With the kind permission of Roger and Nick Bancroft, of Bancroft’s Dry Cleaners, I would like to explain just a little of what they went through with a fire and how business interruption insurance assisted them. This case study is from Business Interruption Insurance and Claims – A Practical Guide by Dr Allan Manning.
So you ask, why chose Bancrofts Dry Cleaners as a case study? The answer is:
- Drycleaning has elements of retail, service, and manufacturing.
- The business is the size of a typical small to medium enterprise.
- At the same time, the business could easily be a division of a larger firm.
- Bancrofts Dry Cleaners have given authority to use the information.
- The loss has all the components we need to discuss.
- Finally, Bancrofts Dry Cleaners are nice people and it is a good story!
The fire started at around 2.51am on Sunday, 21 December. Material around a flush-mounted light fitting in the ground floor ceiling ignited after it became overheated. Although the fire was detected by an alarm system within the building, the fire nonetheless spread so rapidly that the entire three floors of the building, including all plant and machinery, stock and customers’ goods, as well as the roof, were severely affected. The fire was still burning at 5.30am, despite the efforts of the fire-fighters attached to the 14 fire trucks, which attended the scene. Two ambulances attended, as did the Police, who blocked busy Toorak Road, South Yarra for 100 metres in each direction, until the fire was finally extinguished.
Nick Bancroft received a call from the alarm monitoring company at around 3.00am, advising that the premises were on fire. Nick drove to the premises in record time, only to sit there for hours, helpless, until the fire was extinguished and the Police had completed their enquiries into cause. It is impossible to adequately capture the thoughts that go through the mind of a business owner during these hours, as they witness what is a life’s work go up in smoke. In Nick’s case, his great-grandfather had started the business in 1913, and Nick had only recently taken over management of the business, even though his father, Roger, was still involved in the business and providing much valuable advice.
A STRESSFUL TIME
The insurance industry tends to overlook the emotional stress that such a fire has on a business owner and those around them, including employees. Thoughts of the typical business owner range from guilt, through anger and great loss, to ‘Why me?
In another case Loss Management International Pty Ltd handled, a normally placid man whose business had been destroyed in a fire, attended a Rotary Club meeting and his friends tried to make light of his situation with a series of jokes, including ones suggesting he had lit the fire himself. For the first time in his life, the business owner completely lost his temper and almost hit the originator of the so-called jokes. I stress that this fire was accidental just like the one affecting Bancrofts Dry Cleaners. It is clear that everyone, including the Loss Adjuster and Insurer, needs to be mindful of the stress that a business owner is under after a fire or similar loss occurs.
Turning back to the fire at Bancrofts Dry Cleaners, the Bancrofts reported the incident to their insurance Broker on the morning of the fire, and a Fire Investigator and two Loss Adjusters attended that same morning. At this time of great stress, with little sleep the night before, Roger and Nick had to deal with the Fire Investigators from the Metropolitan Fire Brigade, Police, State Forensic Laboratory, their Insurer, as well as the Loss Adjuster and media. The drycleaning business usually opens on a Sunday, and they were subsequently inundated by customers looking to collect their clothes. Some customers were most understanding, however, many more were not. Some blamed Bancrofts Dry Cleaners, and were seeking immediate compensation.
Try and put yourself in the business owner’s position for just a minute. As the reader hopefully appreciates, this initial investigation process only adds to the stress. Incorrect decisions can easily be made during this initial period, which can adversely affect the recovery of the business. A sharp word to a demanding customer or a snappy answer to the media or investigator, can take some getting over. Worst of all, a misunderstood comment to the Loss Adjuster can delay or affect the entire claim process. In Bancrofts Dry Cleaners’ case, they had help, they kept their composure and handled the first day very well. We will come back to this shortly.
NOT ALL PUBLICITY IS GOOD PUBLICITY!
The fire received a great deal of exposure, being reported on all the television network news services, the daily papers, as well as the community papers. Following is a taste of the media reports that this fire generated.
All the media concentrated on the loss of some wedding dresses in the fire. One news bulletin had a tearful customer explaining that she had lost a valuable gown made for her by her grandmother. It was good sensational journalism, but failed to mention the fact that the customer had left the gown at the drycleaners four years ago. The customer either was avoiding paying the cleaning charge or was saving on storage charges – either way, it was hardly Bancrofts Dry Cleaners’ fault that she lost the gown. It was an accidental fire and she should have collected the gown long before the fire occurred.
Nonetheless, years later, the only part of Bancrofts Dry Cleaners’ business that has not completely recovered, are the wedding dresses. So much for “all publicity is good publicity”! Management of the media is just one of the many parts of the loss management process.
WILL THE BUSINESS SURVIVE?
By lunchtime on Sunday, 21 December, Bancrofts Dry Cleaners on the advice of their loss manager, decided wisely to take some time out. They went across the road to a coffee shop, and father and son wrote down the ‘pros and cons’ of re-establishing the business as opposed to giving up and seeking a cash settlement from the Insurer. Some of the questions that went through their mind at this critical time were:
- Is the stress that we are going to endure, worth the effort in the long run?
- How long will it take before the investigation is finished, so we can clear ourselves of any suggestion of wrongdoing?
- Can we, and the business, endure a rebuild?
- What new equipment is available, and what are the lead times?
- We cannot operate from these premises – is there anywhere else we can go, even for a short while?
- Who will do the cleaning until we get replacement equipment?
- Is the cover on our insurance policy adequate?
- Will we be wiped out by all the customers’ claims? We have to find the people to handle the claims, and meet the cost of them.
- Can any of the customers’ goods be salvaged?
- Are our computer backups up-to-date and operational?
- Will the Insurers argue every step of the way?
- Do we have to engage lawyers, accountants, surveyors, builders and other experts?
Roger, who had been through a claim about 20 years ago when the premises were damaged during an attack on the Turkish Consulate (located immediately adjacent to the drycleaners), was ambivalent. He was wishing to go into semi-retirement and, knowing the hassles he had to endure last time, was not relishing the prospect of having to go through it all again. Nick, who was still at school during the earlier reinstatement, was not prepared to give up the business he had so recently acquired. The fact that he was the fourth generation of his family to run the business, also influenced his decision. Roger agreed to assist his son, and the decision to go on was made.
HELP FROM COMPETITORS
By this time, word of the fire had reached their competitors, and they started to arrive at Bancrofts Dry Cleaners’ premises to offer assistance. This, of course, is not the norm, as competitors are typically predatory and take every advantage of the plight of a competitor who has fallen on hard times. This takes many forms, from showing pictures of the damage to mutual customers and refusing to supply or loan excess equipment, through to poaching key staff. Fortunately, the drycleaning industry in Victoria is not like this, due much to the efforts of Roger Bancroft, who has been the President of the Drycleaners Institute of Australia multiple times in the past.
This is a great example of doing unto others what you would like to have done to you and that having and displaying great business ethics does pay off.
Competitors of Bancroft’s come to offer their support
to Nick (far left) and Roger (2nd from left).
THE IMPORTANCE OF PLANNING
Bancrofts Dry Cleaners, like the vast majority of small businesses, did not have a Business Continuity Plan (BCP) before the loss. However, the notes from the lunchtime “time out” formed the basis of a Crisis Management Plan (CMP). On advice from his loss manager, it was pointed out that a crisis is not only a threat to a business, but also an opportunity. In Bancrofts Dry Cleaners’ case, it was an opportunity to invest in the newest equipment, and redesign the layout of the premises to maximise the use of every square centimetre of the valuable South Yarra site. A specialist consultant was engaged to assist in this area. Every decision made by Bancrofts Dry Cleaners during the reconstruction phase, was made to fit in with the their long-term plan for the business. In many cases, this did not increase the amount to be paid by the Insurer, who was kept fully informed and who supported Bancrofts Dry Cleaners as much as possible. The up-front planning was a key factor in the successful recovery of Bancrofts Dry Cleaners.
As with many businesses, Bancrofts Dry Cleaners relies heavily on their location. Therefore, one of the first steps was to locate suitable premises from which Bancrofts Dry Cleaners could operate to collect customers’ drycleaning and return it after it had been cleaned. However, this was only part of the issue, as all the processing equipment was made completely inoperable by the fire. Competitors such as Penguin, Elite, Master and Hudsons, offered to collect any drycleaning, process it and return the items the same day. This work was done at very favourable rates, which allowed Bancrofts Dry Cleaners to cover some of the cost of continued operation, such as wages, etc.
No premises were available for mid- to long-term lease. Six months was ideal, but all the shopfronts along Toorak Road, South Yarra were occupied. A hairdresser located immediately behind Bancrofts Dry Cleaners, in a side street, was reported to be going on leave from Christmas, for 2 weeks. The hairdresser was approached and offered an incentive to leave early or at least allow shared facilities until he left, and then use of the salon while he was away. This proposal was accepted by the hairdresser. Signs were painted along both external walls of the original building, directing customers to the alternative premises, and Bancrofts Dry Cleaners were back trading within 18 hours of the fire.
With this 2 week window, a builder was engaged to clear out the front corner of the original premises and, using a light-framed wall, sheeted with ply, a small shopfront nicknamed “The Cocoon” was created, which allowed Bancrofts Dry Cleaners to continue to trade while the permanent repairs to the building, machinery and plant were carried out. The competitors continued to provide processing until the new machines were received and installed in mid-April, nearly 4 months later. Loan counters were provided by Brown Gouge, and clothing rails by Penguin Drive In Dry Cleaners3.
Footnote: Penguin Drive In Dry Cleaners sustained a fire themselves in August 2000. The first to offer assistance was Roger Bancroft, who was only too happy to return the valuable assistance rendered him during his period of crisis. Ethical behaviour in business does pay dividends in the long run.
Bancrofts Dry Cleaners were fully insured in all areas, but two (customers’ goods and rent).Fortunately, they had insured wages adequately and were able to retain all their staff. These staff were loyal to Bancrofts Dry Cleaners, and were part of the reason for the success of the business prior to, and after, the fire. Some staff were seconded to competitors to handle the drycleaning after hours, while others remained at the site, working at The Cocoon, taking in, keeping track of and returning customers’ garments.
With a much smaller shop during the repair period, Bancroft’s had to start storing customers’ cloths on temporary racks fitted on the second storey of the building. Additional staff had to be employed as “runners” to literally run out the front door, up the side street, up two flights of stairs, find the coat hangers which matched the customer’s docket, and run back to the shop. Rather than find they could reduce their staff, Bancrofts needed more.
The staff had to be trained in the use of the new equipment as it arrived and was commissioned. This was made so much easier due to the fact that Bancrofts Dry Cleaners were able to retain their original staff. Therefore, the added burden of recruiting and training in other areas of the business, was not required. The need for adequate insurance of wages cannot be overlooked, and is just as important as insuring the Gross Profit of the business.
NOT ALL PLAIN SAILING
Two weeks after the new main drycleaning machines had been installed and commissioned, one of the machines developed a leak in the main tank. This required the removal of the machine off-site, for repair. A large shop front window had to be removed, and a crane engaged to lift the machine out of the shop onto a truck. Once the machine was repaired, the process had to be reversed. This type of added disruption to a tight reinstatement schedule, was quite frustrating but the possibility of such a situation cannot be overlooked.
At about the same time, the entire shop was flooded when a Council storm water pipe became blocked. This was followed by a break-in, with the day’s takings being stolen. Again, great patience was called for, not to overreact to this spate of annoying inconveniences, which would be bad enough during normal times.
They do say things come in threes!
One of the most important components to the management of this crisis, was the careful handling of claims by customers in respect of their goods, which were lost in the fire.
The legal position was that as the fire was accidental in origin as far as Bancrofts Dry Cleaners were concerned, Bancrofts Dry Cleaners had no legal responsibility to reimburse any customer for their loss. As was mentioned before, the fire started when a box around a transformer attached to a down-light, ignited after becoming overheated. This box was installed by an unknown electrician after the damage caused by the Turkish Embassy bombing about 17 years earlier. The box was much smaller than was recommended by the manufacturer of the light, and the heat generated by the transformer dried out the timber box to the point where it caught fire. This was not the fault of Bancrofts Dry Cleaners, and it would not be reasonable for anyone to expect them to foresee a fire starting from this cause.
Under Australian law, any businessperson must take reasonable care of their customers’ goods. This does not create a strict liability at law. Having said this, commercial reality needs to be kept in mind. A drycleaner relies heavily on a great many repeat customers. Had Bancrofts Dry Cleaners simply applied the letter of the law to all the customers’ claims, they would have alienated a wide cross-section of their customer base, and this would have no doubt meant a downturn in Turnover for many years. In fact, the business may not have recovered.
On the other side of the coin, it was the week before Christmas and all the clothing racks were full. Over 1,000 customers had garments in the store at the time of the fire. The estimated value of the garments was set at over $2.5 million.
Bancrofts Dry Cleaners had a complete backup of their computer records. This was restored onto a loan machine the day after the fire. As such, a complete list of customers was available, as was a count and brief description of each item. Over 85% of the garments were on conveyor racks on the mezzanine floor of the building and, as such, were completely destroyed in the fire. The remaining 15% were on the ground floor and, while badly damaged, in most cases they were identifiable.
Of the more than 1,000 possible claims, approximately 150 people never made a claim. Some explained that Bancrofts Dry Cleaners had looked after them for many years, and they would not add to their burden. On the other hand, 144 people (many of whom had never used the drycleaner) attempted to claim for goods that were never in the store. Fortunately, Bancrofts Dry Cleaners’ records were such that the non-genuine claims could be dealt with quickly and efficiently, leaving the claimant in no doubt that they did not have any goods in the store at the time of the loss. Of those that had legitimate claims, approximately 30% claimed for higher quality or more garments than were in the store – a sad reflection on values in today’s society.
Again, it was fortunate that the items that could be identified were taken to Penguin Drive In Dry Cleaners, where the label and as good a description as possible, was taken and the items carefully stored until the claim for that item was settled. This was extremely dirty work, requiring careful attention to detail, but it allowed for claims that were exaggerated, to be identified and handled politely and quickly. Some people genuinely thought they had more or different items in for cleaning, than they actually did. Others, who attempted to claim for a garment, say a Versace item when it was actually a mass-produced brand, simply tried to capitalise on Bancrofts Dry Cleaners’ misfortune.
CAREFUL HANDLING OF CUSTOMERS’ CLAIMS
Of the more than 1,000 possible claims, approximately 150 people never made a claim. Some explained that Bancrofts Dry The knowledge of the Bancrofts and their staff was invaluable in this process. Weekly meetings were held, at which the customers’ claims were discussed with the loss manager’s specialist in textile and fashions. The memory of the management and staff of their customers, the usual quality of the customers’ garments and their habits, were of great assistance. This provided comfort that the majority of the claims were fair. In cases where doubt existed, a visit to the customer’s home was undertaken to ascertain whether the residence and its contents were in keeping with the items claimed.
Customers’ goods was one of only two areas where Bancrofts Dry Cleaners were under-insured. This was exacerbated by the timing of the fire, ie. at the busiest time of the year. A month later, and it would not have been nearly so bad. To have met all claims in full would have meant that Bancrofts Dry Cleaners would not have had the funds to reinstate the building and/or the machinery and plant. At the same time, the ongoing support of these customers was vital to the continued success of the business.
To overcome this problem, each customer was contacted and politely asked to claim against their own insurance. If there was a policy excess, Bancrofts Dry Cleaners would meet the excess so that the customer was fully compensated. In many cases, the excess was paid by way of a drycleaning voucher, which encouraged customers to again use Bancrofts Dry Cleaners’ services.
THE NET RESULT
Where there was no insurance, or a good customer simply refused to make a claim against their own policy, Bancrofts Dry Cleaners agreed to pay the claim from their own Customers’ Goods cover. Bancrofts Dry Cleaners had $600,000 cover for Customers’ Goods, and this portion of the claim was ultimately settled for $595,000 with the vast majority of customers accepting the settlement either from their own Insurer or from Bancrofts Dry Cleaners.
The enormity of this task should not be under-estimated. It took over 8 months before the process was completed, with the equivalent of one person working full-time for that whole period. Neither Bancrofts Dry Cleaners themselves nor their staff, had the training or time to handle this project. It is for this and many other reasons that Claims Preparation and Additional Increased Cost of Working covers are required.
Before leaving this topic, the reader may be forgiven for thinking that the problem of customers’ goods is unique to drycleaners. This is, of course, incorrect. Any business that holds customers’ goods for repair or service needs this cover, even when they are not necessarily legally liable for the loss.
The lifeblood of any business is cash flow. Following the fire, the Turnover from the laundry business was, in the main, not affected. The Turnover from drycleaning took a dip for several months, until the new machines arrived and a promotional strategy was implemented to regain lost custom.
At the same time as the fall in overall Turnover, the cost of operating the business skyrocketed. Even with the very favourable rates offered by their competitors, the cost of cleaning and transportation to and from the competitors, coupled with the fact that there were no savings in any other costs, meant that Bancrofts Dry Cleaners found their cash position substantially deteriorated.
Thanks to the loss manager, the insurance claim was processed promptly, with timely progress payments. This, coupled with, as it turned out, adequate insurance in all areas bar two (customers’ goods and rent), meant that Bancrofts Dry Cleaners were able to continue to operate, although this did entail extended credit for short periods from both their bank and creditors.
PERIOD OF DISRUPTION
With the decision taken to remain in the premises, the time required to rebuild took longer than would normally be the case. Lead times on equipment varied from 4 to 10 months and, with the loss of some customers, it took at least 18 months for the business to completely recover from this crisis.
It was 10 months before they were “safely out of the woods”. The vast majority of businesses only have 12 months cover or less. In the case of Bancrofts Dry Cleaners, the ongoing loss beyond the 12 month Indemnity Period was manageable. However, had something gone wrong during the reconstruction phase, the situation would have been extremely tight!
HOW WOULD YOUR BUSINESS FARE?
It is estimated that around 50% of businesses that suffer a major crisis, such as a fire, had not returned to their pre-loss form 3 years after the catastrophe. A business may have been sold, a division moved offshore, or the business may simply have had to go into receivership.
In the business world, most businesses are not producing abnormal profits and, with management and staff working at full capacity, they do not have the resources (either financially or in people) to manage a crisis, supervise the reinstatement, look after their existing customers, and manage the insurance claim. In the case of Bancrofts Dry Cleaners, they made it. But remember:
Bancrofts Dry Cleaners had the ability to respond quickly and as a team. Many partnerships are tested by such a crisis, with in-fighting and blame (for the loss, inadequate cover, everything that has or is perceived to have gone wrong during the life of the business, etc) stifling decision-making.
Can you (or, in the case of insurance Brokers, can your clients) meet or exceed these criteria?
Reference: Manning (2004)http://vuir.vu.edu.au/277/2/02whole.pdf
THE IMPORTANCE OF INSURANCE
Adequate insurance is not the only variable that ensures business survival in the event of a major crisis. Nonetheless, it is one, if not the most, important. A businessperson invests a significant amount of time and resources in building or acquiring a business, and it is in their own best interests to give themselves a fighting chance should the unthinkable happen. If you do not have it, it should be in the “urgent and important” quadrant of your things you need to do matrix.
It is because business interruption insurance is so very important to your business that this site was developed. After you review the summary of this case study please explore the rest of the site to learn more about the cover.
Remember two simple things. It could happen to you and no one remembers the cost of insurance after the event. Every one just wants the Rolls Royce cover. With this site there is no reason not to get it right.
SUMMARY OF CASE STUDY
This case study examined the difficulties that were faced by one business owner following a major fire in their business. Many of the problems described are faced in every major claim. However, every loss has different obstacles that need to be overcome.
The insurance industry employs experts to assist them in reaching an acceptable settlement for themselves. Traditionally, the business owner, who has typically never gone through such a crisis, has been left on their own. At a time of great stress, they are expected to resurrect the business, project manage the rebuild or repair of the destroyed or damaged property, and understand all the nuances of the insurance cover for both Material Damage and Business Interruption. Assistance should be sort from a loss manager.
Clearly, business owners require assistance at this time to safeguard their investment and future income streams, and to guide them through the process, thereby maximising the opportunities that inevitably arise, as well as minimising the threat to their business at this time.
Well before a loss occurring, the insurance protecting the business assets and future income streams needs to be tailored to the requirements of the business. It is bad enough having one crisis, namely the loss of the assets, but it is devastating to a business when they are confronted with inadequate insurance cover. This equates to a second, often harder to overcome, crisis. No one remembers the premium after the loss. Everyone just wants the Rolls-Royce cover to ensure their business survives.
This website provides some assistance, however, this website is only a guide albeit a practical one. It is not designed to be exhaustive. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating a business decision on its own. Expert advice is available, and it is imperative that the advice is tailored to the individual needs of the business