Over the past few years the U.S. coasts have been hammered by hurricanes while the Midwest escaped disaster. In August that changed. The Midwest region sustained severe property damage from a huge storm system that dumped more than 15 inches of rain over the course of 10 days. The storm, accompanied by several tornadoes, swept through Illinois, Indiana, Iowa, Minnesota, Ohio and Wisconsin. In all, 21 counties in Minnesota, Ohio and Wisconsin were declared federal disaster areas. Preliminary figures estimated damage to be in excess of $1 billion.

Rushford, Minn. was among the worst hit, suffering an estimated $38 million in damages. The suburb of Winona, which is wedged between two levees — one on the banks of the Mississippi River and another on Rush Creek — saw its downtown submerged by several feet of water. Rush Creek poured over its levee and the other levee prevented the water from draining into the Mississippi River. No one expected another flood in the town of 1,800 residents. The levees were built in 1962, the last time the small town flooded; therefore, most property owners didn't have flood insurance.

Citing the hard-hit businesses, Rushford city administrator, Windy Block, told Minnesota Public Radio that what happens to those businesses will affect the town's ability to recover.

Mike Beach, assistant vice president and executive general adjuster for McLarens Young International, a global claims management and adjustment company, says, “Not only are the buildings destroyed, but the contents of the shops are lost. Property owners without insurance coverage will likely never recover from these losses — they'll be unable to rebuild.”

Looking for trouble

Beach spent September filing flood claims in Minnesota, seeing firsthand the damage the Mississippi River wrought on the nation's heartland. In addition to having flood insurance, property owners throughout the Midwest, now dealing with the aftermath of that weather-related event, also see the need for a disaster recovery plan.

Throughout the Midwest, property owners of every size face similar challenges. However, those with adequate insurance coverage and a disaster plan will be better positioned in the aftermath of such an event — when, and if, it occurs again.

Pete Bell, CEO of Cotton Companies, one of the largest disaster preparedness and restoration organizations in the U.S., recently deployed restoration teams and trucks to the Midwest to work on flooded commercial buildings. The Houston-based company was involved in the cleanup after Hurricane Katrina and the September 11 terrorist attacks in New York City.

“A lot of people think that insurance companies make decisions for their property after a disaster, but it's the property owner's job to make the decisions to mitigate the damage and get the property back to its operating conditions,” Bell says. “After a disaster, you don't want to be looking in the Yellow Pages trying to find a contractor to fix your building. You need to have all that in place before something bad happens.”

A study on the cost-effectiveness of mitigation strategies conducted by the Multihazard Mitigation Council of the National Institute of Building Sciences found that for every dollar spent on pre-disaster mitigation, four dollars are saved. Pre-disaster mitigation includes everything from emergency preparedness to having adequate insurance.

Increased insurance costs

While having a disaster recovery plan may lessen some of the angst associated with maintaining communication with employees, clients and vendors, the anticipated spike in insurance costs in the nation's midsection will be cause for concern among commercial property owners.

“In the past, insurance companies were willing to leave the Midwest alone because it has been safe ground for them — they've felt comfortable there because there were no hurricanes or earthquakes and they looked at the Midwest as being the safe part of their portfolio,” says Robert Levin, CEO of Globe Midwest/Adjusters International, a national loss consulting and appraisal firm based in Southfield, Mich.

However, Levin expects insurance companies will soon introduce similar coverage limitations and deductibles in the Midwest that are prevalent in hurricane-prone regions. “Since they've been getting away with it in the coastal states, I expect the insurance companies will start to apply it to the Midwest,” he says. In fact, many national insurance carriers like Allstate Insurance Co. and State Farm exited many of the markets vulnerable to hurricanes.

That means many Midwest property owners will not be able to renew their existing policies and will have a harder time finding coverage, says Russell Longcore, an executive general adjuster and author of Insurance Claim Secrets Revealed. He adds, those who can find insurance will pay more for it, and policies will have more exclusions and require higher deductibles before coverage kicks in.

The bottom line for property owners is they can expect to see this fixed operating expense increase and have to address whether they can absorb it or if they have to pass the additional costs on to their tenants.

Hedging on the investment

In the Midwest, floods and tornadoes are the most common weather-related disasters. But, earthquakes should also be on property owners' coverage lists. One of the largest fault lines in the U.S., the New Madrid Fault Line, stretches across much of the Midwest, crisscrossing the Mississippi River in three places. The seismic zone has the potential to impact Indiana, Illinois, Kentucky, Missouri and Ohio.

Tornado damage is covered in most policies because it's considered wind damage — but some insurance companies have excluded wind damage because of the losses incurred in coastal areas. On the other hand, floods and earthquakes are excluded from almost all commercial property policies, says Judy Spry, a partner in BDO Seidman LLP's litigation and forensic investigation group in Chicago. Property owners can assume that they're not covered from losses related to flooding and earthquakes unless they've specifically requested it.

In most cases, flood insurance is only considered when a property sits in a flood zone and has a mortgage on it, says Barbara Munch, assistant vice president of corporate insurance and risk management for KeyBank. Even then, the $500,000 coverage lenders require is nominal.

But, as Hurricane Katrina illustrated, buildings that aren't in a flood plain can still be flooded. The National Flood Insurance Program estimates that more than one quarter of claims are paid on properties not located in a designated flood area. In addition to natural disasters, flood insurance encompasses destruction resulting from water main breaks. One flood recently swept through downtown Cleveland.

Experts advise commercial property owners talk with their insurance agents and/or insurance company to get quotes for both flood and earthquake coverage. “If you can buy it, you should,” Longcore says. “Even if you think it won't happen to you, it could happen to you.”

Midwest property owners should also consider safeguarding themselves with business interruption and business expense coverage. Many retail leases, for example, have provisions that allow retailers to stop paying rent if the shopping center is inoperable due to flooding or some other kind of disaster. In these situations, when the owner's income is in jeopardy, Levin says having the appropriate insurance will cover the loss of income. In addition, owners can get insurance to cover themselves if a retail tenant moves out and they can't lease the space after the property is repaired.

Value appraisal

Securing adequate coverage to address disasters is just one side of the coin — getting the appropriate amount of coverage is the other, says Longcore. Owners must make sure their property is “insured to value.” Insurance companies can penalize owners if their properties aren't insured to value, which means that each property needs to be appraised every two years so the policy can be updated to reflect the current market value and its replacement cost.

If a building is worth $1 million when a policy is written, for example, most insurance companies require $800,000 in coverage. However, if the building's value has increased and it's worth $1.4 million at the time a claim is filed, the insurance company will charge a hefty penalty for not having the building insured to value. Penalties levied can run well into six figures.

Additionally, owners should make sure they have a replacement cost value policy (RCV) instead of actual cash value (ACV), which will cover only the depreciated amount of the property.

“This is hugely important, but thousands of property owners throughout the Midwest have found out that they have an ACV,” Longcore says. “These owners should really sue their agents for malfeasance, but that's really like closing the door to the barn after the horses have gotten out.”

Emergency preparedness tips

  • Have an emergency management team in place: designate employees with specific roles before a disaster strikes and make sure that everyone in the company knows who these people are and what their tasks are.

  • Establish an emergency contact hotline: provide employees with an out-of-state emergency number that allows them to check in and learn of the office's status. This may be your only line of communication to your staff.

  • Designate a place and time to meet: if all lines of communication are broken, this is the only way for the team to get back on track. This can be a remote place that you feel is less likely to sustain damage and is a good spot for the emergency management team to meet.

  • Line up a restoration contractor: familiarize yourself with the process of restoration, the price guides and contracts and have all these terms worked out prior to an event.

  • Arrange for back-up office space and/or operations: have alternate customer phone communication and plans for delivery of your products or services. Many of your customers may not be affected and will still count on you. These customers are valuable and you risk the potential of losing your customers to your competition who can deliver the products or services.

Source: Cotton Companies