Steve Severaid

Disaster Proofing Your Business

By Steve Severaid
Steve Severaid

It is more important than ever for medical manufacturers to prepare for business interruption due to unexpected damage or natural disasters. From building a recovery team to securing proper insurance, there are many steps device manufacturers can take to recover quickly and easily following a disaster.

As supply chain issues continue to cause delays in production and the threat of natural disasters continues to grow, it has never been more important for medical technology manufacturers to prepare for whatever business interruptions might come their way. Having a disaster plan in place, which includes building a recovery team, making sure insurance is up to date and knowing how to keep production running after an incident, is essential. Here are some tips on disaster proofing your business that will help your company not just survive a disaster but recover to the fullest extent possible.

Advance Preparation

Planning ahead is the best way to avoid the disaster after the disaster—that is, loss of customers or revenue because of interrupted business or an improper settlement that causes large out-of-pocket expenses that can hurt the business. Here are a few essential steps to prepare a business for whatever might come its way.

Build a team. Having a team in place before a disaster strikes makes it easy for companies to mobilize and spring into recovery mode right away. This recovery team should be comprised of the business’ accountant, risk manager, lawyer, insurance broker and a public adjuster. Licensed public adjusters negotiate with the insurance company on behalf of the policyholder to get the best settlement possible within the limits of the insurance policy. A public adjuster can help a manufacturing business overcome and recover from a disaster quickly while shouldering the burden of the tedious claims process.

Know the most likely disasters. Understand the common disasters and risks in your area. It is not possible to fully predict what extreme weather or other disasters are going to come your way but knowing if your business is in a fire or hail prone area, for example, will help to inform what insurance coverage you need and help you be aware of what is most likely to impact your business.

Create a communication plan. Determine how communication—both internal and external—will be handled in the event of a disaster. During a business interruption having current telephone numbers, e-mail addresses and emergency contact information for employees, customers, suppliers and other key contacts is critical. Keep this information in digital and hard copy format both on the business premises and off so it can be accessed in the event of an emergency.

Check insurance coverage. The best way to set a business up for a fair settlement in the event of a catastrophe is to have proper insurance in place beforehand. This makes it far easier to negotiate with the insurance company to receive a fair settlement. A good standard for any business owner is to check their insurance policy twice a year. This will ensure that any new equipment or building upgrades are covered, loss of revenue is covered and coverage is up to date. You can speak with your insurance broker about any additional coverages or endorsements you might need for your specific business.

Two of the most important coverages you must have in your policy are business interruption coverage and extra expense coverage. Business interruption insurance compensates the policyholder for income lost during the restoration period. It typically includes coverage for continuing expenses, the profits the business would have earned in absence of the disaster and the salaries of key personnel. Understanding the common disasters in the area can help determine what coverage your business needs and how much your policy limits should be.

Extra expense coverage is typically included in business interruption coverage or as part of the overall commercial policy. While business interruption insurance covers lost revenue from the normal operating costs of a business, extra expense coverage pays for items beyond those expenses that are essential to keep the business running, such as a renting a temporary location, leasing equipment and overtime wages for staff and/or additional hires during the transition period.

Questions manufacturers need to ask themselves and their insurance broker to determine coverage include: If my policy is not written blanket and my warehouse burns—and the warehouse doesn’t produce income—will loss of revenue still be covered? Do I have sufficient code coverage? Do I have professional fees endorsements? Should I include ordinary payroll? The answers to these questions vary depending on your business and your policy, which is why it is important to get guidance from an insurance expert when reviewing your policy.

Additional Coverage Considerations

Even with advanced preparation, manufacturing claims can have varying elements and special circumstances to grapple with. These are some of the most common additional or tangential issues that manufacturers face.

Dependent properties. If there is a damaging event at a separate location that provides your company with materials or products, this can impact your business in a major way. If you have associated facilities like this, called dependent properties, you might consider dependent property coverage. This coverage does not insure the property, but rather insures your loss of revenue or extra expenses if there is ever an incident that is qualified as a triggering event under the policy.

Ordinary payroll. Ordinary payroll coverage, which insures pay for employees during a business interruption, is often excluded from business policies, as it causes an increase in premiums. However, that increase might be worth the investment in this time of labor shortages. Consider if your facility burned down and you had to lay off 20 workers while it was being rebuilt. Do you think you could find 20 more workers once the reconstruction was complete? If not, you’d be facing another business crisis—a labor shortage.

After the Disaster

When medical manufacturers face business interruption, whether from burst pipes or a wildfire, there are many factors to consider. The most important focus for the company, outside of the wellbeing of the employees, is retaining customers and continuing to produce essential products.

There are several options for manufacturers to continue business operations after an incident. For example, a company could partner with a competitor to share use of their equipment or materials. Another option is to move the business to a temporary location. Both situations can be covered under extra expense coverage if that is included in the insurance policy.

A manufacturer could also negotiate for expedited construction, which will allow any damaged property to be recovered or rebuilt sooner. This will be an increased cost compared to average construction, but if the manufacturer or the manufacturer’s public adjuster, can argue that it would cost more to stay at a temporary location longer, the insurance company could be willing to pay the higher construction price.

In the event that there is building damage, but it is not necessary to rebuild from the ground up, there can still be unseen damage present. In a lower-level water or fire event, for example, unseen water or smoke damage can cause major problems down the road if not noticed and addressed right after the event. In this scenario, be sure to act deliberately, not hastily. The best course of action is to have several different experts look at the property and provide their opinions. These experts can be remediation experts, industrial hygienists and/or public adjusters. Hear all their advice, get educated about what exactly is going on in your property, and then make an informed decision of how to proceed with the claim.

Manufacturing claims can be stressful, time consuming and complicated, but having a proper plan in place and a good team by your side can be the difference between surviving a disaster or shuttering your business.

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Steve Severaid