losses, Business Disruption
While all businesses should take a closer look at the limits and conditions of their business interruption policies and reconsider purchasing flood insurance, there is another important lesson to be learned from
Hurricane Irene: Business Continuity and disaster Plans can limit the severity, scope, and duration of a business disruption.
According to technology firm Gartner Inc., only 35% of small and medium-sized businesses have a disaster recovery plan. Yet between 15% and 40% of businesses fail after a manmade or natural disaster, as reported by the insurance information institute.
“Executive management teams need to be able to answer the following question, ‘if we were to lose a major facility tomorrow, how would we stay in business?’” advises Cilente. “It can take you decades to build a business and only an instant to lose it in a disaster. A thoughtful business continuity and disaster plan, which encompasses risk management, finance, operations, facilities, human resources, sales, and communications, can prevent this scenario from happening.”