Cyclones: Managing service interruption risks

Super Typhoon, tropical storm, cyclone, hurricane, tornado, over ocean. Weather background. Typhoon, storm, windstorm, superstorm, gale moves to the ground. Elements of this image furnished by NASA.

When a weather-related catastrophe like a cyclone strikes, the repercussions and cost of recovery for Australian businesses can create a significant financial burden. These unpredictable storms, often accompanied by destructive winds, floods and soil erosion pose significant risks and have the potential to cause power outages/surges and other service interruptions.

In advance of a potential event, businesses can take various steps to prepare for cyclone and tropical storm risk, safeguard supply chains, protect against physical damage to property and equipment, and address potential coverage issues.

Risk mitigation steps

The following steps can be taken to protect your supply chain:

Identify supplies and suppliers in the areas likely to be affected by power outages/surges or other service interruption.
Determine the extent of your reliance on these supplies and suppliers, their value/importance to your manufacturing or service delivery process, and the extent to which any delays might affect your ability to deliver products or services to market.
Consider increasing stocks on hand or locating stocks at secure locations that you can access in the event of a loss. This might include fuel if your business continuity plan includes the use of portable power generation in the event of an interruption.
Review any alternative sourcing arrangements and/or identify new suppliers if such capacity is needed and discuss actual or contingent sourcing needs.

In addition to protecting your supply chain, it is important to review your loss control and security guidelines to ensure protection against damage to property and equipment from power outages/surges, or other service interruptions, which can cause operational disruptions. To help ensure preparedness, you can take the following steps:

Determine the criticality of the facility to ongoing operations and if alternative production or service sites are available.
Assign a plant manager or other operations executive to maintain and disseminate information about power outages/surges or service interruptions.
Review the required shutdown times of all equipment in the facility and determine how such timing can be accommodated in relation to power outages/surges or service interruptions.
Review security measures at the facility, especially human-to-electronic monitoring ratios to determine if additional people may be required to protect the facility during any power outages/surges or service interruptions.
Identify critical electronic data protection functions that might affect operations if power to data centers is lost/surges or if an outage exceeds the capabilities of uninterruptible power systems in place.

If your facility must run on generator power, review fire safety protocols to ensure safe operation will continue.

Insurance considerations

Service interruption claims can affect several areas of the insurance policy and require unique documentation. Some key policy areas to review are:

Waiting period: Most service interruption coverage requires a waiting period: The service must be interrupted for a minimum number of hours before coverage begins to respond. You also should review if the waiting period acts as a qualifier and, after the period of time has elapsed, a dollar deductible applies, or does the waiting period itself act as the deductible. Consider how rolling ‘brown outs’ are treated by the policy.
Notice to the utility: Many policies require that the insured give notice to the utility of the interruption. If this requirement exists, ensure that it is documented as part of your claim file.
Overhead transmission and distribution lines: Many policies exclude losses arising from overhead lines. As soon as possible and keeping safety in mind, identify and document the true nature of your service interruption, including the specific type of equipment damaged, cause of the damage, and distance from your premises.
Distance limitations: Many service interruption coverage grants have limitations that the cause of loss must be within X metres or kilometres miles or feet of the premises, so it is important to document that information early on in the claim process.

Your policy may have separate coverage for service interruption property damage and service interruption time element (or business interruption). Any claim will need to be broken down in accordance with these separate coverage grants.

While rare, some policies may also include service interruption in contingent business interruption coverage. Any interruption of operations arising from a customer or supplier should be researched in the same manner for potential coverage.

Also, you should document and capture all costs for extra expenses to save property from further damage or to continue to conduct normal business operations. These costs could include generator rental or operation, cost to move workers to other facilities, and so on.

While not intended to be a comprehensive review of service interruption coverage, this should help identify some immediate time-sensitive actions to take as soon as possible to aid in presentation of a claim. As always, it is imperative that you review the specific terms and conditions of your policies.

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