The Storm is Coming, Will Your Firm Survive a Natural Disaster?

Preparing yourself and your clients for a natural disaster

By taking steps before a natural disaster strikes, the firm can position itself to thrive in the aftermath. A meeting with your casualty insurance professional is suggested. The agenda should include a review of the current coverage and discussion of changes in your firm operation since the last review.

Preparing yourself and your clients for a natural disaster

Depending on where your business is located, it will eventually be impacted by a hurricane, tornado, earthquake, blizzard, flood or other natural disaster. While fire may be limited to a single location, other natural disasters can cause devastation to large areas of the community. For example, Hurricane Sandy caused damage stretching from North Carolina to Massachusetts.

The consequences of each type of disaster can be mitigated by proper planning. Damage by wildfire can be lessened by proper maintenance of the landscaping surrounding a building while shutters help limit hurricane damage. There is no substitute for planning as the cost of ignoring risk may well be the continued existence of your business.

Pre-Disaster Planning:

Long before the storm warnings are posted or the tornado siren sounds, steps must be taken to prepare.  Responsibility for disaster preparedness should be permanently assigned to a member of senior management. Firm survival depends upon being ready, so this is not a task to be delegated to staff.

This review may include consultation with other professionals such as engineers and legal counsel. It may require rewriting IT procedures or substantial investment in the physical plant, such as the installation of backup generators or storm shutters. Consider whether the firm’s leases provide adequately for disaster recovery.  Are leases terminated? Is payment of rent required during the period of reconstruction?  Who is required to pay for repairs?  Is the landlord’s insurance coverage primary or secondary? What coverage is required by the lease? If the building is owned, is the lender required to be a loss payee? Who will hold the funds until repairs are made?

A line of credit may be invaluable for providing funds for payroll and continuing expenses until payment of the insurance proceeds are received. Get that in place now, as it may not be obtainable if the business is severely damaged.

As insurance carriers require current financial data to process your claim, some steps can improve the likelihood of a satisfactory claim recovery. These records may have to be reconstructed in the event they are destroyed. This restoration process can be both expensive and time consuming. Use of off-site record storage for both paper and computerized records can facilitate this task. 

Insurance Checkup:

A meeting with your casualty insurance professional is suggested. The agenda should include a review of the current coverage and discussion of changes in your firm operation since the last review.

Just as your professional knowledge is critical to your clients, the professional knowledge of a good insurance broker/agent cannot be understated. Many insurance companies sell insurance over the internet or by direct sales, bypassing the personal attention which a broker/agent provides. Is the small reduction in premium worth it if you find that the proper coverage was not obtained? Treat your firm as your best client.

Building Coverage:

Is the coverage adequate to rebuild the premises in the event of a total loss? Does it provide for upgrades mandated by laws passed since the building was built? For example, due to revisions in Federal Flood Insurance Programs, buildings which previously qualified may now have to meet new elevation standards. This can entail the installation of fill or pilings, both expensive improvements. Buildings may need to become compliant to the Americans with Disabilities Act.  As insurance agents are not usually qualified to estimate building costs, an engineer or builder may need to be consulted.

Contents Coverage:

The review starts with a listing of the assets of the firm and the cost to replace them. Don’t forget to include any assets of your clients in your possession and the valuable papers of the firm. These include internal firm records such as accounts receivable records and work paper files. Consider the cost of replacing these documents.

Computer records coverage may be limited, so be sure to go over both the firm’s risks and backup practices with the insurance professional. Review this with your broker/agent carefully, as alternate or additional coverage may be available.

Computer Records:

Backup, Backup, Backup!  While these words cannot be overly stressed, the methodology of the backup is equally important.

A client of mine practiced nightly backup to prevent the accidental loss of data due to computer failure. Unfortunately, the backup disks were stored next to the computers and the crooks made away with the backup as well. Onsite backups are now kept locked far away from the computers.

Your IT department should already be on top of this, but don’t forget to review their procedures. An outside consultant trained in disaster recovery procedures may be a good investment, especially if your IT person lacks that training and experience.

Today, onsite backup should be augmented by automatic offsite backup. There are several internet-based backup services such as Carbonite, and Quicken/Intuit. My firm uses Crashplan (one of many vendors). Crashplan provides a hard drive for your initial backup and automatic internet backups. In the event of any loss, the choice of retrieval by internet or by hard drive is available. We have chosen to encrypt the data for additional security.

Business Interruption coverage should not be ignored. As the coverage is based on the costs of continuing the business (not gross revenue), the financial statements of the firm should be made available to the risk management professional.  This coverage pays the firm for its costs of keeping the doors open and its lost profits during the rebuilding period, and requires a physical loss to covered property.

During many regional disasters such as hurricanes, tornados or earthquakes, damage to the electrical grid may cause a loss of power without physical damage to the covered premises. This interruption of the business is not usually covered by the standard policy, but may be purchased by endorsement. This is very important to a professional practice which cannot work without electricity.

The physical plant is the obvious, but not the only a part of the disaster plan. Focusing on the physical property ignores the firm’s most valuable asset, its staff. 

The plan should include procedures to contact all staff members, inform them of the status of the firm offices, and ascertain their situation. (Is their house damaged. Are there any injuries?)  A telephone tree should be established insuring that all staff members are contacted and the results are communicated back to a responsible firm member. Remember to include cell phone numbers as land lines may have been damaged.  The emergency communication should advise the employees as to where and when they should report.

Every firm should have a contingency plan for a temporary office. Facilities where the firm can move to almost seamlessly were once cost prohibitive to all but the largest of businesses. Today, with cloud computing and internet backup, a firm can relocate to a virtual or executive office suite quickly and with minimal upfront costs. Phone lines can be forwarded by the phone company to the temporary location and the phones can be answered by your staff or the staff of the executive office.

The World Trade Center attack of 2001 caused the death of over 80 staff members of Fiduciary Trust Company. Their offices in the South Tower were destroyed, yet their disaster plan had them open for business within a few days at a temporary location using backup computer data.

Insurance can lessen the impact on the firm’s finances, but it cannot provide for the potential damage to its personnel. The loss of a home or a community can have severe effects on your staff. Newspapers describe the physical aftermath of disasters as being like a war zone. As in a combat situation, your staff and their families may suffer post-traumatic stress. Human resources may wish to address the possibility of counseling and making such programs accessible to staff. Each firm should develop a plan based upon its own resources. 

The Silver Lining: 

Once you have gone through this process of preparation for yourself, you will have the experience to provide this consulting service to your clients. Further, you will be in a position to be available to help both existing and new clients to recover from a disaster. This exercise will make for a stronger firm, which is better able to withstand the inevitable storm.

Howard J. Schneider CPA, is an Editorial Board Member with NACVA and has over 40 years of forensic accounting experience.  He  lives in Coral Gables, Florida with his wife, Gail.