Aerial View of the Damage

Since the monsoon rain season began last month, floodwaters have devastated Pakistan. The floods have displaced more than 20 million Pakistanis, a number that exceeds the entire population of New York State. One fifth of Pakistan’s land mass is submerged, as shown in this photograph provided by the United Nations. Many communities are isolated as traditional transport routes are no longer viable. It is truly a humanitarian crisis with urgent needs for water, food, shelter and sanitation. Public health officials fear the spread of water-borne diseases, such as cholera. For more information about Pakistan’s pressing needs, please click unicef-immediate-needs-document-pakistan-flooding-26-august-2010 to download a current report from the U.S. Committee for UNICEF. To make a contribution to UNICEF for Pakistani flood relief, clear here for a direct link where you can donate online.

I also want to introduce you to Kashf Foundation, an organization that provides sustainable financial services to poor women in Pakistan, allowing them to become economically self-sufficient. I had the privilege to meet Roshaneh Zafar, Kashf’s founder, when she served on the UN Advisors Group for Inclusive Financial Sectors. Click here to learn more about Kashf and how you can support their important work.

This appears to be the year for epic flooding. Rhode Island experienced the worst flooding in 200 years in the spring and many affected businesses have yet to re-open. Tennessee experienced a 1-in-500 year flood event, devastating a good part of the state, including Nashville and the Grand Ole Opry. Germany, the Czech Republic and Poland experienced major floods this year. China’s floods required massive mobilization of public resources. India is underwater and Pakistan’s flooding represents a humanitarian crisis with the very real threat of cholera and other water-borne illnesses. Check out the photographs of the flooding disasters from Asia to Europe here. The tragedies are compounded by the fact the lack of public resources to provide relief aid, as a consequence of a protracted global recession. We should all give whatever we can.

Source: China Daily

More than 700 people died and 347 more are missing following torrential rains and floods in China, the worst that country has experienced in a decade. The floods affected 110 million people in 27 provinces and municipalities; 8 million residents of those areas were evacuated. The Chinese government estimates direct economic losses from the flood to be $21 billion, which includes damages to more than 7 million agricultural hectares and the destruction of more than 600,000 homes. The government also reported that 287,000 military personnel had aided in the flood rescue operations. This year’s flood season, which begins in China in April, has been unusually severe. In more than 230 rivers across the country, water levels have risen above what is considered safe. Areas adjacent to the Yangtze River have experienced the worst flooding in 30 years but, according to the Chinese government, the Three Gorges Dam prevented even more severe flood damage by blocking more than 40% of the water.

I have not yet formed an opinion on whether global warming has induced permanent climate change. But it is undeniable that we are experiencing the most severe weather patterns in some time and it appears to be a global phenomenon. At a time when the recession has stretched resources thin, we are particularly vulnerable to external shocks, such as natural disasters. And public resources are inadequate to fund relief efforts. Many people will try to ease the pressure on their budgets by foregoing “non-essentials”, such as insurance, when times are tough. But that is when you need it the most. Sadly, for entrepreneurs in China, most small businesses don’t have access to adequate insurance coverage. We do, so there is no excuse for us.

In 2007, I had the great experience of visiting Laredo, Texas, a community on the Mexican border, for the purpose of delivering disaster preparedness workshops with the San Antonio Small Business Development Centers. Over the past several days, Laredo has experienced extreme flooding as the water levels of the Rio Grande River rose to 42 feet. As of today, the levels are back down to 30 feet, as residents await a decision as to whether disaster aid will be made available to their community. Sadly, many of the affected residents were without flood insurance that costs, on average, $1500 annually in that community. It is particularly difficult in this recession for small businesses and families to budget for expensive insurance coverage until they learn the costs of being uninsured. I will post alerts to this blog as soon as private fundraising initiatives are announced for those who wish to contribute. Laredo is not a wealthy community and needs our support.

I Miss Winter

The weekend began with a series of giant tornadoes tearing through Minnesota, destroying buildings and causing at least three deaths. The National Weather Service received 36 reports of tornado sightings which, if all are confirmed, would exceed the previous record of 27 tornadoes striking Minnesota in a single day, back in 1992.

Estimates of the volume of oil leaking each day into the Gulf of Mexico were revised upward as more information about the extent of the rig damage came to light. More Gulf Coast tourism and fishing businesses closed as a consequence of the environmental damage. USA Today published an excellent article about the disaster fatigue suffered by Gulf Coast residents who are “forever in recovery” as Katrina-inflicted damage is still with them even as they face the consequences of the oil spill.

The southern states experienced an extreme heat wave, with temperatures in the high 90s/100s. And summer doesn’t officially begin until tomorrow! We are in for a tough weather season. To get you thinking about updating your disaster recovery plan, check out the following article by Inc. magazine columnist Donna Fenn.

Heavy rainfall over a period of days ruptured river bank dykes and triggered flash flooding in low lying areas of Poland, Hungary, the Czech Republic and the Slovak Republic. Strong winds accompanied the heavy rain, causing power outages and disrupting transportation. At least twelve people have been killed with thousands of homes and businesses flooded. Southern Poland was hit the hardest; experiencing the worst floods in ten years after the Vistula River burst a dyke. Government officials in Poland estimate the flood damage to be in excess of €2 billion or US$2.5 billion. Following on the worst floods in 200 years in Rhode Island and the worst floods in 500 years in Tennessee, the weather patterns of extreme frequency and severity are alarming. Make certain your flood insurance is up to date. In any given year, 30% of the properties that flood are located in regions that have never before flooded or are not located in identified flood plains. In other words, you can’t necessarily assume that your property is not at risk for its location.

Banking on Rebirth

On page 140 of Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition paperback, 2009), I informed readers that when the President declares a federal disaster, early withdrawal penalties on time deposits are waived as residents and businesses will need additional cash resources to recover. Many banks are unaware of this requirement, so I recommended that if your bank is not, get the cash as soon as you need it and seek reimbursement of any early withdrawal penalties, time permitting, when you are further along in your recovery efforts. I also recommended that you immediately request forbearance on any and all loans and credit facilities. In disaster recovery mode, you will need every inch of breathing room you can get.

So I was delighted to read that Bank of America is putting into effect a disaster relief program in the 42 Tennessee counties designated federal disaster areas by the Federal Emergency Management Agency. The Bank’s disaster relief program provides that small businesses in the affected counties may qualify to avoid early withdrawal penalties on bank certificates of deposit. They may also receive emergency credit line increases on their bank credit cards and may modify or extend payments on loans, credit cards or lines of credit. This is exactly the way to proactively help small business customers in the aftermath of a disaster.

And may I make an additional suggestion to the Bank of America? In the aftermath of a disaster, many small businesses with otherwise pristine credit histories will develop blemishes on their credit reports though no fault of their own. The business will inevitably have some customers that were unprepared for the disaster and will be delayed or default entirely on their obligations, causing some strain on the business. This is the time for banks to show some flexibility and take these factors into consideration for loan applicants.

At a time when bashing banks has become politically fashionable, we should remember how they support our communities. In banking on Tennessee, Bank of America is being true to its roots. A.P. Giannini, the founder of Bank of Italy, the institution that is the predecessor to the Bank of America, saw the opportunity represented by the devastating San Francisco earthquake of 1906. As other banks succumbed to panic, his made emergency loans to customers, mostly immigrant owned businesses, earning the bank their loyalty. This cemented the Bank’s position as a leading financier to the film and wine industries in northern California.

Nashville residents are coping with an epic flood, a one-in-500 year event, and struggling for “air time” against other major events; namely, the oil spill in the Gulf Coast and the attempted bombing in Times Square. Nashville’s recovery is dependent on resources provided from elsewhere in the U.S.; the city needs and deserves our attention. Meanwhile, the following are tips for Nashville small businesses owners as to things that they must do right away to begin to recover from the flood (this is modified from an earlier blog posting on hurricane recovery issues):

1.    Rapid response is critical. Many small business owners will be in a state of shock and disbelief as a consequence of the disaster.  However difficult it may be, they must manage their emotions and work to restore operations as soon as possible. The choice is not whether to recover quickly or whether to recover at a more measured pace.  The choice is whether to recover quickly or not to recover at all.  A study of small businesses affected by the 1993 World Trade Center bombing found that of those businesses that could not restore operations within five business days, 90% of them were out of business within one year. Prioritize your business needs according to relative urgency and delegate where necessary.

2.    Mitigate your losses. To establish a valid property insurance claim, you must demonstrate to your insurer that you acted in good faith to mitigate your insured losses.  Consider a hypothetical example.  Let’s imagine that you have returned to your property and you see broken glass about the site. You must take reasonable steps to insure that the broken glass will not injure people.  Insurance companies are not very tolerant of passive policyholders who fail to act in their interests to limit losses. Limit subsequent losses to your business by taking prudent steps, such as restoring fire sprinklers or other equipment that may have been damaged by the storm.

3.    Identify your implicated policies. You should invest the time and effort required to examine all insurance policies implicated in the disaster, rather than foreclose options for coverage by limiting the scope of your review. Begin with insurance policies for first-party property losses that cover direct property damage, including collateral damage and indirect property damage, such as business interruption losses and loss-related expenses.  Next review all-risk policies, named peril policies, business owner’s policies, policies covering particular endorsements, valuable papers and records policies.

4.    Provide timely notice. Your business owner’s policy likely requires you to provide timely notice to your insurance company of covered losses.  Do not forfeit indemnification for a covered loss by failing to give timely notice. If you are in doubt as to whether an item is covered by your policy, err on the side of caution and include it in your claim.

5.    Report the facts, don’t diagnose the cause. Think of the words of Sergeant Joe Friday, “Just the facts, ma’am”.  Here is an example of why you should not be a diagnostician.  A sole proprietor worked from her home near the World Trade Center on 9-11 and experienced a systems crash.  She concluded that the crash was most likely due to the loss of electrical power that was the result of the terrorist attack and so notified her insurer.  Because her policy did not include an endorsement for interruption of electrical supply, that portion of her claim was denied.  In fact, the damage to her computer was the result of soot and ash clogging the fan of her computer, a peril that was covered by her policy.  The denial of coverage and dispute that followed could have been avoided had she sent a description of the problem without the diagnosis.  Had the insurance adjuster inspected the damaged computer, he would have seen the soot and ash in the machine and likely authorized payment on the claim.  Her hasty diagnosis resulted in a denial and delay of her claims payment.

6.    Inspect your IT and other electronic assets at least twice to ensure that you have not overlooked anything. I began hearing unpleasant grinding noises emanating from my PC when I returned to my office following the 9-11 disaster.  I suspect I had not heard them earlier because of the background noise outside my office as work was being done to restore electricity and other essential services. Upon closer examination, I learned that the noise signaled an imminent hardware failure. By inspecting each IT asset twice, I avoided the error of submitting an incomplete claims report.

7.    Document your loss mitigation and other loss-related expenses; your business owner’s policy likely covers them.  Such expenses might include overtime wages paid to employees who work to restore the business, lease payments for alternate office facilities when your primary space has been rendered unusable by the flood, costs of purchasing assets for temporary business use and so forth.

8.    Get help if you need it. You are likely to experience a range of emotions following a disaster, from disorientation to shock and disbelief to grief. This is not uncommon and may continue for some time after the disaster.  You won’t be able to look after your employees and family if you are run down.  Get the support you need.

9.    Assess your performance. Review your business contingency plan and, in particular, your employee training to identify areas for improvement so you will be better prepared for the future.  You can and will learn from this difficult experience.

10.    Exercise care when negotiating continued insurance coverage. Premium increases following a major disaster are not uncommon, but there are steps you can take to protect yourself.  In particular, be aware of the “paying more/getting less” phenomenon in which increases in insurance premiums can be dampened by excluding risks that had previously been covered. Also, be prepared to demonstrate to your underwriter the features of your business protection plan that make your business a better risk.

When I worked in the reinsurance industry, “double-trigger” policies were the latest innovation for commercial policyholders. A powerful storm season concomitant with severe financial stress owing to a prolonged recession suggests a new market for this innovation. Double trigger policies offered more cost-effective coverage for linking uncorrelated risks. Consider an insurance company that covers policyholders in a seismically active area. It has sufficient capital reserves to pay expected claims from its own resources and so would prefer to forego more expensive reinsurance coverage to supplement its capital strength. But what if the earthquake occurs at a time when the value of the insurance company’s bond portfolio is impaired due to events in the financial markets? A double-trigger policy kicks in when two events, or triggers, occur: a defined financial event and an insurable peril. As these two risks are uncorrelated with one another, the premiums are lower than standard earthquake insurance alone. I wonder if such a product could be adapted for public insureds; certainly state and local governments are in need of assistance.

Consider that the flash floods caused by record levels of rainfall in Tennessee could not have come at a worse time. And they follow an unusually active storm season, such as the recent floods in Rhode Island, the worst in that state in the past two hundred years. At least 25 people have been killed in the southern states in thunderstorms, floods and possible tornadoes. Top Nashville tourism spots, such as the Grand Ole Opry and the Country Music Hall of Fame, are flooded. The news media have reported stories of local residents who are unemployed, lack funds for evacuation or temporary housing and could not pay for flood insurance. A disaster like this is doubly devastating when it occurs during a time of financial stress.

Sharp and Functional

This subway grate represents a creative design and a practical solution and was this week recognized with an Urban Design Award of the American Institute of Architects. (The photograph is courtesy of New York City’s MTA Facebook page.) Because ventilation grates are flush with the sidewalk, above subway stations that are not deep underground, stations are at risk of flooding. When a particularly heavy rainstorm in August 2007 completely flooded the New York City subway system, the transit authority instituted a $31 million flood prevention plan in susceptible areas. This clever subway grate doubles as street furniture. What the transit authority has yet to address, however, is passenger education about disaster risks. There is concern that New York City residents would seek refuge in subway stations in severe storms which are, of course, the last place you want to be during a disaster alert.