How businesses can fully recover after a tornado
'Twisted claims': These are the steps risk managers should take before, during and immediately after a tornado strikes.
That Tuesday seemed like any other Tuesday in recent history. John, a plant manager at a large manufacturing facility, was nearing the end of his shift. He made his final checks, said goodbye to a few colleagues and stepped outside of the facility.
That’s when he heard it: The tornado sirens began to blare out in his hometown. This wasn’t uncommon in the area, but something else was — the low rumbling in the distance. As he stood outside, the rumbling began to grow louder, the wind began to swirl, and the sky was churning. John immediately ran back inside the plant, got on the PA system and informed all employees to take cover in the tornado shelter.
Workplace readiness
The plant employees had, in fact, been trained for this scenario. They had practiced the appropriate safety procedures. But this was different.
Once inside the shelter, the rumbling began to grow as if the tornado was bearing down directly on the plant. Then they heard it: a collapse of what sounded like the roof, parts and supplies flying around the plant and banging against machines, and a loud screeching of what they imagined was bending steel.
They knew without even opening the door that the worst had happened; a tornado had struck the plant directly. Their lives would now be changed forever by this one disastrous day.
After a tornado: That first phone call
The first call John made after assessing the damage was to you, the company’s risk manager, to report what happened. Thankfully, there were no injuries from the event, but the plant has taken substantial damage.
Procedures were in place before and immediately after the tornado, including the phone call to you. But where do you go from here? A loss of this size has never happened to your company, and you understand the efforts needed to recover will be significant.
Luckily, you prepared for potentially large losses and had implemented the following prior to the tornado:
- Standby contracts in place with emergency contractors, consultants, and others you may need following a loss to immediately respond and begin the procedures required for recovery both physically and financially.
- A recovery plan that directly communicates to various executives within the company who will be responsible for executing which activities and recovery efforts.
After the tornado hits, you immediately begin to work on and assign the following:
- Insurance policy review. Understand your sub-limits, your period of indemnity, how business interruption is calculated, whether you have ordinary payroll coverage, and what types of expenses are recoverable under your policy. Hopefully, you are prepared because you did this prior to the tornado.
- Have employees at the plant focus on debris removal, safety, cleaning the plant and assessing damage to the building.
- As cleaning commences, test machinery and equipment to determine what needs to be repaired or replaced and protected from further damage. Take note of the specific damage that was done to the equipment as best you can. As is common with most tornado claims, there may have been either wind damage from flying or falling debris, water damage, or both, to the machines.
- Immediately communicate with your broker and insurer that a loss happened, and you are assessing the damage. If your insurer assigns an adjuster and consultants that they want on-site, set up procedures for communication, making sure to stress the importance of safety and working to restore production, not the insurance claim process. If these teams have questions or would like to perform their own assessments, they should not impede your recovery process or take time from key employees.
- Have your accounting group set up general ledger accounts to capture expenses directly related to the tornado recovery efforts. This is an important step in expediting recovery in the coming months, as costs will be properly segregated from normal operations.
- Build out an estimate of what it would take to repair or build the plant back to an “as was” condition. This includes estimated costs and timelines of repairing both the building and machinery and equipment to help in preparing your insurance claim.
- Work with your consultants to begin developing a preliminary estimate of the loss. The goal should be to submit this to your insurer(s) within one to two months, or as stipulated by your policy, to establish your position on the loss and communicate to stakeholders.
- Before submission, prepare a narrative or presentation to establish the parameters of the loss, the story of the loss, background information on your business, the estimated recovery timeline and any other important details. At the end of this narrative or presentation, ask for a first cash advance to help in covering the immediate expenses or business interruption losses your company will be incurring.
- Keep in mind that your first submission of the loss will help the insurance company in setting reserves for the loss.
Managing the claim
Over the coming months, it is important to establish communication protocols with your adjuster and the insurance team to document conversations. There will be numerous parties involved on any large loss, and it is difficult to properly reference agreements or other important details of the loss that have been discussed without proper documentation. Involve the adjuster or insurers in important contracts that may be signed and get their approval before doing so, or at least document the portions of disagreement.
Set proposed recurring meetings to keep lines of communication open and proposed deadlines for receiving input from insurer’s consultants. While certain components of your claim may not be adversarial, always remember where parties’ interests lie within the insurance claim process.
As you near the final settlement, there are many issues that could arise:
- If machinery and equipment damage is considered as part of the claim, it could be that any issues arising months after the loss are highly contested as being part of normal wear and tear or maintenance, and not directly tied to tornado damage.
- Business interruption calculations based on hypothetical forecasts can become highly scrutinized.
- Reconstruction that occurs and does not put the plant back exactly as was can become a point of contention and cause disagreements about needed construction.
As you reach final negotiations, take note of common issues or arguments the insurers may make and properly document arguments against these. No claim from a tornado will be exactly the same, but following the outline above should put you in a position to reach your financial recovery goals. Hopefully, these tips will provide you, John, and the company with the tools to help you recover from the “twisted claim.”
Michael Schilling (Michael.schilling@ey.com) is manager of EY Insurance & Federal Claims Services. He is a licensed public accountant in the state of Illinois and has over 10 years of experience providing property damage, business interruption, and cyber claim services to his clients. Throughout his career, he has assisted clients in the automotive, manufacturing, retail, food and beverage, chemical, health care, education and telecommunications industries.
The views reflected in this article are those of the author and do not necessarily reflect the views of the global EY organization or its member firms.
This piece is published with permission from Ernst & Young LLP and may not be reproduced.
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