The importance of preparing for the worst

Disasters that bring businesses to their knees are often in the headlines, although the business damage may not be apparent. The Buncefield trial recommenced mid-April, and many were undoubtedly reminded of the terrifying explosions in 2005, heard some 125 miles away, as millions of gallons of jet fuel exploded or went up in roaring flames. What they may not recall is the damage this incident inflicted – and is still inflicting – on businesses in the vicinity.

Four and a half years on, businesses affected by the disaster are still fighting for compensation, in some cases for millions of pounds. With only one quarter of all businesses developing a disaster recovery plan, and a third feeling that putting one together would be too time consuming (according to the British Insurance Brokers’ Association), perhaps the fallout from Buncefield will send a message that it is time to treat this issue more seriously.

Even though material damage claims can be settled relatively quickly, business interruption and loss of profit claims may drag on for years. It can be real speculation to guess when a company will receive compensation, and how much. With cases taking up to five years to settle, businesses often lose over ten times the amount they receive in compensation. One reason for all this is a little-known insurance practice called ‘subrogation’.

Subrogation allows an insurer to launch recovery proceedings against the party liable for the accident. It also means that insurers are now often reluctant to pay out in the first place if receiving compensation for themselves looks unlikely.

The process is even more complex when dealing with uninsured losses, which are often more substantial once knock-on effects are considered. A company may be compensated for a distribution site being inoperable within the time of the indemnity period as an insured loss. But disasters like fire at a facility often feed through to other locations, and will, for example, bring manufacturing to a halt. This means potential customers will worry that the business cannot cope with demand, and can bring about a loss of contracts it expected to win or grow. These long-term effects of business interruption often go well beyond a company’s indemnity period - typically, companies have Indemnity Periods of 12 or 18 months, which are unrealistically too short.

At the very least, businesses should take a reasonable and practical look at their indemnity period and consider extending it without delay, as any business seeking to win or grow clients faces similar battles to regain losses. All too often businesses make a false economy by renewing policies which won’t meet their needs.

If the worst does happen, the most pivotal action a company’s management can take to strengthen its case, and shorten the legal action, is in the first 24 hours following the incident. The moment the damaged site becomes accessible, or if they have access to other sites, they should get hold of all the current data they can before recommencing trading. Whilst financial records and accounts will document past events, the key evidence of future growth is what was happening at the date of the incident. In this respect, notes of meetings with customers and tenders for contracts are profoundly important. If business does fall away post incident, then third party confirmation of why contracts were moved or cancelled can be compelling evidence.

Perhaps the question to answer is ‘How could we evidence the business we expect to be doing in the next six, twelve or eighteen months if a business interruption incident happened yesterday?’ It is therefore essential to keep up-to-date records of relationships with all new business prospects and clients, all emails held by the organisation, and everything the company has had to spend since the interruption occurred.

Whilst preparing an overly-extensive disaster recovery plan may be too onerous, a few simple common sense precautions may be very effective and provide compelling evidence of what might have been. The scale of the Buncefield disaster may be unparalleled, but fires and floods will always threaten businesses. To survive these, businesses must be prepared for unpredictable and devastating interruption, otherwise a long and painful claims process – more distressing than most directors and owners realise – will follow.

John Alexander
Insolvency Practitioner
CBW
Part of the MGI association
www.cbw.co.uk
www.mgi-uk.com