Expect The Unexpected Create a monster plan to disaster-proof your business.

These days, it's nearly impossible to turn on the eveningnews without hearing of some major disaster. Since 1992, we'vewitnessed three of the four most costly disasters in U.S. history,as Hurricanes Andrew and Opal, along with the Northridge,California, earthquake, caused billions of dollars' worth ofdamage. And it doesn't end there. In 1996 alone, Hurricane Franwreaked havoc along the East Coast, more than 1,000 tornadoesspread terror across the country, and massive flooding brought muchof the Midwest to a standstill.

In spite of all the press coverage, however, many businessowners have yet to develop an effective disaster plan. "Theoverwhelming majority of business operators are simply notprepared," says Gerry Havlena, general manager and CEO ofFirst Restoration Services in Greensboro, North Carolina."They come into work one day and find out their property hasbeen burned or flooded, and they panic because they haven'tdone any planning."

Particularly for small businesses, that lack of planning can bedisastrous. "Many small businesses are not sufficientlycapitalized," explains Sean Mooney, senior vice president ofthe New York City-based Insurance Information Institute. "If adisaster occurs, they'll quickly run out of capital and be outof business."

The key to staying afloat in the aftermath of a disaster isadvance preparation, centered around a carefully structuredinsurance program. "Many companies don't pay enoughattention to their insurance program until a loss occurs,"says Vince Cali, associate national director for businessconsulting at Deloitte & Touche LLP, a professional servicesfirm specializing in accounting, auditing, and tax and managementconsulting, in Dallas. "You can usually replace the assets ofa company, but you'll have a very difficult time recoveringbusiness if you are down for an extended period of time."

In spite of a devastating fire that closed his mattressmanufacturing plant for nearly a year, Joe Riney, Jr.,third-generation co-owner of Riney Bedding Co. in Louisville,Kentucky, never had to worry about recovering business. Althoughthe factory sustained $200,000 in damages from an April 1989 blaze,manufacturing was up and running again in a matter of days, due toa strong insurance program and the cooperation of other localmanufacturers.

Because Riney's company carried extra expense coverage, hisinsurance company paid not only for restoration of the plant'sVictorian-era building, but also for temporary relocation of itsmanufacturing operations. While the leased facility was beingprepared, other bedding companies in the area granted Riney the useof their plants to help keep his manufacturing on schedule.

This kind of arrangement, formally known as a reciprocityagreement, has become an increasingly common way for businesses todeal with disaster. After 1993's World Trade Center bombing inNew York City, a large percentage of displaced companies soughttemporary refuge within other businesses' quarters. A nearbylaw firm, for example, shared its office space with H. AbbeInternational, a travel agency and freight forwarder usuallylocated on the Center's 28th floor.

Owner Herb Abbe relocated his entire operation into the lawoffice for a month while repairs were completed. Despite thearrangement, however, Abbe estimates he's still out $70,000 inlost business and relocation expenses. Business-interruptioninsurance would have covered his lost net profit, as well ascontinuing expenses, such as taxes and salaries. However, Abbe sayshis broker never offered the coverage, so he was in the dark aboutits benefits.

Abbe's not alone. Nearly half of U.S. business ownersdon't purchase business-interruption coverage. According toMooney, a little homework and a well-developed business plan canhelp them avoid being caught under-insured.

"Business owners don't have to be insuranceexperts," he says. "They need to be experts on their ownbusiness and the factors that can hurt them, and be able to conveythat information to their agent."

For too many business owners, however, insurance decisions arebased on budget, rather than on need. They simply don't want totake money they could use elsewhere and put it toward insurance.They treat insurance as though it is a luxury. For that reason,many small businesses neglect to carry specialized coverage, suchas earthquake insurance.

"Many companies today will take on the risk themselves,rather than buy all the insurance they could possibly use, becausethe expense to protect the company from all potential risks hasgotten very high," says Cali.

Flights of Fantasy Books in Santa Monica, California, is stilldigging out from the debt it incurred from 1994'srecord-breaking Northridge earthquake, and all indications are thatit will be for several years. Less than a year old at the time ofthe quake, the science fiction and fantasy bookstore was forced totake out loans to cover relocation costs and $30,000 in lostinventory.

"Earthquake insurance was initially offered, but we refusedit because of the price," says manager Jean-Louis Wolfe."Later on, when we're big and successful, we'llprobably get it, but right now, the overhead is just toohigh."

Although Wolfe again declined earthquake insurance, experts sayhe was in the ideal position to evaluate his coverage. "Weencourage our clients to assess their coverage after a majorloss," says Cali. "That's usually when they'llhave an excellent idea as to the responsiveness of thecoverage."

Other compelling reasons for reassessment include drasticoperating changes, such as acquisitions, mergers and newmanagement.

A disaster's aftermath can also be a good time to upgradeoutdated facilities. While business-interruption insurance onlycovers the time it takes to repair insured assets, extended periodof indemnity coverage provides extra time to woo back customers orto update facilities to modern specifications.

"It's not practical to close down the entire businessand just start rebuilding," says Cali. "If you have aloss, you're in that predicament already, so it's a goodopportunity to take advantage of whatever insurance is availableand rebuild to address the future growth demands of yourbusiness."

Another way companies can prepare for potential disasters is bypracticing proper document storage. According to Havlena, themajority of business owners are unaware of the importance of anoff-site back-up location for both their computer and their paperrecords.

"People think they won't need their old files, so theydon't give much thought to where they put them," he says."Lo and behold, they have a loss, and they need them forrecovery purposes, or simply to continue running the business, butthey're often misplaced or destroyed."

Although large corporations are more likely to have vastcomputer files, the issue of data protection may be even morecrucial for small companies. While disaster-recovery specialistsare often called in to provide "hot sites" for majorcorporations, small businesses usually cannot afford such servicesand must take a more grass-roots approach to data protection, suchas using uninterruptable power supplies and investing in redundantequipment.

John Kreitler, partner with the Hartford, Connecticut, law firmof Shipman & Goodwin, counsels businesses on the technologicalramifications of a disaster. Once again, planning is the key tosurvival. "You're not going to have time to think about itwhen disaster strikes," he stresses. "You have to have aplan in place that you know will be effective."

These few simple precautions, combined with a strong insuranceprogram, can keep a business running rather than standing idly inthe rubble. "Companies simply cannot afford to beoperationally vulnerable after a major loss," says Cali."In our competitive environment, if you can't immediatelyrecover, you could lose your share of the market."

Key Terms

Business-Interruption Insurance--Covers continuingexpenses, such as taxes and payroll, as well as loss of netprofit.

Extra Expense Coverage--Pays for temporary relocation ofworkers and machinery, allowing a business to continue operationswhile repairs are taking place.

Extended Period of Indemnity--Adds on to the periodcovered by business-interruption insurance to allow for extra timeto get revenues back up to pre-disaster levels.whereby if onesuffers a loss, the other will permit temporary use of itsfacilities.

Disaster Recovery--Services offered by specialized firms,as well as major computer manufacturers, to help businesses avoidloss of crucial computer data.

Julie M. Cook is a Rockford, Illinois, journalist whospecializes in small-business topics such as sales and marketingand human resources.

Contact Sources

Deloitte & Touche LLP, 2200 Ross Ave., Dallas, TX75201, (214) 777-7000.

Flights of Fantasy Books, 523 Santa Monica Blvd., SantaMonica, CA 90401, (310) 917-9112.

H. Abbe International, 2 World Trade Center, #2844, NewYork, NY 10048, (212) 839-9211.

Insurance Information Institute, 110 Williams St., NewYork, NY 10038, (212) 669-9214.

Riney Bedding Company, 431 E. Market St., Louisville, KY40202, (502) 587-8469.

Shipman & Goodwin, 1 American Row, Hartford, CT06103-2819, (860) 251-5119.