Archive for February, 2010

In the pre-dawn hours of Feb. 27, Sirens broke the morning quiet all over the islands of Hawaii.  A continuity plan that has been in existence for a number of years was put into place and the sirens started the announcement process.

An 8.6 magnitude earthquake in Chile caused concern amongst the scientists at the Pacific Tsunami Center.  The early indicators showed a tidal surge caused by the earthquake to be heading across the ocean.  At Midnight, the advisory was changed to a watch and at six in the morning, upgraded to a warning.  The expected height of the surge was to be 6 – 9 feet.

Because plans were in place and the local population has been educated in what to do if a tsunami hits, the process went smoothly.  Lines formed at gas stations to top off the gasoline tanks, stores sold essential items (primarily rice, toilet paper and spam), and the population moved out of the flood plains and onto higher ground.  There was no panic and everything proceeded in an orderly fashion.

Government officials went through their checklists and closed near shore highways so no one would be caught on the road.  Sanitation facilities were shut down to protect the machinery prior to the expected arrival of the wave (one hour was a small price to pay for a downside potential of several weeks of no processing plants).  The locals acted with grace and aloha spirit, helping their neighbors and family through the difficult time.

This is how a contingency plan should work…smoothly and with minimal issues.  Businesses should take a lesson from this event and build the contingency plans necessary to remain afloat during a low potential/high impact event.

One of the other things I noticed while this event was going on was the way a business can capitalize on a risk event such as this.  Costco had opened their stores early in order for the public to be able to stock up on the various sundries that they might need.  This act helped them in two ways:

First, the amount of customer good will generated by opening 4 hours early to serve the needs of their customers helped solidify customer loyalty to their brand.

Second, the product that was sold early was no longer inventory in the store, and would not be a loss if the tsunami destroyed the store or caused water damage.  Less product means less loss, sold product means profit, sold at the normal price means more customer loyalty.

The fortunate news about this situation is that the all the contingency plans put into place were not needed.  The surge estimated at 8 feet didn’t materialize and while Hilo Bay has been draining and filling every 20 minutes because of the surge, no damage or loss of life occurred.  The other fortunate thing is the contingency plans worked, in an actual emergency, all the I’s were dotted and the T’s crossed.

Not bad when you consider the number of locals and tourists that were at the islands when this occurred.   Hats off to those folks who spent time building the plans and tweaking them as the years have passed.   Thanks also to those folks who put the plans into action and kept calm and peace to those around.  Kudos as well to those of us who were there, hindsight shows the effects were not as great as projected, but keeping cool heads and watching out for others showed the true Aloha spirit of the islands.  Finally, our thoughts are with the people of Chile during this very difficult time.

There are lessons to be learned hear and we will discuss them in future postings.

Last week the Illinois Supreme court ruled that a law passed in 2005 by state congress could not establish liability caps  limits for pain and suffering damages.  The overturned law capped the the amount for this portion of settlement to $500,000 or $1,000,000 for a doctor and a hospital respectfully.

The law was passed to curb the rising costs of medical liability in the state due to large “discretionary” settlements awarded by juries.  The court held that the cap violated the “separation of powers” doctrine by establishing limits to awards the judges feel appropriate in these types of cases.

My concern over this ruling is the wide ranging impact a decision like this has on the overall health costs and quality of care.   

  1. With the removal of the cap, the insurance company or medical professional will be subject to greater risk via larger potential cost in a law suit. 
  2. In order to offset this risk, a greater reward is required to fund the “pool” of money that must be available to pay for these types of claims. 
  3. To fund the pool (or pay the insurance premium) the costs for Dr. visits, procedures, hospital stays, tests, etc. will increase.
  4. To remove hints of impropriety, or improper medical treatment, more tests will be generated to validate the diagnosis.
  5. More tests lead to more medical charges.
  6. An increase in medical charges, leads to increased medical costs to insurance companies, employers and employees, and the associated increase in consumer goods to pay for the increased medical costs.
  7. Higher costs could limit the number of medical professionals in the state due to the high cost of establishing a practice.

I might be wrong, but the 2005 law reminds me of the Worker’s Compensation (WC)  coverage.  With WC an injury or death is covered at a set amount as established by a state board.  The coverage is provided by the company for the employee and if the employee is hurt while working, the insurance coverage kicks in.  For this coverage, the employee may not sue the employer and the employer may not terminate the employee.

This process makes sense to me.  The programs were established to protect the worker from unjust treatment, and to hold the employer accountable during work hours and unsafe working conditions.  It even protects the employees from those “oops” or “aw shucks”  where they ignore safety rules or make a stupid mistake and get hurt.

The Worker’s Compensation program has been doing an excellent job for a number of years and has helped to keep costs down.  Perhaps it’s time to expand the model to the medical insurance program. 

While I agree we should be limiting the costs associated with malpractice claims, I also think that the medical field should be held to accountable and a national board be established to review credentials, and make sure these professionals remain current and be certified and that the certification must be renewed on a regular basis.

If there is one benefit from the real estate bust that occurred over the past year and a half, it is that the cost for replacing your home of business may have gone down.   While it would affect your total assets, it could drive your property insurance costs down.

There are typically three different ways to look at property value:

  1. Market value - the amount of money you can expect to receive when selling the property under the current market conditions.
  2. Replacement value – the cost to replace any of the structures should a total loss occur.
  3. Use value – the amount of income your company would lose if the structure became uninhabitable or unusable for a set period.

Property insurance is based on the value of the structures on your property and the cost to replace them.  You might ask h0w this is different than the purchase price or estimated selling price?  The important factor is the value of the land.  Land will not burn up, blow away and with the exception of erosion if you are on the bank of a stream or lake will not be lost in a flood, so you have a foundation to rebuild on, or funds from a sale of the land.

With the implosion of the real estate market, it is possible that the value of your property has dropped, and you may be over insuring your property.   This could have occurred because the property was improperly valued initially (based on market value rather than replacement value), established an incorrect modifier to determine replacement value, or incorrectly estimating inflation modifiers when renewing the insurance programs over the course of several years.

In order to be sure that you are being properly covered, I suggest you have an appraisal completed on your property.  The small cost of having a certified commercial property appraiser can be recouped in reduced premiums, and proper coverage in the even there is a claim.

The property appraiser will be able to provide information on the Market and Replacement values.  These values go directly towards the true value of the property as well as the repair or replacement costs associated with to the structure.

The Usage value is something that would be identified by your organization and depending on the role of the structure can be part of your business continuity program, or a separate policy/program to replace rental income generated from the structure if the building was leased to others.

Please note that Personal Property such as copiers, computers, phones, and desks  is different from Real Property that the basic property package coverage and, while it may be rolled into the entire package, requires a separate declared value.

Once you have completed a certified appraisal, you will probably want to continue with this practice every 3 – 5 years.  This will make sure your coverage keeps pace with actual costs, and reduce the risk negative impact from co-insurance clauses in the event of incorrectly valuing the replacement costs to low.