Terrorism is the least of an SME's problems, explains Harry Roberts

Terrorism is currently a hot topic and the potential impact of another major act needs to be addressed. A number of high profile companies were hit by the tragic events of the September 11 attacks, but many smaller businesses were also affected, both directly and indirectly.

With the threat of natural or man-made disasters at the forefront of many minds, all businesses, including SMEs, need to consider how they can best prepare themselves for such an event. Not least of their problems will be developing a response that meets the difficulties produced by a wide range of potential events:

Natural disasters

- storms; floods; and earthquakes.

Terrorism

- chemical; biological; radiological; and nuclear.

Man-made

- oil/chemical spills; explosion; and pollution.

The common threads throughout these scenarios include:

- widespread damage;

- staff concerns;

- supply chain impact;

- excess demand for recovery specialists;

- loss of, or restricted access to site/direct control by local and other authorities

- demand for the services/products of the SME in question; and

- communication.


Widespread damage

The impact of these potential disasters needs to be contrasted with that of a major fire loss. The latter is only likely to directly affect the business in question. Other parties such as employees, suppliers, customers, emergency services, reclamation specialists, insurers and adjusters will not be directly impeded by the effects of the fire damage. This may well not be the case when there is, say, widespread flooding.

Staff concerns

Many staff live in the vicinity of their work. In a flood scenario their homes too may have been flooded. Even if they live further afield, will they be able to reach the workplace or will the flooding prevent them from doing so? In the event of a more hazardous scenario (e.g. terrorism or man-made incident) the employees may have concerns for their safety if they return to their place of work.

Supply chain impact

Those who supply the business may also have suffered damage. Stock and work in progress for delivery may have been damaged or contaminated and could need to be reworked or even scrapped. Even if there is no damage to products destined for delivery, the supplier may still be unable to produce due to the effects of the incident. Even if they can produce, can it be delivered?

When it comes to customers, similar criteria apply. Even if we are able to produce they may no longer require deliveries because they are not producing. Alternatively, could we supply greater quantities to replace damaged stock if required? Can the delivery be made?

Following a fire, damage reclamation specialists will assist in the mitigation of the impact of the damage. Specialist contractors, such as asbestos licenceholders, will be called in. Even they are relatively few in number but in the event of a less common substance there may be still more limited resources available to handle issues of decontamination.

Access to site/control

It is the responsibility of the various authorities to take control of disaster scenes. A wide cordon is likely to be established with human safety the primary concern. Thus, access to some premises may be restricted even if there is no direct damage. In the event of an act of terrorism it may take some time to establish the nature of any toxic material involved.

A major or widespread incident, such as floods, hurricanes and September 11, can have a distorting effect on the economy. Following widespread flooding certain businesses may experience an increase in demand for their products, e.g. suppliers of building materials. On the other hand some businesses may suffer a downturn, e.g. hotels, if other local attractions are lost or damaged.

Communication

A hurricane, for instance, can seriously impair communications. Even satellite-based systems will experience uncommonly high traffic. Coupled with this, the media are likely to emphasise the extent of damage and thus problems faced by businesses.

Given the above, is it reasonable to expect or even possible for the majority of businesses to have plans in place to address each potential scenario? Plans to relocate to a previously identified site may be thwarted if that site has also been affected. Even if the site is available and uncontaminated will there be increased demand for such sites? Would a move need to be permanent if the cause of damage leaves the risk site contaminated for the short to medium term? How soon can these decisions be made and will there be cover for all the costs involved (e.g. land)?

Such plans need to be part of a more widely co-ordinated response to these potential disasters.

A detailed plan may not be appropriate. However, all SMEs need to consider how a major disaster might impact on their business. Merely having explored these threats will mitigate some of the shock and improve their state of preparedness. Staff briefed on their roles and with the ability to communicate effectively in the face of a disaster will alone provide an enhanced degree of resilience.

Major disasters involve extensive physical damage and, worse still, loss of life. Many people's lives will be blighted by the loss of their home, but life does go on. So too does business, but it may not be business quite as it was before.

A cornerstone of any developed economy is the availability of insurance to cushion the blow to individuals and business caused by an unforeseen event. In the main such events are localised, e.g. a fire, which will affect a single business. In such circumstances the remainder of the commercial infrastructure remains unchanged, with customers, suppliers and competitors not directly affected by the incident. It is essential that Material Damage cover is supplemented by Business Interruption (B1) cover if a business is to survive a major loss.

A major disaster, say as a result of an act of terrorism, may have more far-reaching consequences for not just the individual businesses affected, but the economy as a whole and the insurance industry. Looking back, the results of IRA terrorism activity both in London and Manchester were significant.

Given the lengthy periods required to rebuild, available office and retail accommodation was immediately at a premium. BI insurers were faced with meeting these inflated costs as legitimate Increases in Cost of Working.

It should not, however, be assumed that BI insurers will, or should, meet all the costs of other impacts upon markets and the economy as a whole. A major disaster, and the very nature of that disaster, can cause a seachange such as:

- movements in financial markets;

- reduced consumer spending;

- curtailment of international travel; and

- military action.


In the aftermath of September 11, many local businesses in New York were faced with reductions in their own trading activity due to one or more of the above factors. Not all these businesses had suffered any direct damage and may not therefore have been able to submit a BI claim. Some may have had Denial of Access or Loss of Attraction cover, but even those businesses beyond the vicinity of the damage also suffered. Indeed, the impact was sufficiently widespread that businesses in other cities, even other countries were affected. In this regard, the best example is probably international travel which will have affected travel agents, airline carriers and hotels all over the world.

This wider impact on businesses highlights one fundamental point. This is that businesses which have suffered direct damage and thus have their BI cover triggered may well be suffering trading losses for two reasons.

Firstly, the damage they have sustained will impair their ability to trade.

A second consideration, however, is the extent to which their trade would have been affected generally by the disaster.

Following both the two UK bombings and September 11, there was a physical shift in either the retail or commercial centre of activity. Where rebuilding was carried out, the periods involved were elongated, compared with the single loss scenario. Such shifts affected many of the supplementary businesses such as office suppliers and coffee shops. In this regard, there were both winners and losers, notably those in the undamaged areas experienced increased levels of trade that they would not otherwise have done.

There are also other businesses which may see increased levels of activity following a major disaster. Natural disasters such as floods or hurricanes cause, amongst other things, extensive building damage and those involved in construction, building suppliers and security as well as property owners and agents may all benefit. A local builder's merchants if not affected by the incident itself can expect to face unprecedented demand. In the US in the wake of hurricane damage, retailers of building materials who were in the path of the hurricane itself have sought to claim an increased loss including the additional 'hurricane induced' demand. In those circumstances, the insurance market argues that claims should be based on the level of activity that would have pertained but for the hurricane itself. It is questionable if this is correct, particularly if one just considers the actual trading results of a competitor business just outside the path of the hurricane which does benefit considerably from the misfortune of others.

On balance, however, major disasters are more likely to lead to a downturn in the economy, locally, nationally or even internationally. The insurance industry has performed admirably to date in responding to incidents all around the world, most notably September 11. Nevertheless, it must be clear that the insurance market never intended, and indeed could ill afford, to fund the major reductions in economic activity that such events, particularly terrorism, can cause.

A tale of two sandwich shops

Adjacent shops enjoy healthy trade in supplying the needs of local businesses and their employees in the City of London. The shock wave from a nearby explosion causes the windows of one of the two shops to crack, whilst the other shop escapes unscathed.

The damaged shop window is boarded up but the shop remains open for trade. Repair of the shop front is not effected for some two weeks, there having been considerable strain placed on the glazing contractors who were working '24/7' in the aftermath of the explosion.

Both businesses suffer a downturn in trade which lasts for many months whilst local office accommodation is repaired. Neither business has any Denial of Access or Loss of Attraction extensions. In these circumstances, the Material Damage Proviso for one business is satisfied and they have a valid claim, whilst the other suffers an uninsured loss. It cannot be right, however, that all the downturn in trade for the sandwich shop which had a cracked window can be attributed to the damage.

The important point to note is that BI policies only cover loss of profit resulting from damage caused by an insured peril. They do not cover losses resulting from insured perils themselves.