The catastrophes in Japan have caused many companies to take a hard look at the terms and conditions of the coverages they have in place.
Many policies exclude earthquake, flood and nuclear damage from coverage, says Shane Moran, vice president of ECBM Insurance Brokers and Consultants. However, there are other factors that make a company susceptible to contingent losses.
“It’s really a matter of evaluating your business model and identifying whether you are dependent upon a small number of vendors or suppliers to produce your product or service,” Moran says. “If so, you definitely have an exposure.”
Smart Business spoke with Moran about how to prepare your business for unexpected events.
How will the tsunami and earthquake in Japan change the way companies consider their coverage?
The tragedy will force companies to take a hard look at their business model, the key relationships they have and their risk management program in general.
Contingent business income is a property form, so you could expect to see earthquake, flood and nuclear exclusions on many forms. If you are a larger company with that type of exposure, you would want to negotiate with the carrier to write the coverage for your exposure. So you may be able to get an insurance carrier to provide some type of coverage for losses from an earthquake or flood, but probably not for a nuclear event.
The second area that companies are looking to reassess is the limits of coverage that they have chosen on their business income coverage. The magnitude of that destruction was so large that it will take a lot of those manufacturers a lot of time to get back up and running. That will force the buyers of those products to go elsewhere to find companies that can meet their needs, and that process is time consuming. Can a replacement meet quantity and quality expectations? You are not going to be able to pick up the phone, call a company down the street and immediately process an order for 10,000 widgets.
If you have a piece of equipment that takes nine months to build and you have one component you can’t get, the ripple effect can cause problems for your business for a long time.
How do unforeseen events affect losses for small and larger companies?
Whether you are a small or large company, you still need a well-thought-out contingency plan. It’s essential for any business to survive an unforeseen event.
If your business relies on a small number of key component suppliers, or depends on only a few customers, or if you only use one or two vendors for your product — then you have a very large business-contingent income exposure. That is going to apply whether you are a small, family-run company or large, international organization. For example, take the iPad 2 launch. Because so many of that product’s key components are made in Japan, shortages have created delays, which have cost that company because it can’t get its product into people’s hands.
Events like the disaster in Japan give us the opportunity to evaluate how our own contingency plans would respond and look at it from a fresh perspective. The key is to develop a plan that can be implemented whether you are a small or large company.
