Business insurance – be prepared

You don't want to spend time worrying about things that might never happen, but if your premises burn down or are flooded it's worth knowing how to recoup some of those losses. Emma Allen speaks to operators who have had to endure thousands of pounds-worth of damage

At the Barbican Kitchen restaurant in Plymouth, owned by chef brothers Chris and James Tanner, it was business as usual, with the front-of-house team busy taking Mother's Day bookings and getting ready for lunchtime service. But then disaster struck. A fire broke out in the kitchen's extraction system and quickly spread, wrecking the kitchen, the roof and causing immense damage to the Grade II-listed building.

Luckily, nobody was hurt, but Chris can't believe what happened. The restaurant reopened after three months, on 8 June, while financial losses will be in the region of £250,000.

"The main thing is that no one was injured, or worse," Tanner points out. "But when it happens to something you've built up through years of hard work, it's really traumatic."

Disasters as serious as the Tanners' are rare, but they can be devastating for a business. About 250 firms closed down as a result of the Manchester bombing in 1996, while 80% of companies affected by a major incident, such as fire or flooding, will either never recover or close within 18 months, according to Axa Insurance.

This is mainly because most businesses fail to recognise the potential long-term effects on reputation, cash-flow and customer satisfaction of a major incident.

However, while nobody can predict when disaster might strike, there are ways to be prepared. First, ensure you are adequately insured and review your cover regularly.

According to Doug Barnett, head of risk management at Axa, being under-insured is one of the most common problems with claims. "If you're responsible for the building, check that your valuation is correct and if you're in any doubt, take professional advice. It's up to business owners to value the building properly," he warns.

Business interruption cover, which gives compensation for any downtime, can be another tricky area. "Most policies should include some form of business interruption allowance, but this is normally based on previous years' figures so you must keep your turnover and gross profit figures updated," Barnett explains. "Tell your broker if anything has changed, such as refurbishing bedrooms or extending, otherwise you could be under-insured."

Shortfalls can also arise when business interruption cover is taken out for only one year, when in some circumstances, two to three years might be more realistic. "Flood damage can be more time-consuming to rectify than fire," he says. "It can take up to six months to dry everything out, then you've got to disinfect everything, let alone the time it takes to re-establish the business. You can be looking at 12 to 18 months to bring everything back the way it was."

If somewhere has to be closed for any period of time, cash-flow is likely to be the biggest problem. Many insurers will make interim payments in the event of a claim, but these could take time to come through, and furthermore, they might not be enough to cover costs or outstanding payments to suppliers or contractors. Turning to the bank, therefore, might be the only option.

Most banks will be sympathetic, says Tim Helliwell, head of hotel finance at Barclays. However, he adds you need to be close to people there, particularly if you need to borrow more. "If your lender knows your business well, it's beneficial because it will help to mitigate any perceived risk of bridging your costs," he says. Some banks offer payment holidays until business improves, he adds.

Showing evidence of forward financial planning can also help. Ideally, every business should have a financial buffer to cover costs for at least a month, while at the very least, says Helliwell, it is vital to have a grasp of the figures. "Ensure you know what level of revenue you need to cover costs, such as loans, for example, or staffing," he advises. "What is the business's break-even point and how long can you survive without an income?"

Drawing up a crisis management plan is one way to map out how the business would cope in an emergency, and by asking "what if" questions, any gaps are likely to be uncovered.

Maintaining the computer systems can be overlooked in small firms, but regularly backing up data and keeping financial records off site can reduce the impact of any disruption, from minor irritants such as power cuts, to something more serious. Putting together emergency contact lists, with 24-hour contact details of senior and specialist staff, suppliers and emergency services is also an easy basic step. Other issues to address include clarifying what happens when owners or managers are on holiday and ensuring staff are trained in emergency procedures.

"Ask yourself if your staff understand the evacuation procedure," Barnett points out. "Do they know how to contact emergency services? Or deal with deaf guests, or foreign travellers who don't speak English?"

Ultimately, should you be hit by a serious incident such as fire or flooding, being as prepared as possible will help prevent your business from grinding to a halt. Nevertheless, it can take months to re-establish trade to what it once was.

Chris at the Barbican Kitchen says his priority was to rebuild the restaurant and relaunch it. Financially, he says, he's prepared for the worst.

"There's no point whacking up the prices to recoup our losses as we'd kill the business. We'll probably just have to take it as a hit," he says. "There's no point looking back. The most important thing for us now is to move on."

Contacts

• Association of British Insurers www.abi.org.uk
• Fire Protection Association www.thefpa.co.uk
• Environment Agency www.environment-agency.gov.uk
• Free guides to risk management are available at www.axa4business.co.uk

How to prepare for the worst

• Check your insurance to see if you are adequately covered. If in any doubt, talk to your broker or insurer.
• Maintain equipment properly, particularly extraction equipment in kitchens. Ensure regular checks are carried out by competent contractors.
• Draw up a crisis plan. Include 24-hour contact details for key staff and suppliers, evacuation procedures and any equipment precautions. Then review the plan every six months.
• Regularly back-up data and keep records off site.
• Train staff how to deal with emergencies and set key roles and responsibilities in the event of a crisis.

Source: Axa Insurance

Case study: A problem with gas

When a gas explosion destroyed a large part of the Lamb Inn, a 16th-century pub in Wartling, East Sussex, owned and run by Robert and Alison Farncombe, the blast was heard six miles away. The couple, who were upstairs at the time, were unhurt, and there was nobody else on the premises.

In terms of business timing, however, things couldn't have been worse. The disaster took place two weeks before Christmas, the couple's busiest time of the year, and every reservation had to be cancelled. With little left of the restaurant, the pub's windows blown in and no kitchen facilities, the couple had to close.

"It was a nightmare," Robert says. "One of the hardest things was telling the staff what had happened and then cancel everyone. We lost about £26,000-worth of bookings in 10 days."

Although the incident was covered by insurance, the pub closed for five months and reopened on 24 May, and the couple, who own the freehold, came out with £25,000 in debt. Before it happened, they were running on an £18,000 overdraft, which the bank put up to £42,000 after the accident, but that ran out in January.

"The insurance company has made two payouts but it's still a mess. It can sometimes feel like you'll never get ahead," Robert says.

One problem has been proving business levels to claim business interruption cover. In other words, the money refunded is less as takings were lower last year. "We had to use last year's figures, but we've seen a rise in business, partly because we're in the guidebooks," says Robert. "We were getting there, business-wise, but proving that on paper is difficult. I recommend you calculate how much it costs to keep your business closed for six months and plan accordingly."

On a positive note, the Farncombes say suppliers have been supportive, taking back chilled and dried goods and crediting the couple.

Since December, the couple have put key staff on a retainer, on the basis that they help out over the next couple of months, although they have had to make six part-time staff redundant. Their outlook remains philosophical. "Without a doubt, it has cost us, but you can't prevent things like this happening," they say. "We hope we can get customers' faith back and rebuild things."

Case study: The flood

When Jonathan and Kate Butler bought the lease on their pub, in Upton upon Severn, Worcestershire, in August 2006, they were aware that the area was a flood risk. However, with no dramatically high water rises in 60 years, the couple believed they were safe.

"We contacted our insurance company, which said it wouldn't cover us for flooding. We thought that was fine as we're far back from the river," explains Jonathan.

But, the following July, Upton became one of the UK's worst-hit flood areas when, after torrential rainfall, the river burst its banks, cutting the town off completely. The pub, which had just had a £250,000 refurbishment, including a new kitchen and 42-seat restaurant, had to close for five weeks. "It all happened so quickly. We could see water pouring in and no number of sandbags was going to stop it. But we managed to take up the new carpet and lift out most of the furniture," says Kate.

However, because the floods arrived during the weekend of Upton's blues festival, normally one of the pub's busiest times of the year, the financial toll was high. "We'd been expecting a turnover of £20,000 that weekend, but it wasn't to be," says Jonathan.

Worse still was the effect on the Butlers' other pub, Fosters on the Docks, a 10,000sq ft converted warehouse in nearby Gloucester.

The pub, which was flooded throughout, was closed for five months and it took four months to dry out the ruined wooden floor. As with the Anchor, structural repairs have been paid for by the brewery but for the Butlers, a lack of cash-flow has been a real problem.

The couple lost £350,000 gross turnover for Fosters. Most of the couple's trade is in the summer, but because they didn't reopen until late December, they lost most of their Christmas sales and some of January's.

To make matters more difficult, the couple's insurance company is disputing the existence of their Fosters' policy, which covers loss of business, stock and some equipment. Their case is still being assessed. Last summer, to boost their income, the couple set up a temporary bar outside their Upton pub, which helped to carry them through financially but they say it's been a real struggle.

"We're trying to build up two businesses again, and with a young family, it's pressurised," says Jonathan. "We still owe our suppliers a lot of money. Luckily we have good relationships with them, which has helped." The couple have since changed insurer and have been able to get flood cover. They stress that, above all, it pays to shop around.

Looking ahead, the Butlers have no plans to sell up. "We've got two great businesses with some good staff who have helped us pull through, and touch wood, 2008 will be a good year," says Jonathan. Certainly it can't be any worse than 2007.