(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the part of a series she is writing on business interruption claims).
“Experience is the name everyone gives to their mistakes” – Oscar Wilde
I picked up a couple of pointers worth sharing in an article published by the University Risk Management and Insurance Association titled, "Case Study-Business Interruption: An Exposure by Many Names," by William Austin, et al., (2005). The article examined a case study similar to what some academic institutions near the Gulf Coast experienced in the aftermath of Hurricane Katrina. The business interruption case study, however, was analyzed in a scenario where a catastrophic fire damaged a state of the art research facility at a higher education institution that thrived on revenue from its prestigious research and development programs.
Reading this article was like watching a train wreck, but in slow motion and surround sound. Everything that could go wrong did. The multi-million dollar research data was lost, the quality or existence of duplicate data was unknown, the research grants were suspended until 100% resumption of operations, patent paperwork was delayed, key faculty members went to teach elsewhere, and the world was deprived of new bioscience research. Of course, despite the broker’s best efforts to get the BI worksheet right, the institution was significantly underinsured.
However, the institution had only itself to blame for its demise.
According to the risk managers, the lesson to be learned from these costly mistakes is that the purchase of insurance is never a substitute for a risk management plan and that risk financing should only be considered after careful analysis of the value of the business and any related interdependencies of revenue.
A BI worksheet normally uses annual financial statements to determine the insurable value, but in a catastrophic scenario like an unprecedented storm or a consuming fire, the lag in revenue may continue even after the business returns to its pre-loss operational capacity and the exposure oversight can be costly. The following suggestions were offered to minimize risk exposure in a catastrophic scenario:
- Prioritize all revenue sources by contribution toward the aggregate value of the organization, not just by the dollar amount
- Streamline revenue sources within an organization so to identify highest risk exposure
- Identify key buildings and facilities critical to overall revenue generation
- Consider revenue from other sources which may pose contingent exposures
- Establish a Business Continuity Planning Process (or risk management plan) as a pre-loss triage process that concentrates efforts on critical activities (ie. mitigation efforts)
Once the exposures have been identified, a business should then consider financing the risk through the purchase of insurance. In general, after a covered loss occurs, the basic business income coverage should protect the insured from the loss of net income to the extent income would have been earned, including normal operating pre-loss expenses. In the case above, however, the basic coverage can only go so far. If the insured depends on specialized facilities and does not have redundant space or backup facilities to continue or resume operations, the insured can finance the risk of most losses by purchasing additional coverage forms such as, extra expense coverage, ordinary payroll, an extended period of indemnity, contingent/dependent coverage, service interruption and a special research and development form that is available for organizations engaged in this business. A catastrophe may very well deprive the world of a breakthrough scientific discovery, but with adequate coverage and sufficient business resilience, we can continue expecting great things from mankind.