The survey on which this report is based was in the field for just a few days when Hurricane Charley struck Florida. Interviewing in the state ceased due both to the damage businesses incurred – how can an interviewer contact a potential respondent when the owner’s business is not operating? – and in deference to the difficulties people were experiencing. The survey had just returned to the field when Frances struck. Ivan and Jeanne followed shortly. Meanwhile, Gaston came on shore in South Carolina and dumped heavy rains all over the mid-Atlantic leaving large parts of Richmond’s business area among others under flood waters. The weather problems in the southeast and mid- Atlantic mean that any survey based on a random sample, such as this one, will probably under-represent the difficulties, particularly the most severe difficulties, small-business owners have experienced from natural disasters. Compounding the estimating problem is that many businesses hit by natural disasters never recover and are therefore not available to be sampled. Herbert Mitchell, Associate Administrator, Office of Disaster Assistance at the Small Business Administration (SBA), told the author that as many as 40 percent of small businesses hit directly by a serious natural disaster perish. Another representativeness issue for the survey is that some natural disasters, such as destructive earthquakes, do not appear randomly over short periods of time. Using a short reference period such as the three years employed here therefore means that some disasters may be proportionately recorded too often while others may be proportionately recorded too infrequently. One must further recognize that not all disasters are natural. Man-made disasters ranging from civil disorder to computer viruses add another dimension to the overall issue for small-business owners. Many of these do not appear to be random over a short period, either. Still, sampling issues aside, the fact that Florida alone was struck by four major hurricanes within 45 days provides ample reason to devote this issue of the National Small Business Poll to Disasters.
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It is often difficult to sort the type of natural disaster impacting one’s business. Is the storm surge following a hurricane classified as a flood or a hurricane? Is the disaster of a brush fire in a drought-stricken area the fire or the drought? Despite such vagaries, the survey asked small-business owners whether specified types of natural disasters shuttered their businesses for 24 hours or more at least once within the last three years. Thirty (30) percent report that they closed their business for at least a day during that time due to one or more natural disasters.
The most frequent type of disaster small-business owners encountered was blizzards/ice storms/extreme cold. Twenty (20) percent of all small businesses closed for at least 24 hours due to such conditions one or more times in the last three years (Q#1F). Other types of natural disasters resulting in business closure were much less frequent. The second most common type experienced by small employers was tornados, hurricanes, and typhoons with wind and hale storms following. Five (5) percent report being closed at least 24 hours due to the former set of disasters (Q#1C) and 4 percent due to the latter (Q#1D). Floods strike with the same approximate frequency as 4 percent disclose being shut-down for at least 24 hours in the last three years due to high water (Q#1B).
The remaining disasters queried occurred less often. Three (3) percent cite “other,” the most important of which was power outages (Q#1H); 2 percent cite fires which could either be natural, such as wild or brush fires, or man-made, such as arson (Q#1E), and 0 percent for drought or extreme heat (Q#1G). Not a single respondent registered earthquakes, landslides, or sinkholes (Q#1A). But given the Northridge (CA) and the Nisqually (WA) quakes, the interval between destructive earthquakes is much less important than the damage of a substantive one.
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a. Damage from Natural Disasters
More important than the frequency of forced closing is the dollars lost to a disaster. Being closed for two or three days due to several feet of snow, for example, is not the same as being flattened by a tornado. Still, the type of natural disaster likely to cause the greatest amount of economic damage for most owners is blizzards/ice storms/severe cold. Thirty-two (32) percent of those experiencing a natural disaster in the last three years (whether or not closed for 24 hours) cite winter-based storms (Q#2) as the most costly type. Since 70 percent of the population did not experience a natural disaster in the last three years, winter-based storms adversely impacted 11 percent of the small employer population enough for owners to term it a disaster. Thirteen (13) percent or 4 percent of the population note floods as the most damaging. Tornados, hurricanes, and typhoons; wind or hale storms; and power outages (volunteered response) follow in frequency. However, the per event damage done by tornados, hurricanes, typhoons and floods is more severe than that caused by winter storms.
The greatest problem caused by the most costly natural disaster occurring in the last three years, whether it closed the business at least 24 hours or not, was lost sales and customers. Sixty-two (62) percent report lost sales as the primary negative result of the disaster (Q#4). Seventeen (17) percent claim uninsured physical damage was the primary problem and another 17 percent cite “other.” Other could mean anything from failure to receive an important shipment to insured physical damage that takes time to repair. Just 2 percent believe their biggest problem was lost records and documents.
The greatest identified problem is related to the type of natural disaster experienced. Seventy-four (74) percent who identified a winter storm as the most damaging disaster cite lost sales and customers compared to only 54 percent who identified tornados, hurricanes, typhoons and floods. Meanwhile, only 11 percent of the former identified uninsured property losses compared to 29 percent among the latter.
Given that the loss of sales and customers is so relatively important, the amount of time a business remains incapacitated is vital. The following examines partial incapacity and total incapacity: of those struck by a natural disaster, half (51%) report that they were forced to close 24 hours or more and half (49%) report they were not (Q#5). If forced to close for a day, half (50%) were operating at least partially into the second day (Q#6). Another 39 percent were operating at least partially within 72 hours. But 6 percent were totally closed for more than one week. The average time totally closed was about two and one-half days.
Partially operational and fully operational are very different. It takes much longer on average to become fully operational following a disaster, about 11 and one-half days (Q#7). The high average to become fully operational reflects the extended period of incapacity experienced by a relatively small percentage of firms. Three in four (75%) were fully operational in 72 hours or less. Meanwhile, 10 percent say it took more than one week to become fully operational again. Thus, about 1 percent of small employers per year are closed for more than one week due to a natural disaster. It must be reemphasized that these numbers reflect only the experiences of those who survived the disaster. They do not reflect those destroyed or mortally wounded.
Physical damage to business property from natural disasters also appears concentrated in comparatively few firms. Half (50%) of small-business owners impacted report no physical damage to their business property. (Their damage likely results from interrupted operations.) Another 19 percent report damage amounting to less than $5,000. At the other extreme, 6 percent say that their property losses were $100,000 or more. The latter represents about 2 percent of the population or somewhat less than 1 percent a year. Again, these numbers exclude those who did not survive a recent disaster.
An important factor in minimizing damage is the amount of advance warning owners receive. The greater the advance warning, the more time they have to prepare for an approaching problem. Unfortunately, 46 percent say that they had no warning whatsoever for the most costly natural disaster experienced in the last three years, or at least they believe that they had none (Q#3). Another 4 percent say that they had less than one hour. A total of 87 percent report having 24 hours or less warning. While that figure appears high given the prominence of the country’s weather forecasting system, it indicates that small-business owners are typically surprised by these events.
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b. Insurance Coverage
An important financial issue is the portion of the losses incurred from the disaster that are covered by insurance. Reflecting on their most costly natural disaster over the last three years, 36 percent report that in hindsight they were adequately insured to cover the loss of sales (Q#8). Yet, 12 percent say that they were under-insured and another 47 percent say that they were not insured. Purchase of continuing operations insurance (including any deductible and/or exclusions) may or may not have been a prudent decision by those forced to close for more than a day. Individual circumstances dictate the wisdom of their decision. However, those non-operational for greater and lesser periods of time were not related to the adequacy of insurance coverage, suggesting the difference cannot be explained by deductibles and/or exclusions.
A larger proportion was adequately covered for losses to physical property than interrupted operations. Fifty-one (51) percent experiencing property damage believe in hindsight that they were adequately covered (Q#9a). However, 16 percent believe they were under-insured and another 27 percent did not have coverage. It is not known whether those without coverage took the risk of going without or whether they thought they had coverage and did not.
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Most typically think of disasters as having natural causes. But we are increasingly coming to the realization that some disasters are man-made. Examples include civil disorder, terrorism, arson and so forth. One in 10 (10%) small employers say that they have experienced some type of man-made disaster in the last three years (Q#10). The most common type was an act of terror, including eco-terrorism. Sixty-one (61) percent of those experiencing a man-made disaster in the last three years or 6 percent of all firms cite it (Q#10a). The sample size is too small to determine how much of this response is the result of 9/11. Many outside the immediate New York and northern Virginia areas cite the terrorism problem. But it is not clear if those respondents were reacting to the residual effects of 9-11 such as airport closings or other forms of terrorism.
Small employers note vandalism as the second most frequent type (11%) followed by break-in/theft at 8 percent. Just 3 percent cite civil disorder or demonstrations and no one mentions arson.
A variant of man-made disasters are economic disruptions caused primarily by construction projects, including road building and relocation, street repair, urban renewal, subway construction and so forth. These projects typically restrict access to the business thereby reducing sales, causing general inconvenience, and perhaps even damaging physical facilities. Twelve (12) percent say that their business has been damaged by such disruptions in the last three years (Q#11). Noteworthy is that only 15 percent of that group received 90 days or more notice of possible disruption (Q#11a), thereby not giving affected owners reasonable time to prepare. The survey did not determine the amount of damage incurred.
A new type of potential man-made disaster is a computer virus or worm. Within the last three years, 34 percent of small-business owners have had their business computer or computer systems infected by a virus damaging it (them) or its (their) contents (Q#18). Sixty-four (64) percent have not and 2 percent report no business computer. Of those experiencing one or more viruses, 60 percent needed to hire a professional to get rid of the virus and return things to normal (Q#19C). Twenty- nine (29) percent report that they had to purchase new equipment (Q#19A) and 28 percent report a substantial number of documents lost (Q#19B). Sixteen (16) percent both lost documents and needed new equipment.
There are means to protect computers from viruses. One is anti-virus software specifically designed to intercept the potential problem. Eighty-three (83) percent of small-business owners now have anti-virus software, such as Norton, to protect themselves against viruses (Q#20). Those owning firms employing 20 or more people almost universally have it. Further, most of the anti-virus software is new. Eighty-one (81) percent having it maintain that they last updated theirs in 2004 (Q#20a). Another 10 percent claim that they last updated it in 2003.
A second common method to protect oneself against viruses is to download software patches correcting known vulnerabilities. Seventy-two (72) percent say that they or a designate regularly download patches (Q#20b).
A simple way to shield computer equipment in the event of a power spike is to employ surge protectors. Eighty-nine (89) percent report their use (Q#21).
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The loss of electric power can create serious problems for a business, particularly if the outage lasts for an extended period. In the last three years, 21 percent of small businesses have lost electric power at their principal location for 24 hours or longer (Q#15). The most recent loss of power was usually (64%) caused by a storm, but 32 percent say that it was caused by another situation (Q#15a). Moreover, about one in five (22%) who report the most recent outage as storm related also say that a prior outage (in the last three years) was not (Q#15b). Adding the two together, virtually half (49%) who went without power for at least a day or 10 percent of all small employers say that they experienced a loss of power for at least 24 hours in the last three years caused by something other than a storm. The recent grid problem in the northeast and Canada is an example.
Rolling brown-outs are another type of electric power problem that can cause small-business owners problems. These tend not to result from a storm, but from an imbalance between supply and demand, particularly during peak periods. Twenty (20) percent claim to have experienced a rolling brown-out in the last three years (Q#16).
A backup generator can bridge the problem when a power loss occurs. But just 20 percent have backup generating capacity available at their principal business location whether or not they own the facility (Q#17). Smaller, small businesses appear as likely as larger, small businesses to have it.
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Despite the fact that disasters (at least as defined by small-business owners) appear to be more common than recognized, most small-business owners do not have an emergency preparedness plan. Just 38 percent have one in case of a natural or man-made disaster (Q#12); 62 percent do not. Owners of larger, small firms are significantly more likely to have a plan than owners of smaller, small firms. Fifty-five (55) percent of the former have one.
Those with a plan typically (91%) talk it over with their employees (Q#12a).
With or without a formal emergency preparedness plan, small-business owners can take steps that would be useful in case of a disaster. Most do, but it is not always clear that the steps taken are to avoid or mitigate disasters or for other purposes.
The survey asked respondents, with and without plans, about some of the more common emergency preparedness steps. The most frequently taken (88%), though probably not taken for emergency purposes, is having at least one person, other than the owner, who can shut-down the facility, including turning off switch boxes, water, gas, and equipment (Q#13C). This capacity seems particularly important in a stand alone building without some type of building manager, such as would be found in a high-rise office building. Having a portable radio, tool kit, flashlight, first aid kit, bottled water, etc., on-site is almost as common (86%) (Q#13E). Other typical actions include: having a telephone tree to contact employees at home rapidly (75%) (Q#13B); and, keeping a separate contact list for emergency services, such as police, fire, hospital, building manager, etc. (74%) (Q#13D).
The step rarely taken is contacting the local or state emergency preparedness office. Only 8 percent have contacted their local or state emergency preparedness office in the last three years to determine the types of disasters common to the area as well as obtain other pertinent information (Q#13H). One would have thought that with the uncertainty created by the potential of another terrorist attack, the number of recent contacts would have been notably higher.
Insurance coverage is important when a disaster strikes. But many policies require riders in order to have coverage for certain types of disasters. For example, common business insurance policies rarely cover flood damage. As a result, it is prudent to understand what is and what is not covered prior to a disaster, not after. Seventy-nine (79) percent of small-business owners say that they annually review their insurance policies to determine what types of disasters, natural and man-made, are and are not covered (Q#14).
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This hurricane season, the rumblings under Mount St. Helens, and a continuous flow of new computer viruses underscore the need for small-business owners to prepare as best they can for natural as well as man-made disasters. The data in this report show that disasters are more frequent than many recognize. About 10 percent per year say that they experience adverse effects from a natural disaster. About a third of that number say that they experience similar impacts from man-made ones. But there are disasters, and then there are disasters. For example, though 10 percent annually may experience a loss due to natural disasters, less than 1 percent annually experience natural disasters involving closure of a business for more than a week or more than $100,000 in physical damage. These estimates do not account for businesses destroyed by disasters and, therefore, are likely to be undercounts, particularly undercounts of the most serious events.
The most serious events tend to be those that we traditionally term natural disasters, such as hurricanes and floods, and they often lead to physical damage among small businesses. The most frequent, however, involve winter storms that typically lead to loss of sales and customers, but which usually do not involve physical loss. But all types of events can lead to greater and lesser damage, and more and less time shuttered. More preparation and greater advance notice of a potential disaster should reduce disaster related problems. However, in the true surprise of this report, comparatively few believe that they receive much notice before a natural disaster strikes. This may be true for tornados and earthquakes, but it is more difficult to understand for blizzards, hurricanes, and most floods. The traditional view has been that a disaster stems from an act of nature, but manmade disasters are not new. The civil disorders of the 1960s serve as a reminder. Yet, 9-11 and the outside sabotage of computer systems present new challenges that require new frames of reference and skill sets. These new challenges as well as the shift from manufacturing to services also suggest that continuing operations losses may increasingly displace physical damage losses as the more prominent type of disaster loss. This and other insurance issues such as the advisability/availability of terrorism insurance add a further dimension to small-business owner/manager decision-making.
Most small-business owners have taken steps to prepare for a disaster whether that was their intent or not. These involve common sense actions such as having flashlights, first aid kits, portable radios, etc., on-site, separate lists and telephone numbers for emergency personnel such as police, fire, hospitals, etc. However, less than half have a plan communicated to employees and many fewer seek out local and state emergency preparedness officials to help. But even with a plan, a lack of warning as well as the limited capacity to protect the business from the consequences of disasters makes losses from them inevitable.