Hurricane Preparedness Insurance Style

By David Griffiths, Insurance By Ken Brown / dgriffiths@insbykenbrown.com

We can all list the critical steps to take regarding hurricane preparedness.  In fact, after hearing them year after year, we know the suggested steps by heart.  We probably all follow most of them!

So, just wondering, does this concept of hurricane preparedness have an application to an insurance program?  You bet it does!  In fact, it applies to both commercial and personal insurance programs.  Let’s talk about it and see if we can’t come up with a few suggestions and ideas you might consider, specifically relating to your commercial property insurance.

The basic purpose of a commercial property policy is to insure Building, Business Personal Property (contents) and Business Interruption/Extra Expense (essentially business continuation coverage).  

While much of this can be applied to any insured catastrophe (such as a fire) let’s say, for our purposes, that a Cat. 2 hurricane has just ripped right through your place of business destroying most of your building, contents and left the building inhabitable for a few months while repairs are conducted.  What would you do, where would you go, how much business profits would be lost, and how much would it all cost? 

Risk can be easily defined, in insurance terms, as a chance of loss.  There are three ways to handle risk.  1- You can avoid it.  In this instance, it might be tough to run from a Cat. 2 hurricane.  2- You can assume it.  This is another way of saying that you’d take on the financial burden with savings and resources.  3- The final way to handle risk is to transfer it.  This means that for a fee (premium) you transfer the risk to the insurance carrier, and they carry the burden.

As structured, how would your current insurance program respond to this catastrophe?  Have you analyzed the risk?  Have you transferred enough risk to insurance to offer the protection your business needs? 

This is all very important.  Back in 2004 when four hurricanes hit Florida, statistics showed that upwards of 50% of the businesses which failed to reopen did so as a result of the inability to absorb the financial entirety of the risk that they had assumed.  In other words, they assumed risk by not passing it along to their insurance carrier but failed to plan adequately and were crushed by the financial hardship when a storm hit.

Most businesses have a Disaster Plan.  Less often, it seems, these plans incorporate a detailed financial analysis and complete risk management plan, which is really the most important part.  Having all the generators available won’t matter much if there aren’t enough corporate resources and/or insufficient insurance to carry the financial burden created by the insured loss.

So, where to start?  How do you perform a detailed financial analysis and develop a complete risk management plan? 

First, understand your exposure to loss.  How old is the roof of your building?  How far are you from coastal waters?  What is the elevation where you are located?  How quickly can you prepare for a catastrophic storm?  How would you do it?

Know your limits, coverages, and deductibles. What is the replacement cost value of your building (if owned) and, more importantly, how much money do you have it insured for?  Is that enough?  Do you carry Ordinance or Law coverage?  Your Replacement Cost coverage is based on building materials that are of “like kind and quality”.  So, if there have been changes to building codes (for roofs, windows, etc.) and you are not in compliance, the additional cost may very well be your responsibility.

How about your Business Personal Property (commonly called Contents)?  Do you have enough coverage there?

Do you have Business Income coverage to assist with ongoing financial expenses during a work stoppage to your company caused by a direct hit to your property from a storm?  How about Flood insurance?  Are you in a flood zone and is your property subject to flooding?

These are all coverages you should consider making a part of your insurance program.

If you have some or all of these coverages, you should also understand what your deductible (your “out of pocket”) will be.  Wind and Hail deductibles are almost always a percentage vs. a flat amount (such as $1,000).  It is important that you understand that the Wind percentage deductible functions differently from the flat deductible in that the percentage applies to the total amount insured not to the value of the loss.  For example, if you have a building insured for $1M with a 5% Wind/Hail deductible your deductible is $50,000, regardless of the value of the property loss.

Hurricanes are nasty storms that we all know do billions of dollars of damage.  Some folks never recover.  Please make sure your insurance program is structured with the proper limits and coverages to help get you through.