By DAVID P. CROWE, senior vice president and claims division executive at Lexington Insurance Co.
Author Aldous Huxley observed that experience is not what happens to us but how we respond to life's events.
During the mid- and late 2000s, many of the most ferocious hurricanes on record pummeled the United States, causing more than $100 billion of insured losses.
The arrival of the 2011 hurricane season provides a timely opportunity to draw on the catastrophe preparedness lessons learned from those losses in order to mitigate future business interruption and physical damage losses.
Research scientists Phil J. Klotzbach and Prof. Emeritus William M. Gray of the Tropical Meteorology Project at Colorado State University forecast an active Atlantic hurricane season this year. Between June 1 and Nov. 30, Klotzbach and Gray predict, 16 named storms will form, with nine strengthening into hurricanes. The forecasters expect that five will develop into major hurricanes--Category 3, 4 or 5 storms packing sustained winds of at least 111 mph.
"We remain--since 1995--in a ... multidecadal period for enhanced Atlantic Basin hurricane activity, which is expected to continue for the next 10 to 15 years or so," Gray observed in a statement.
Indeed, Klotzbach and Gray calculated there is a 72 percent chance of at least one major hurricane making landfall on a U.S. coastline this year. The long-term average probability is 52 percent.
With such a high risk of at least one brutal storm making landfall this year, catastrophe preparedness is imperative.
UNDERSTANDING THE INSURANCE
The first and most basic step for policyholders remains to understand their coverage. A policy review will help insureds understand the amount of company resources they must marshal after a major loss, in addition to the insurance proceeds they can expect to recover. The chaotic period immediately after a disaster is not the time to ensure proper coverages are in place.
For example, the extra expenses a policyholder incurs to mitigate storm losses--such as boarding up damaged windows (post-loss) and adding post-storm security--are typically covered by a policy.
Similarly, policyholders should understand their business interruption coverage. Does their property policy provide business interruption coverage? Does the policyholder assume a percentage of the loss? Is there a waiting period to receive payments? Business interruption insurance can be a critical financial bridge between disaster and business as usual, but it is only one part of the process of getting back in business.
PUTTING A PLAN IN PLACE
A substantial portion of that process--developing catastrophe response and business continuity plans--has to be completed before disaster strikes.
A vital element of a catastrophe response plan is contracting well ahead of hurricane season with the various vendors needed on short notice after a storm to assist a property owner in restoring a damaged facility.
After a catastrophe, retaining vendors can be difficult, as was the case during the turbulent 2004 and 2005 hurricane seasons. Contractors quickly became overwhelmed both years, making many insureds wait long periods to have their damage assessed and repaired.
Under those circumstances, an insured could find itself choosing between waiting for an experienced contractor or turning to a less experienced firm without the expertise necessary to handle a multimillion-dollar loss.
Besides working with their carrier to line up a loss adjuster who specializes in their industry, policyholders should also consider contracting with a debris removal firm; a structural engineer to determine whether a damaged building is safe to occupy as it is repaired; a construction consultant; an industrial hygienist to measure air, water quality and even radiation levels; and an accountant who can calculate business interruption loss.
After securing commitments from their vendors to respond immediately when contacted after a disaster, policyholders should also lock in service-level commitments and rates.
Business continuity also is critical. It can shorten operational downtime and reduce lost revenue after a catastrophe by anticipating damage or inaccessibility to a primary facility. Such planning can benefit any type of business, not just those that lose the use of a plant or warehouse.
When New Orleans flooded after Hurricane Katrina in 2005, some hotels that were forced to close nonetheless retained a substantial portion of their business by redirecting guests to affiliated motels outside of the flooded area.
In some situations, a healthy mix of creativity and proactivity is the key to getting back in business quickly, which can burnish an organization's reputation in its community.
For example, unable to safely open their damaged stores after hurricanes, some big box stores have operated from makeshift facilities in their parking lots.
One New Orleans fast-food franchise owner was not satisfied with waiting around for an insurance recovery after a catastrophe. The owner worked with his insurer to pay his idled workers during the few weeks the restaurant would be closed for repairs after Hurricane Katrina struck. The owner wanted his experienced work crew around when he reopened, but he risked losing them if they had no incentive to stay in town in the meantime. Because the insurer concluded that its insured's plan ultimately would mitigate losses, they paid for the incentives.
After reopening, that location was one of the only restaurants serving food near where adjusters, contractors, law enforcement and various crews were working to clean up and rebuild New Orleans after the storm. With its experienced crew already in place, they were able to take advantage of business opportunities after the storm.
COMMUNICATION IS KEY
That example also illustrates the value of communicating with insurers both before and after a loss--but not only about mitigating losses. If the processing of a claim is getting off track, alerting the insurer quickly can help resolve the problem more easily.
Claims processing also will be facilitated by providing insurers clean loss documentation as soon as possible after a loss.
But as is the case with business continuity planning, documenting pre-loss earnings and post-loss expectations should begin long before the first storm begins forming in the Atlantic.
Policyholders should consider establishing a separate ledger for extra expenses related to losses sustained. That way, their insurer does not have to search for the information through other ledgers or databases.
All of that adds up to a lot of planning and work for a policyholder. To ensure that everyone understands their post-catastrophe roles and expectations, the insured should conduct a joint pre-catastrophe meeting with its carriers, broker and vendors.
By adopting these catastrophe preparedness lessons, all organizations--not only those that previously sustained windstorm losses--can benefit from the wisdom gained though catastrophe experience in recent years.
June 1, 2011
Copyright 2011© LRP Publications