At about 3 a.m. on July 2, 2010, the building caught fire.
By 3:20 the fire had grown hot enough to set off alarms. At 3:30, Howard Bernstein, president of Penn Installations in Pennsylvania, received a call from his emergency service, alerting him. A minute later he received a call from one of his employees who lived near the site: “The building’s on fire.”
By the time Howard arrived,10 fire trucks and more than 100 fire fighters were already in place and hard at work. It was, however, already clear that there was no chance of saving the building.
Disasters and Planning
If a disaster, by definition, is an unplanned-for event with negative impact, can you avoid one by planning?
The short answer is, mostly, no.
There is no escaping those unplanned-for events where Mother Nature, both legally and metaphorically speaking, is acting: floods are the result of severe weather, earthquakes are the result of restless tectonic plates, and tornadoes are the result of atmospheric conditions.
But while the impact of these events cannot be avoided, they can indeed be lessened.
When it comes to fires, yes, a well-executed prevention plan may avoid them altogether.
Two Types of Plans
Disaster plans come in two distinct flavors: prevention and recovery.
Prevention plans are crucial when it comes to fires, for a well-equipped and monitored building is virtually safe from that danger.
When it comes to acts of God, while you can’t prevent them, you can significantly reduce their negative impact by constructing or strengthening your building with the possibility of a nature-related disaster in mind.
We can now construct buildings that will survive moderate earthquakes unscathed; we can construct or reinforce buildings to withstand moderate tornadoes—though no works of man can withstand a truly severe storm; and we can select building sites with the dangers of floods in mind.
In the main, however, when it comes to Mother Nature’s whims, the bulk of our plans will focus on efficient and speedy recovery.
Prevention. David Barry, national technical director for Casualty Risk Control at Willis Group, a global broker (http://willis.com/), cannot stress enough the value of having good fire detection and prevention in place.
Sprinklers. “The best way to come out ahead in a fire is, of course, to prevent it in the first place, and one of the best ways to prevent fire disasters is a good sprinkler system.
“There is, however, a common misconception about how they work.
Due to the common Hollywood misrepresentation of sprinklers—where someone breaks the glass and pulls a lever to flood the entire building—people think sprinklers are an either/or proposition.
“This is far from the case, and a good sprinkler system is, in fact, invaluable. They not only detect fires. Each individual sprinkler head goes off (pops, as we say) when it reaches a certain temperature, or detects smoke—but do so on a head-by-head basis, not all going off at once.
“So, a good sprinkler system will detect and prevent a small fire from spreading by attacking it with water.
“Most modern sprinklers also have alarms built in, so when the head pops, the local fire authorities are also alerted. And most will sound a gong if for some reason the sprinkler system is deactivated, and deactivation will also alert the fire monitoring company.
“Some modern sprinklers don’t even use water but a gas that will suffocate the flames by displacing the oxygen in the air.”
Infrared thermography. Berry recommends another excellent heat/fire detection technology.
“Infrared thermography is a fantastic technology. It consists of infrared cameras that scan and check for hotspots. Whenever there is increase electrical resistance (as in a faulty connection) heat will build up which can eventually turn into a fire. The infrared thermography cameras spot this and allow you to take action even before a fire can start.
“This is a relatively inexpensive technology that can save you millions.”
“For threats other than fire, we have other early warning technologies—hurricane tracking, for example. This can help a business owner prepare for the worst well ahead of landfall.”
Recovery. When it comes to recovery plans, Berry had this to say: “The key is to prepare, ahead of time. If needed, work with an expert on this. Establish a formal, written plan with clearly assigned responsibilities.
“Then practice that plan. Run through and drill various scenarios. Take, for example, an out-of-commission factory that manufactures a critical part of your product: What do you do if that factory goes off-line? How long before you recover? Is there an alternate supply? These are question you must consider and answer if you want to stay in business and continue to serve your customers.
“You should then review this plan whenever there is a major change, either in protocol or ownership, but no less than twice a year.
“And, of course, you need adequate insurance.”
Insurance
In fact, adequate insurance coverage should be at the top of your action plan when it comes to recovering from a natural disaster.
Scott M. Negwer, president of Negwer Materials, and two of his
lieutenants, Rich Hargis and Pete Wilhelms—both of whom were instrumental in getting the company back on its feet after being struck by a tornado in April 2011—shared their experiences.
Says Negwer, “Over the 2011 Easter holiday, our main warehouse was hit by a tornado and completely destroyed. Our office was also damaged, but less so.
“As for the warehouse, nothing was usable. It had been a 50,000 square-foot facility filled primarily with gypsum board and ceiling tile. We lost all of that. We also had 22 trucks parked in the warehouse at the time. Six of them were buried under the debris. Seven of them had to be towed away. Only four of them sustained no damage.
“In our industry, insuring the building and content is an absolute must. We had a lot of money tied up in the building and in our inventory, but we had good coverage.”
Campus Coverage. Negwer points out a few things to keep in mind: “We operate on a six-and-a-half-acre campus with several buildings—all of which sustained damage, and in this scenario you must be careful how your coverage reads.
“Initially, the insurance adjuster told us that each building was individually insured and would require a deductible for each building. This would have added up to a sizeable amount.
“Reviewing this with our broker, we found that we were in fact insured as a campus, with only one deductible. This is a detail that may not be applicable everywhere, but where it applies, you need to make sure you insure your campus as a whole.”
Replacement Value. “Another important point: When it comes to building content and inventory, make very sure that you insure it for replacement value. This is a key point, especially in the construction industry, where gypsum board may be very hard to come by after a disaster, and so, by the laws of supply and demand, will sky-rocket in price. Replacement value is a must.”
Business Interruption Coverage. “Another must, in our industry, is Business Interruption coverage. The job site cannot—and will not—wait for you to get back in business. You may well lose your existing contracts to undamaged competitors if you don’t show up on Monday with the promised supplies.
“Your competitors, while sympathetic, will also breathe a collective sigh of relief that they were not hit, and then gladly delivery their product in your stead. Business Interruption coverage will cover the cost of that lost contract.”
Adds Wilhelms, “A tornado can be very localized. Your facility may be razed while the job site down the road is untouched, along with your competitors.”
Bouncing Back
Scott Negwer’s new building was completed in March 2012, and they are now 100 percent back in business.
“The team understood what had to be done, and did it,” explains Negwer. “So we never really went out of business.
“To be honest we did not have a formal recovery plan in place, but we had discussed the eventuality of a disaster, and outlined the broad strokes of what we’d have to do.
“When it did strike, each of us—Pete, Rich and I—took full responsibility for the recovery effort, leaving the rest of the company free to focus on the business itself. We told our employees only to worry about our customers, not about the disaster.
“Since good will is one of your main assets—and one that you cannot really insure—you must, in an emergency like this, do whatever it takes to protect it. And we had to live up to who we are and what we stand for as a business, which is that we do deliver as promised and on time.”
Wilhelms expands on this: “One of the key points here is that first thing Monday morning our VP of sales personally called all of our customers to let them know that we were indeed still in business and would deliver as promised.”
Adds Hargis, “The strange thing here, and a very human thing, is that all of our customers knew of our disaster—we were, after all, TV and front page news—and one of their first reactions was that since we now have enough to worry about, they didn’t want to bother us.
“That’s the notion we wanted to nip in the bud. We were still in business, and we let them know this, proactively.”
Negwer elaborates, “Our yard manager was in all through that weekend getting things ready for Monday morning. The IT department was also in all weekend bringing the computer systems back online.
“It’s true that come Monday, all your customers are very understanding, but come Tuesday they will return to their own problems, and if you’re part of their solution, you better remain part of their solution”
Data and Records. “A disaster like this,” says Negwer, “opens your eyes to how you really should do things, and during the recovery period we have reviewed and documented how best to catalog and protect not only our inventory, but also all of our information as well, whether employee, customer, accounting or legal.
“Today we back up all such data and we bring the backups off-site.”
Adds Hargis, “We also make full printouts of our equipment and inventory, which I then keep with me in the truck at all times. This includes an up-to-date list of all equipment, with all of our serial numbers.”
Recovery Plan. “Based on our experience,” continues Negwer, “I recommend you take very good notes in a case like this so that you don’t overlook or forget anything. We have now sketched out a very functions- and goal-oriented recovery plan.
“Mind you, we have not assigned specific ownership to actions. Since there is no guarantee that everyone assigned tasks will be available after a catastrophe—in fact, two of our key people were out of town when the tornado hit. We prefer to keep this more flexible. All of management knows what functions need to be carried out, and final ownerships would be assigned after the event.
“I should mention that even before the tornado, Rich had mapped out the locations of every gas shutoff valve, every electrical panel and all water shutoff points on the campus. This saved both time and possibly lives, and was one thing that the fire guys commended us on as they would be able to shut off everything immediately.”
The Major Claim
When it comes to insurance companies and accidents, one important distinction must be made.
There’s the minor claim, say the dented fender, which the insurer will settle on the spot.
Then there’s the major claim—the one with a lot more money at stake for the insurer. And this is a horse of a very different color.
Howard Bernstein, whose business building burned to the ground in July 2010, knows all about this.
“It is important to realize that insurers will only stay profitable, and in business, if they limit their losses, and the way that they go about this is not always in the spirit of ‘good hands people’ or ‘good neighbors.’ Even the best insurer in the world will put you through the ringer when faced with a major claim.”
Coverage. “Although sitting down with your broker to review coverage is not very exciting,” Bernstein says, “it’s nevertheless one of the most important things you can do because being underinsured is almost as bad as being uninsured.
“When it came to coverage, we discovered that we were underinsured in three important areas: code upgrades, additional expenses and personal content.
“We had code upgrade coverage of up to $25,000, which, as it turned out was far too little since the building, now destroyed by fire, was discovered to not have been up to code in two areas. The difference between the cost of building the new warehouse fully up to code and the $25,000 the insurer paid came out of our pocket.
“When it came to additional expenses, we had not thought through all of the details and again found ourselves underinsured. Additional expenses include such things as: Where will you work while the building is rebuilt? In our case, we opted for a set of trailers with temporary electricity and phone service, which, of course, was an ongoing expense all through reconstruction.
“Again, we had a limit of $25,000 for these expenses, which was soon reached. Everything after that came straight out of our pockets.
“As for personal content coverage—this is where you set the per-employee limit for personal articles brought to your office. Most of our employees have been with the company for 20-plus years, and over that time you not only bring in a lot of valuable personal stuff, but you also get so used to having it around that you may even forget that you have it there.
“I, for one, brought some of my most valued possessions—a great set of collector quality guitars—to the office, each valued way beyond the $500 limit, of course. Even though they were, in the last minute, brought out, they were all water-damaged and had lost their actual value.
“I recommend two things here: Really survey what people have of value in their offices, and insure for adequate coverage. Also, take a video of all offices—desks, walls, etc.—to act as a reminder for one and all what they actually had in the office should disaster strike.”
The Broker. Bernstein offer more advice: “You need a good, experienced broker. At the least, you need an honest one. We did have an honest broker who, right out of the gate, admitted that he had never handled a claim of this size before, but he promised that he would do his best.
“However, after a couple of weeks we realized that he was in over his head, and that we were spending way too much time on claims. Our attention was forced off our day-to-day business and onto recovery.”
Third-Party Consultant. “At this point, I opted to retain a third-party loss-consultant to handle the appraisals and claims. This proved to be a good decision, since we found and partnered with a very experienced and ethical firm that, since they also had extensive insurance background, were well aware of the insurer’s tactics and potential loopholes in avoiding or delaying payments.
“The consultant took care of all appraisals and acted as a liaison between us and the insurer. This did allow us to return our focus to the day-to-day operations.
“It is a fact that insurance companies, when faced with claims of our size, will commit various sins of omissions, and if your broker has not handled anything this large, a third-party consultant will know what to look for. He does understand the language, and he will serve as your advocate.
“One area where the consultant saved us a bunch of money was in recovering our electronic data. We discovered, as recovery began, that restoring lost electronic data was going to cost a small fortune, and since this was not directly covered—neither under building nor content—we stood to pay for this ourselves.
“Our consultant, however, pointed out that we did have coverage for ‘important papers’ and that a recent court decision had upheld that electronic data fell under ‘important papers,’ so we did indeed submit all relevant invoices for payment and our insurer did pay up.
“So, unless your broker has navigated major losses in the past, I strongly recommend that you retain a third-party loss-consultant—especially since your attention should be on running your business and serving your customers, not on researching and filing claims.”
Details, Details, Details. “Our consultant sent in his own appraiser, who emerged with a complete list of all content, some 3,000 line items, with replacement costs.
“We submitted this spreadsheet to the insurer who came back to us with: ‘Please submit proof for prior existence and replacement cost of each item and we will process your claims.’ Leaving us with 3,000 items to now document to the insurer’s satisfaction.
“With the help of the third party consultant, we did dig up the needed proof and submitted the whole thing, again, for payment.
“The insurer rejected a good portion of this list due to ‘insufficient documentation,’ questioning the value of this and that product, many of which were commodity items that they could have Googled as easily as we did. But since the insurer is very protective of its bottom line, it’s not in their interest to help you get paid.”
A Lot of Them Against a Few of You. Bernstein elaborates, “During a claim of this size, they will—because they have the manpower and the resources, and you don’t—they will wear you down, or at least try to. And at some point you might just wake up one day and say, I can’t do this anymore.
“At this point we still have items worth six figures on the table, all of which require some additional documentation in order for the insurer to pay. It seems never-ending. So, not long ago, I contacted the insurer and asked them to simply make me an offer to end all this, to wrap it up. They said no. Not going to do that. We have to follow procedures. This is how it’s done. Knowing all too well that people like you will, in the end, probably give up and leave the rest, the unpaid stuff, on the table—to their profit.
“History has proven to the insurer that the claimant is never able to keep up with them. They can, and do, wear you down.
“People in the industry have since told me that this is the nature of a major claim. The insurer is in the business of limiting their exposure, period. And they will do whatever it takes to achieve that—within the letter, if not the intent, of the law.”
Prior Appraisals. “However,” adds Bernstein, “some years ago, we had all of our buildings and content independently appraised by a third-party appraiser, which we could now use to counter any low appraisals done by the insurer.
“We live in a flood zone, and I was told early on that it was not a question of if, but when, we would be flooded. Based on that we went ahead and had all of our assets appraised, and we’ve kept this appraisal up by notifying the appraiser of any building improvements or content additions, which gave us an up-to-date record of the value of our assets.
“Retaining this service proved money well spent. In fact, at one point they pointed out that so and so was valued at $1.5 million and that our policy only covered $1.2 million. We upped the limit and, as it turned out, saved ourselves $300,000.”
The Bottom Line
The best fire plan is prevention.
The best natural disaster plan is to meticulously envision and document what it will take to restore your full operation, and to then, working with a good and experienced good broker, ensure that every facet of your operation is adequately covered in your policy.
It also seems that disasters rarely strike the well prepared.
Los Angeles–based Ulf Wolf writes for the construction industry as Words & Images.
