As Florida residents and auto dealers who are still recovering from Irma well know, hurricanes are large-scale, destructive events that can inflict damage over a large area with little warning. While most of us know what to do to keep ourselves, our employees, and the physical structures of our places of business as safe as possible, in preparation for an impending storm of the magnitude of Irma, many do not realize, that just as much preparation needs to be put in place to ensure business continuity after the storm.
Overall, total damages to the Florida economy, were thankfully less than initially expected, given the magnitude of the Hurricane Irma. Citigroup has estimated that damages were about $50 billion. Still, in the hardest hit areas, such as the keys, there are many small businesses that were all but destroyed. Even in areas where physical damage and flooding were less than anticipated, auto dealers and other businesses statewide struggled to reopen due to days without power. All in all, Irma served as a stark reminder of just how difficult disaster recovery can be.
Before we discuss recovery, indeed, the first priority is the safety of your personnel and clients/customers. Every dealership location should have an evacuation plan for all staff and customers. This means more than knowing where the emergency exits are located. You need to designate someone to be in charge of communicating with employees and customers, and implementing your evacuation plan in a calm and orderly fashion.
It is a good idea to assign a “Team Captain” to take charge and coordinate your plan in the event of an emergency. Check into the backgrounds of your employees for anyone that has had military, or other kinds of training, which would make him or her ideal for this role.
Have your captain or emergency coordinator check all public safety gear and equipment, including firefighting equipment and first aid materials. Repair and replace faulty items as necessary. In addition to fire safety equipment and first aid kits, you may want to budget for Automatic External Defibrillators (AEDs), and other “shelter-in-place” supplies that may be needed. Make sure all employees know how to access and use these supplies.
All dealerships should also have an employee communications plan. This plan starts with each employee having a list of all employee addresses, home phone and cell phone numbers. A call system should be established, with department heads and other “captains” calling designated employees to find out if their homes suffered damage and if they need any assistance. In addition to having a plan in place for employee communications, you need to know who to contact in an emergency, and how they can help. Be sure you have contact information for:
- Local and state police
- Fire department and emergency medical services
- Local government officials, emergency management office
- Local public health agency
- Local American Red Cross chapter
- National Weather Service
- Utility companies
- Neighboring businesses
Continuity and Recovery
While preparing to protect life and limb and your property is your first priority, the importance of preparing for what to do after the disaster, cannot be understated. According to a recent study conducted by Business Insider, over a five year period from 2000 to 2015, natural disasters cost the global economy 2.5 Trillion dollars. According to The Institute for Business and Home Safety “…at least 25 percent of businesses will close after a natural disaster and never reopen.”
Preparing for Continuity
Check your policies before their annual renewal dates to make sure that coverage has kept pace with exposure. That review should be extensive for property and casualty policies and for business interruption insurance. You also need to be aware of penalties for “co-insurance,” and make sure you are insured for the proper amounts. For example, if you have an 80/20 coinsurance clause in your policy, and the actual cost to replace your building is $1,000,000, and you have insured the property for only $750,000, since its insured value is less than 80% of its replacement value, when you suffer its loss, the insurance payout may be subject to a “reduction adjustment” to the payout amount, due to underinsuring your property.
Business interruption insurance is critical. This type of insurance, often called “business income insurance,” provides money to a policyholder for a pre-designated period to replace lost revenue and cover payroll when your dealership may have to be shut down due to disaster.
Business interruption policies and many property and casualty policies do not cover flood damage. The National Flood Insurance Program includes the option of buying business interruption coverage for flood damage. Businesses in South Florida need to be particularly concerned about flood damage.
Many business interruption policies do not pay claims when a business is shut due to off-site events, such as electrical damage when a hurricane knocks down power lines.
In some states, many insurance companies do not include coverage for hurricane damage, also known as windstorm, and for earthquake damage as part of standard property insurance policies. Businesses and homeowners are usually able to obtain separate policies to cover windstorm and earthquakes. Insurance agents can provide details.
Continuity preparation should also include daily electronic backups of important documents, files and databases. Owners should make copies of those records and store them in an off-site, physically secure facility. Articles of incorporation, accounts receivable, client records and important personnel and administrative documents should be among the priorities for back-up.
Other key business continuity preparation issues include:
- Credit: Because insurance payments can be delayed, it is important to maintain a sufficient line of credit for business continuation.
- Payroll: Do you have a strategy in place to be sure to cover payroll immediately post disaster, and during recovery?
- Tax Issues: Depending on the magnitude of the disaster, federal aid may be available in the form of tax breaks at the end of the year. Thus, it is critical to stay up-to-date on tax policy changes.
Preparing for Recovery
After a hurricane or other disaster, recovery for your operation involves rebuilding not only your physical structures but also your “financial structure.”
Remember, in the wake of a disaster, the main goal should be to restore customer confidence by getting the doors back open as soon as possible, which means even a partial reopening may be better than remaining closed.
Cash flow and traditional forms of credit may be interrupted in the aftermath of a hurricane or other major disaster. Your business may qualify for federal grants or low-cost disaster recovery loans.
Taxes and Other Financial Concerns
In the aftermath of a hurricane or other significant natural disaster, it is also important to consider the financial reporting implications of such extreme events, as the effects can be substantial. Once safety is assured, you need to begin considering what steps to take to appropriately capture the effect the hurricane has had on your operation, and also to be ready for period-end reporting. We have broken down post disaster recording considerations into five steps, as a way to consider addressing GAAP and GAAS issues.
- Develop an expectation of what could have happened.
- Inquire of appropriate personnel.
- Consider the effects the disaster will have on various assertions/assumptions and consider additional procedures on areas such as:
- Valuation of receivables
- Inventory lower of cost or net realizable value considerations
- Impairment of Property, Plant, and Equipment
- Insurance proceeds and gains/losses
- Consider the appropriateness of disclosures in the financial statements.
- Be ready for possible additional audit procedures to be performed by your financial statement auditors.
You can find out more about how to implement these five steps, by accessing our report: GAAP and Post-Disaster Audit and Accounting Procedures. In addition, Hurricane Harvey and Irma have left a wake of not only destruction, but confusion when it comes to taxes. The IRS has expanded taxpayer relief programs and other assistance. We have provided this FAQ document that can help you understand the tax implications and taxpayer relief programs as a result of these storms.
As of the writing of this article, The House of Representatives is poised to vote on a bill introduced by Rep. Kevin Brady (R-TX). Brady’s bill is a set of tax relief provisions designed to help people who have suffered losses from damage associated with hurricanes Harvey, Irma and Maria, and it will also make it easier for others to donate money to charities to help with disaster aid.
If You Need to File an Insurance Claim
If you do need to file an insurance claim after the storm, here are four tips as provided by Florida’s Chief Financial Officer, Jimmy Patronis, and Insurance Commissioner David Altmaier:
- Locate all applicable insurance policies.
- Document all damaged property and inventory.
- Contact your insurance company or insurance agent as soon as possible to report damages, and be sure to obtain and record a claim number.
- Cover damaged areas that may be exposed to the elements in order to prevent further damage. You need to understand, that post-disaster, it is your responsibility to mitigate your loses, and minimize additional damages and expenses.
- Be sure to check your policies for “extra expenses,” or “loss of use” clauses. You may be entitled to be reimbursed for any additional expenses you have incurred due to damage to your property.
How MBAF Can Help
In the aftermath of a hurricane or other disaster, you may be facing more than merely physical damage as your business tries to recover. With our years of expertise in providing post-disaster advice, we can help you through the above steps and considerations relative to your specific business, and damage/loss you may have incurred.
In addition, we also provide the following specific “post-disaster” services:
- Consulting on the application of GAAP
- Assistance with preparing for financial statement audits
- Business valuations
- Business interruption cases
- Help prepare insurance claims
- Disaster tax planning
- Loss of profit claims
At MBAF, it is our sincere wish that all of our auto dealership clients, their customers, associates and families, remain safe for the remainder of Hurricane Season, and we remind you, that we are here to help with disaster preparations and recovery in any and all ways that we can.