In a small company, the death of the key executive can often trigger a complete business failure. A larger business can take basic precautions, such as not allowing executives to travel together, but still might experience a substantial financial loss should one key person die. For these reasons, the purchase of an insurance policy payable to the business in the event of the death of a key executive should play a vital role in the planning process for businesses of any size.
Unfortunately, business insurance in general, beyond the protection of owned and leased property, is often overlooked in the disaster planning process. Yet such an oversight can be disastrous. In addition to Key Person insurance, the purchase of Business Interruption insurance must be considered since it can protect against the loss of suppliers or buyers, cover payroll expenses, and also provide protection for a multitude of other contingencies. Numerous other types of business insurance should also be considered to minimize the damage from a disaster.
The first thing step in this planning process is to work with a risk management professional to identify all the hazards that the organization is exposed to.
The next step is to determine a response the identified risks. You have three options:
Risk Avoidance - Act to reduce or eliminate the risk.
Risk Transfer - Reduce the financial damage by assigning the risk to an insurance company or other party.
Risk Acceptance - Accept the risk to the extent that it's neither practical nor possible to avoid or transfer it.
If the risk can be eliminated, you won't need insurance. If the risk can't be transferred or insured against, it must be accepted. For risks that can't be eliminated, insurance remains your company's best protection against financial disaster and possible ruin.
As important as it can be to have insurance, it's just as important to have the right insurance. Weigh these factors in deciding on the policy that best fits your needs:
- Are your coverage limits and deductibles appropriate?
- For what types of disasters (perils) are you covered? Which perils are specifically excluded?
- Does your insurance provide adequate protection to senior management against litigation resulting from inadequate business continuity planning?
- Does your coverage contemplate inflation, improvements, and building code changes?
- Is your coverage for 'replacement cost' or 'actual value' (cost less depreciation)?
- Does your Business Interruption insurance cover loss of income and payroll expenses?
- Is your documentation (serial number, date of purchase, cost, receipts, photographs, etc.) current and sufficiently detailed for your insurance company?
- Are the originals of all insurance policies secured in a fireproof cabinet with copies readily available?
- Are you covered for loss of power or other critical services?
- Are you covered for a denial of access order issued by civil authorities?
- Does your insurance cover loss incurred as a result of a disruption of transportation services?
- If the Disaster Management Team makes a 'disaster declaration' does your insurance cover the costs charged by your alternate site vendor? Does it cover all the extra personnel and other costs associated with activating and operating the alternate site?
- Do you carry enough Life insurance on key executives?
- Have you reviewed your coverage with your professional insurance advisor within the past year?
- If you implement an effective Business Continuation Plan will your insurance premiums go down?
If disaster strikes, careful consideration of the risks your business is exposed to as well as how well you are protected against them can make the difference between survival and extinction. The time to take action is now-before it's too late.