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by Ed Schirick
In
the November/December issue, we identified business interruption as one
of the risks camp directors have a tendency to overlook. Many risks might
cause an interruption of your business, such as physical damage to your
real and personal property (buildings and contents) from a catastrophic
fire or windstorm. The magnitude of the loss of income that could result
is determined by the type of loss, when it happens, and how long it will
take to resume operations.
By asking yourself "what if" questions you can plan solutions and respond
more effectively if you are confronted with a real-life interruption
of your business. The objective of your planning and problem-solving
should be to stay open at all costs. To accomplish this, you will probably
need to consider different scenarios. You will also need to work with
your insurance representatives to become more familiar with the insurance
offered to help you cope with a business interruption situation. Insurance
does not solve all of the problems you will be confronted with in the
event your camp business is suspended or interrupted. However, by becoming
more knowledgeable about how business income insurance responds, you
will avoid blindly assuming risk.
Brainstorming Real-life Scenarios
Consider what would happen if your dining hall burned to the ground
two weeks before opening day. What would you do? How would you respond
to this possible interruption of your business? Here are some issues
to consider after the fire is out and everyone is safe:
- How quickly can your insurance company get a claims representative
on site to authorize clean up?
- Who would you hire to clean up the debris and grade the site? How
much would this cost? Could they complete the job in time for camp
to open?
- If the site can't be cleaned up in time, should you cancel camp or
delay opening?
- What should you tell your camper families? How would you do it? Who
will help you with this task? What can you do to maintain their goodwill
in this time of crisis?
- What are the obstacles to staying open and using a field kitchen,
large tent, picnic tables, paper plates, and plastic utensils? How
would you manage these obstacles? Is there anything you can do in advance
to reduce these obstacles or eliminate them? Where would you find this
equipment? How much will it cost?
- As an alternative to a field kitchen, is there another location or
brother or sister camp nearby that you could use by transporting your
campers to their site to eat? This is the mutual aid concept. Is there
a firehouse, grange hall, or other facility you could use temporarily?
How much would one of these solutions cost?
- If none of these alternatives is viable and you have to cancel the
season or session, what are the implications for your business? How
many employees are you obligated to pay? What other expenses would
continue (i.e. mortgage, taxes, telephone, electric, automobile leases)?
- How would you deal with refunding tuition? Would you have enough
financial resources to refund tuition immediately?
- Are you likely to lose customers to other camps? Will you be able
to get them back next year? How long will it take you to recover from
the closing and build your enrollment back to pre-loss levels?
- Would your situation be different if this fire occurred the day before
camp opened? While camp was open and the campers were already there?
In September?
What Business Income Insurance Covers
The business income and extra expense coverage form designed by the
company's insurance services office is typically used to insure a camp
for loss of business income and extra expense when a business is confronted
with interruption or suspension. Some insurance companies have modified
this basic coverage, but this form is the basis for business income insurance
used by most camp insurance carriers.
Business income insurance covers net income (profit or loss) that would
have been earned had there been no loss to your dining hall, plus continuing
expenses incurred. The physical damage to your dining hall must be from
a covered cause of loss, such as fire. Reimbursement for the loss of
net income is for "actual loss sustained." There is a misconception that
business income insurance provides reimbursement for gross income. Or,
that the limit of insurance purchased is what is paid in the event of
a suspension or interruption of operations. The coverage does not work
this way.
In some situations, you may recover under business income insurance
even if your business would have incurred a loss, rather than earned
a profit, during the period of restoration. In such a situation, you
may recover continuing expenses, to the extent they would have been earned
by the business during the period of restoration. But certain payroll
expenses, if they are not vital to restoring the business, may not be
covered.
Expense Insurance Covers Necessary Payments
Expense insurance is an important part of the coverage camps need and
is built into the business income and extra expense coverage form mentioned
above. This insurance covers necessary expenses incurred, as a result
of the fire, during the period your business is being restored and is
designed to provide you with financial resources that may help you stay
open. It will pay:
- extra expenses to avoid or minimize the suspension of business and
to continue operations at your location, at a temporary location, or
at replacement location.
- extra expenses to minimize the suspension of business if you cannot
continue operating.
- relocation expenses and the costs to equip and operate the temporary
or replacement location if you can continue operating.
Coverage also includes extra expenses to repair or replace any property
or to research, replace, or restore information on damaged valuable papers
or records - to the extent that the expenditure reduces the amount of
a loss that would otherwise be covered under the loss of net income portion
of the coverage.
There are numerous options and nuances to these coverages too extensive
to discuss here. It is imperative that you work with your insurance representatives
to fully examine your risk and the solutions in this area of business
income insurance as part of your response to the risk of business interruption
or suspension.
Knowing How Much Insurance to Buy
How can you determine how much insurance to buy? This takes some thought
and planning. First, with the help of your insurance representative and
your accountant prepare a business income worksheet based upon your worst
what-if scenario. Your insurance representative can supply you with a
copy of the worksheet. This will result in a formal determination of
your net income. Then, as a result of your thought and planning, you
should be able to identify how much extra expense insurance you may need
in this worst-case scenario.
These two amounts should be added together plus some cushion for unforeseen
contingency. This will establish the amount of business income and extra
expense insurance to purchase. Don't over insure; only buy as much as
you think you need after thoughtful analysis.
This seems like a lot of work. But the reality is you can do it now
or do it later if you have a loss. Prudent management and good stewardship
would suggest that you take the time to do it now. A claim, particularly
a property insurance claim, can be a nightmare because the settlement
requires so much documentation. As a risk manager, one of your primary
responsibilities is to keep the enterprise operating. You will accomplish
this goal more effectively and have a better experience with your claim
adjustment if you take the time to prepare and buy the right amount of
insurance.
Remember, insurance is only one of the methods of managing risk. It
is not always a complete solution. By learning more about what business
income insurance covers, you will be able to identify what is not covered
so you can make appropriate financial arrangements. There are many other
risks of business interruption and suspension that cannot be transferred
to an insurance company. Be prepared and use the risk management process
to your advantage.
Originally published in the 2000 January/February
issue of Camping
Magazine.
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