Before the storm

It's no secret that creating a firmwide disaster recovery plan helps ensure business continuity in the face of crisis, but having one in place could ultimately affect your insurance premiums as well.Gary Marchitello, managing partner and property practice leader at New York-based Integro Insurance Brokers, said that disaster recovery plans are not mandatory when negotiating premiums. But presenting one to your insurer can save you between 25 and 50 percent -- particularly if you are located in a catastrophe-prone area.

"If you consider a firm with no backup plan that resides in a catastrophe zone, the underwriter will have to assume that if the firm's physical location is damaged or destroyed, their business will be interrupted, they will lose customers and their revenue stream will be curtailed, if not eliminated indefinitely," he said. "Compare that to a firm that has a business continuity plan, where they have a place to physically relocate their employees and access to communication devices, computers and data. In other words, they can continue serving their clients with little or no interruption, and consequently little if no loss of revenue. This can generate a 50 percent difference in rates or premiums."

Dave Sukert, executive vice president of Aon Insurance Services, the executive administrator of member insurance benefits for the American Institute of CPAs, agreed that a plan helps overall, but declined to guarantee that having one would necessarily lower premiums. "I would say that it's important to an underwriter's overall view/assessment of the firm's risk profile, and that it would be one of many variables that is taken into account in the calculation of premium," he said. "On balance, I would think that it is better to have such a plan than not."

His colleague, Jim Eisenmann, chair of Aon Insurance Services, said, "For some insurers and for some coverages -- management liability and employment practices liability -- a disaster recovery plan and a succession plan may be almost a requirement to get coverage."

"The best underwriting meetings are those in which the insured is prepared and provides information to the underwriter, as opposed to merely responding to questions that the underwriter may ask," Sukert said. "That type of preparation and communication enables the insured to demonstrate that they have a plan for the continuity of their business. They've got to plan for the people, the technology, the work product."

GET WITH THE PROGRAM

"The first thing to bear in mind is that a disaster plan -- as well as adequate insurance -- are keys to recovery following disaster for businesses," said Claire Wilkinson, vice president of global issues for the New York-based Insurance Information Institute. "Our estimates suggest that of all businesses that close down after a disaster, more than 25 percent never open their doors again. There are critical steps that businesses can take to protect the bottom line. Whether a business is small or large, it needs to conduct some kind of analysis to identify what it should do to protect itself in the face of disaster."

That analysis includes setting up a written emergency response plan that will illustrate what measures should be taken to preserve life and limit property losses, according to Wilkinson. Once that is identified, a firm needs to train employees on how to implement the process and who should be contacted in the event of a disaster.

Yigal Rechtman, CPA, CITP and director of information technology, technology assurance and attest services for the accounting and consulting firm of Buchbinder Tunick & Co. in New York, said that conducting a risk assessment within the firm should be the first step in disaster recovery planning. He suggested pulling together a group of people from various areas in the firm -- a key IT person, a tax partner, a few tech-savvy managers -- to create a task force with the goal of addressing the firm's worst-case scenarios. Next, he said, figure out the likelihood of these possibilities occurring. "With that in mind, you can decide what kind of insurance you want. If you're doing it proactively, you know what to ask for at this point. You come educated to the process. Not only do insurance companies want to see the report, it likely would affect your premium because now you are looking like an experienced person, as opposed to somebody willy-nilly."

ARE YOU COVERED?

"A 'telephone tree' is not a disaster recovery plan," said Jeffrey Cavignac, CPCU, RPLU and president of Cavignac & Associates, a commercial insurance brokerage based in San Diego. "Without a plan, you could have all the insurance in the world, but it might not do any good. Insurance is going to reimburse you for your losses; disaster recovery is designed to lower the severity of those losses."

Making sure your firm is adequately covered can be very complex and confusing, especially if you are blindly renewing a policy year after year. "The first thing we generally do with our clients is talk to them about doing an audit of their insurance coverage portfolio," said Rachel Kronowitz, a partner at Gilbert Randolph LLP, an insurance law firm based in Washington, D.C. "What's really important for them to do is make sure they understand what coverage is currently available to them. Often what we find when we do those sorts of audits is that what our clients believe is in place as far as coverage is concerned does not actually match up with what is, in fact, in place."

For most firms, according to Cavignac, general liability insurance and property coverages are combined into a business owner's policy. BOPs do not cover professional liability, auto insurance, workers' compensation, or health and disability insurance, according to the III. Business identity insurance also is not included, but firms may wish to purchase this coverage, which the III described as "providing legal liability coverage to businesses that are victims of data theft."

"One of the benefits of the BOP is that it provides loss of income or business interruption insurance on an actual loss-sustained basis with no limit typically for up to 12 months," Cavignac explained. "What that means is any expenses the firm incurs to avoid an interruption and loss is going to be covered."

Business interruption insurance is composed of two types of coverages, Cavignac explained: loss of income and extra expense.

Designed to cover loss of profits and continuing expenses during restoration after a disaster, loss of income, Cavignac said, is not as big of an exposure for an accounting firm as extra expense. "Loss of income would be huge for a retail store," he said. "If it was closed for three months, it couldn't make sales, and there's no income. But an accounting firm is going to have to remain in business. It still has clients, they still need accounting services and the accounting firm needs to get back up as quickly as possible. So, the accounting firm is going to incur extraordinary operating expense to avoid an interruption. That's covered under extra expense."

Cavignac added that most people don't pay enough attention to their business interruption limits and end up undervaluing their coverage. "An accounting firm that has coverage on an actual loss-sustained basis does not have to worry about setting an appropriate limit," he said, adding that the coverage is unlimited subject only to what the client can quantify. "But for firms that don't have this luxury, it's critical that they understand their exposure and set their limit accordingly. Business interruption is one of the most misunderstood coverages. A little extra time spent considering what is appropriate is a good investment."

One confusing element is that there are two business income forms, which are distributed by the Middle Market Standard Insurance Services Office, a provider of data, underwriting, risk management and legal/regulatory services, currently being used. According to John R. Campos, ARM, CIC and an account executive at Salt Lake City-based Diversified Insurance Group, one form includes extra expense, while the other doesn't.

Campos said that the "Covered Causes of Loss" offering on the form that includes extra expense follows the perils insured on normal property concerns. Filing the right form is something brokers should be concerned with, he said, adding that that extra expense is not always automatically included within the coverage.

Firms should look more closely at what the policy entails to obtain the broadest type of coverage anticipated, according to Kronowitz. "Some business interruption insurance is off the shelf, but you can actually negotiate your way through the coverage that you get," she said, adding that income losses can include interruption of utility services, customer and vendor inability to reach you, and critical suppliers suffering their own significant damage.

Kronowitz said that she has seen instances where business interruption insurance does not cover additional expenses beyond actual loss of income -- something her firm dealt with a lot through its work with businesses in the Mississippi Gulf region after Hurricane Katrina. Many of those businesses, however, negotiated extra expense coverage into their policies and as a result were able to pay for renting substitute space, buying additional computers and installing additional phone lines to get up and running again.

Another protection to be aware of if a firm rents office space, according to Marchitello, is leasehold insurance. "If you've signed a 20-year lease and you're into the lease for about five years and you have a catastrophe, in most cases the lease is cancelled if there is substantial damage to the premises," he said. "You then have to go out and look for new space. If real estate values and rental rates have increased, you'd incur a huge, unexpected loss. You can actually insure that. You can insure the differential in the lease rates."

Experts said that the key to getting the best insurance is to find a broker who is knowledgeable about your business. Ask brokers about their risk management capabilities, what they provide, who provides them, and how you can get them, said Aon's Sukert. He also suggested finding out how long the provider has been in their line of business, and investigating the backgrounds of the underwriter.