Post on 22-Jul-2015
Before and After the StormMinimizing Loss and Maximizing Insurance Recoveries in Response to Your Next Business Interruption
Before The Storm
Disaster Recovery & Business Continuity Planning
Brian J. Courtney, RPLU, AAI
The Safegard Group, Inc.
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Brian J. Courtney, RPLU, AAI
Brian Courtney joined The Safegard Group, Inc. in April2005 and serves as a Producer and the Healthcare PracticeLeader for the company. He is primarily responsible for thedirection of client services to the healthcare industry.
Brian began his career at the height of the medicalmalpractice crisis. Working with a large regional insurancebroker, Brian served with the healthcare practice leaderhelping hospital systems and physician groups obtainmedical malpractice coverage.
Prior to joining The Safegard Group, Brian joined a largenational insurance brokerage firm where he gainedconsiderable experience in healthcare risk managementserving the needs of large physician groups, long-term carefacilities, home healthcare providers, and allied healthprofessional organizations.
Currently, Brian is helping many of his clients with RiskManagement initiatives, such as Risk Assessments, IncidentResponse Planning, Contractual Risk Transfer, InsuranceProtection and a host of other related services.
Brian lives in Downingtown, Pennsylvania with his wife Erinand three kids, Aidan, Carter & Chase. He is active in thecommunity volunteering his time with the Lionville YouthSoccer Association and Brandywine Health Foundation. Heis also an avid fitness/thrill seeker recently competing inthe Spartan Races, which was voted the 2012 Best ObstacleCourse Race by Outside magazine.
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Agenda
• Briefly discuss the importance of Business Continuation & Disaster Recovery Planning
• Discuss in detail what are the important factors to consider in the planning process.
• Site examples throughout on the effectiveness of a Business Continuation & Disaster Recovery Plan
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True or False
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True or False
72% of companies that close following a natural disaster do not stay in business?
TRUEAccording to Gulf Coast Back to Business Act, Congress finds that 43% of businesses that close following a natural disaster never reopen and another 29% close down permanently within two years.
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True or False
A most SMB companies have a disaster recovery plan and most SMB companies believe that computer systems are critical to their business.
FALSEAccording to 2011 survey by Symantec, half of the SMBs surveyed do not have a plan in place and 52% do not think that computer systems are critical to their business.
Ironically, 65% live in areas prone to disasters
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True or False
An IT outage costs SMBs an average of $6,000/day if their computers are down.
FALSEIt is actually $12,500 per day and it does not include the effect on customers. Also, more than 50% of SMB customers switch SMB vendors due to unreliable computing systems.
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Headlines on Business Interruption
Many U.S. Businesses Still Not Adequately Prepared One Year After Superstorm Sandy
Claims Journal 10/16/2013
A Third of Large U.S. Firms Show Business Interruption From Japan Disaster
Insurance Journal 4/29/2011
Sandy claims linger as midsize firms strive to track interruption losses
Business Insurance 4/21/13
Survey: Many Sandy-Impacted Small Biz in N.Y. Unprepared for Another Storm
Insurance Journal 10/24/13
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So Where Do We Get Started?
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The Planning Process Begins With . . .
Step #1 - BUILDING A TEAM
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Building a BC/DR Team
1. Management Commitment
2. Pick Individuals with Expertise in Key Areas
3. Develop a Mission Statement
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Who Should Be On Your Team?
• Human Resources
• Finance
• Sales/Marketing/CS
• Legal
• IT/Telecom
• Facilities
• Production/QA
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My Team Is Built
NOW WHAT?
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Step #2 – Assess the Risk
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Understand What Makes Your Organization Vulnerable
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What Should Be Included in the Risk Assessment?
• Facility Construction
• Fire Protection
• Technology Resources
• Staffing
• Past Events
• Supply Chain
• Specialized Equipment
• Climate
• Security
• Utilities
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We’ve Assessed The Risk
On to Step #3
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Step #3 - Analyze the Business Impact
Tools for this Step
• Business Impact Analysis
• Recovery Time Objectives
• Recovery Strategies
Goal: Develop action-oriented procedures to quickly recover the most critical operations
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Most CriticalFunctions
Business Impact
Analysis
Divisions
Business Functions
“Critical Few” Business Functions“Useful Many” Business Functions
#3 Analyze the Impact
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Time versus profit loss helps set priority
0
2
4
6
8
10
1 day 2 days 3 days 7 days 30 days
Critical
Important
Non critical
#3 Analyze the Impact
Pro
fit
Lo
ss
Time
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Recovery Time Objective (RTO)
#3 Analyze the Impact
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#3 Analyze the Impact
Recovery Strategies
o Steps required to meet RTO objectives
o To be effective, they must be:
• Cost effective
• Easily implemented
• Reliable
• Approved and funded by management
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#3 Analyze the Impact
● Resource Requirements
○ Staff
○ Facilities
○ Equipment
○ Documentation
○ IT Applications
○ Internal Inputs
○ External Inputs
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#3 Analyze the Impact
● Recovery Strategies – Internal
○ Alternate work site
○ Duplicate or spare equipment
○ Off shift personnel
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● Recovery Strategies – External
○ Contracted “hot” site
○ Service level agreements (SLA) with vendors
○ Data migration
#3 Analyze the Impact
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#3 Analyze the Impact
● Emergency Response
○ The initial steps after an event that helps organize the efforts to recovery the business
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● Emergency Response Communication
○ Internal • Phones
• Pagers
• Text messages
• 2-way radio
○ External • 800 number
• web site
• blast faxes
• phone calls
#3 Analyze the Impact
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On to Step #4
Document the Plan
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#4 Document the Plan
● Review of Planning Document
○ Not one size fits all - must be adapted to individual firm
○ Single site vs. multiple sites
○ Paper, electronic or both
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#4 Document the Plan
● Review of Planning Document
1. Overview
2. Emergency Response Procedures
3. Risk Assessment / Recommendations
4. BCP Management Action Plan
5. Biz Unit / IT Plans
6. Crisis Communications
7. Testing
8. Appendices
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Practice Makes Perfect
Step # 5 – Test Plan, Exercise People
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#5 Test Plan, Exercise People
● Orientation
○ Informal session to educate staff on the function
and process within a plan or portion of a plan
○ 1 hour duration
● Tabletop
○ Staff review and discuss the actions they would
take per their plans, but do not perform any of
these actions
○ 2-4 hour duration
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#5 Test Plan, Exercise People
● Functional
○ Simulates a scenario as realistically as possible
without moving personnel, equipment and
resources to the actual site
○ 4-6 hour duration
● Full Scale
○ Deploys personnel, equipment and resources to
a specific location for a real time simulation of a
scenario
○ 6-8 hours duration
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Typically 7 to 10 months
BCP Development Timeline
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www.flastergreenberg.com36
After The Storm
Business Interruption Insurance
Lee M. Epstein, Esq.
Flaster/Greenberg P.C.
www.flastergreenberg.com37
• Basics of business interruption coverage
• Calculating the claim
• Presenting your claim effectively
Topics
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Basics: The Purpose of BI Insurance
• Protect the insured against loss
of income
• Put the insured in the same
financial position as if no loss
had occurred
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The Policy is
“Extended to cover the Actual Loss Sustained by theInsured during a Period of Interruption directly resultingfrom physical damage of the type insured against bythis Policy, to property not otherwise excluded by thisPolicy, utilized by the Insured and located as describedelsewhere in this Policy”
Basics: The Insuring Agreement
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Basics: The Business Interruption “Chain Rule”
In the event of1. A Discrete Event of Physical Loss or Damage
3. From a Risk of Loss
4. Where No Exclusion Applies
5. Which Causes an Interruption of Business Operations
The policy covers6. The Defined Loss
7. For The Defined Indemnity Period
2. To Described Property
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Physical Destruction of Property Not Required
Loss of Use of Property Constitutes Physical Loss
Physical loss or damage means:
“physical dispossession of property from the insuredwithout their consent, or actual, substantive, physicalchanges to property that reduce the property’s worth orusefulness, as distinguished from changes that exist onlyin the minds of people.”
Basics: Physical Loss or Damage
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Basics: Covered Property
Insured Property
Service Interruption
Customer/Suppliers
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Basics: Fortuity
Can’t insure property as the flood waters approach
Subjective knowledge necessary
• Insurer must prove that policyholder
was aware of damage at time
insurance policy incepts
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Basics: Suit Limitation
Suit must be commenced within prescribed time after date of loss
• Strict Construction
• Tolling of the Limitation Period
• Date of Discovery of Damage
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Basics: Period of Interruption
A typical period of interruption clause provides, in pertinent part, as follows:
“The period from the time of the physical damage of the typeinsured against by the Policy to the time when with due diligenceand dispatch damaged buildings and equipment could be repaired orreplaced and made ready for operations under the same orequivalent physical and operating conditions that exist prior to thedamage, not to be limited by the day of expiration named in thisPolicy”
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Basics: Extended Period of Indemnity
Additional period which typically covers an insured for loss of market share
Extended period typically consists of defined number of days
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Calculation: BI Loss In Five Easy Steps
1. Pinpoint the length of time during whichproduction or business operations wereinterrupted because of an insured event.
2. Determine the quantity of lost production.
This is done by reviewing: inventory records, production records and sales records. Computewhat the plant what have normally produced, had there been no loss. The see how many units were actually produced. The difference is the Gross Lost Production.
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Calculation: continued...
3. Deduct any sales or production that can be continued or made up through the use of existing inventories, otherplants, working overtimes, etc. The difference is the Net Lost Production.
4. Multiply the lost production by the unit B.I. Value(net profit and fixed expenses).
5. Add back the extra costs associated with the abovemake up including the extra costs to replenish inventoryused to maintain sales during the interruption, overtimepremiums, etc.
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Calculation: The Experience of the Business
In determining the indemnity payable…
“Consideration shall be given to theexperience of the business before andthe probable experience thereafter”
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• Actual experience of the business
before the loss
• Expected experience of the business
after the loss
• Actual experience of the business
after the loss - Mitigation
• Reasonableness of repair period -
“due diligence and dispatch”
Calculation: Factors To Consider
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Other Key Factors• New customers
• New product lines
• Changes in market prices
• Changes in market demand
• Cost cutting measures expected during loss period
• Seasonality
• Competitor changes
• New supplier agreements
Calculation: Other Key Factors
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Calculation: Continuing Expenses
• Fixed expenses
• Payroll of key employees
• Some utilities
• Depreciation
• Rent
• Contractual obligations
• Advertising
• Others?
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Calculation: Non-Continuing Expenses
• Raw materials and supplies
• Ordinary payroll vs. “key”
employees
• Utilities
• Maintenance
• Rental equipment
• Sales commissions
• Others?
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“This policy is extended to cover:
1. The reasonable and necessary extra expenses incurred to temporarily continue as nearly normal as practicable the conduct of the Insured’s business.
2. The reasonable and necessary extra costs of temporarily using property or facilities of the Insured or others.”
Calculation: Extra Expense Endorsement
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Calculation: Extra Expense Coverage
Indemnifies for loss-related
expenses which are incurred to
CONTINUE OPERATIONS
but which
DO NOT
reduce the loss
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Calculation: Extra Expense Basic Purpose
. . . Then the Company
Has IncurredExtra
Expenses
If a Company . . .
Has an InsuredPhysical Damage
Loss
Which Causes anInsured Interruption
of Business
LO$$
Which Requires Additional Expenses to Operate the Business
LO$$
And Those ExpensesINCREASE
the Loss . . .
LO$$
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Calculation: Extra Expense Examples
Fulfill Contracts
Maintain Market Share
Satisfy Customers
Maintain Goodwill
Maintain Employees
Secure the Property
Simply Operate
Expenses Necessarily Incurred to:
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Calculation: Types of Extra Expenses
AdditionalManpower
AdditionalUtilities
Overtime
Non-OperatingLoss-Related
Expenses
ResalePrice
PurchasePrice
Purchase of FinishedProduct for ResaleAbove Sales Price
TemporaryFacilities
Cost toRetain
Customers
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“This policy also covers such expenses as are necessarilyincurred for the purpose of reducing any loss under thispolicy, but in no event shall this company be liable for anamount greater than that for which it would have been liablehad the Insured been unable to make up any lost productionor to continue any business operations or services.
Calculation: Expense To Reduce Loss
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Calculation: Expediting Expenses Basic Purpose
If a Company . . .
Has an InsuredPhysical Damage
Loss
Then the Company Has Incurred
Expediting Expenses
Which Can Be Reduced by Incurring Additional Expenses .
. .
LO$$
Which Causes anInsured Interruption
of Business
LO$$
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Calculation: Expediting Expense Test
To be a Recoverable Expediting Expense, the Expense:
1. Must be related to the covered loss
2. Must have been incurred for the purpose of reducing the loss
3. Is LIMITED to the amount by which the loss is reduced
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Calculation: Expediting Expenses
The Insurance Company Will Pay up to
IfIt Saves a Dollar of Business Interruption Loss!
99¢
To Simplify . . .
MAKES SENSE!
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Calculation: Expediting Expense Examples
• Air freight
• Telephone charges
• Rental units - compressors, generators
• Capital items - shelves, remodels, and renovations
• Processing agreements
• Outside storage of intermediate product
• Demurrage
• Overtime pay
• Excess heat, light, and power
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• Duty to mitigate
• Mitigating revenue must be
credited against the claim
• Costs incurred to mitigate
must be added to the claim
Calculation: Mitigation
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• Believe in your claim
• Present your logic
• Present documentation
• Meet in person
Presenting the Claim
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What stops the settlement process?
• Exaggerated claims
• Withholding information
• Unrealistic expectations (by either side)
Presenting the Claim
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•Believe in your claim
•Go for 100% recovery on a defensible claim
•Not for 50% on an inflated claim
Presenting the Claim
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Present Logic
• Logic always wins
• Lay out the facts
• Affidavits
Presenting the Claim
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Present Documentation
• The insurer will not just take
your word for it
• Invoices
• Purchase orders
• Internal work orders
• Time sheets and activity logs
• Financial records and budgets
Presenting the Claim
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Meet in Person
• Complex claims need to be
explained
• The insurer needs to see that you
believe in your claim
• Present your logic
• Present your documentation
Presenting the Claim
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Rebuttal Analyses - Bridging the Gap
• If the insurer finds flaws in the claim, concede on those
items
• If you disagree with the insurer, prepare a detailed
reconciliation analysis
• Support your rebuttal with facts and logic
Presenting the Claim
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Summary
• Know your coverage
• Set up appropriate accounting procedures after a loss
• Consult appropriate professionals
• Present a realistic, well documented and logical claim
Advice for a successful business interruption claim
Questions?
Lee Epstein
215.279.9390
lee.epstein@flastergreenberg.com
Brian Courtney
610.892.6812
bcourtney@safegardgroup.com