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November 2001
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Disaster Recovery

Talkin' Money

By Catherine Paunov

Talkin' Money
Photos by Monica Bay.
ACCORDING to the New York State Bar Association, almost 19 percent of the state's attorneys practiced in and around the World Trade Center. Many of these firms have simply been inconvenienced ­ their offices temporarily unavailable, services briefly unstable. But for other firms, the situation is catastrophic: everything is gone.

Whether or not firms will be able to continue will depend on a number of factors. They include: Did key personnel survive? Will present staff be available when the firm restarts? Are there any firm and client records still in existence? Can records be replaced or rebuilt from other sources? Will the firm be subject to sanctions or possible malpractice charges for failure to meet statutory and court mandated deadlines? Does the firm have the financial resources to weather the transition period?

Assuming key personnel did not perish, the answers to all the other questions depend on the last -- adequate financial resources. If no other lesson is learned from this terrible disaster it is that all firms and businesses must have a disaster plan to assure continued service to clients, and the survival of the business.

While other analysts have discussed how to protect and recover the documents of a practice, I'd like to tackle financial issues. Start with the firm's bank account, not including the client trust accounts. (Under no circumstances should the latter be touched.) Ideally, firms should have on hand enough cash to cover two months' of expenses. There is a temptation to include a line of credit in calculating the cash resources of the firm. This is not a good idea when planning for disaster, as use of such funds only increases the firm's liabilities when cash flow is a trickle to nonexistent, and may impact the firm's ability to borrow money when it is absolutely necessary.

So what should your firm do if the disaster has happened and you don't have two months' of reserves? Talk to your bank. You have an existing relationship, they have access to your financial history, in fact, and you may have provided them a financial statement for a loan in the past. They are more likely to want to retain you as a customer, too.

Review Debts

The next step is to review the firm's debts. Once the disaster has happened, pick up the phone and call your creditors and talk to a human. A computer doesn't realize that a bill going to the 10048 zip code is directed to an address that no longer exists. Even if you are only going to be out of the office space for a few months, let your creditors know what has happened.

Near WTC Ground Zero, September 11, 2001.
Near WTC Ground Zero, September 11, 2001.
Redirect mail to your accountant or bookkeeper. Don't forget the companies from which you have leased equipment, such as photocopy machines and printers. Generally, you are not responsible to continue payments if the equipment has been destroyed, however, you are obligated to let them know what has happened. Review lease agreements to be sure your liability ends if the equipment no longer exists. Again, speak to a human and follow up conversations with written confirmation. Maintaining good relations with your creditors will help to insure the continued existence and credit rating of the firm.

As a result of the WTC disaster, a consortium of banks in New York are providing loans at attractive rates to small businesses, including law firms. According to Edward O'Donnell of the Bank of New York, these loans are for amounts up to $100,000. Because many of the records for WTC businesses have been destroyed or are unavailable, these are low documentation loans. Rates will vary and are adjustable, but generally will be two points below the prime rate.

Again, your bank, familiar with your financial history, is more likely to make a loan to your firm and at the best available rate. One interesting aspect of these loans is that they are not for the repayment of existing debt, but for the actual expenses of getting the firm back on its feet.

Note, too, that many bank branches within a short distance of the disaster site have set up small business recovery centers. These provide a one-stop shop not only for loans, but equipment leasing, temporary office space, and SBA, federal, state and local government assistance. The Bank of New York's recovery services center is at 1 Wall Street, within a few blocks of the disaster site.

Next, sit down with your insurance agent and/or adjustor and calculate what you can reasonably expect to receive under the terms of your property and business interruption policies. Whether pre- or post-disaster, this insurance review is most important. Be sure policies are up to date and are adequate to cover actual losses. Have you purchased a costly new computer system since your last review? Does you insurance cover depreciated value or the actual replacement cost? The latter is more expensive, but may mean the difference between survival and bankruptcy. A three-year-old chair is worth about $25, but the cost to replace it is $200.

In addition to property insurance, firms should carry business interruption insurance. Such insurance is typically not sold separately, but in conjunction with the purchase of property insurance or included in a package policy. Business interruption insurance compensates a firm for lost income if it is required to vacate its premises due to damage related to a disaster, such as a fire. It covers the profits the firm would have earned, based on its financial records, had the disaster not occurred. It may also cover operating expenses such as health insurance premiums that continue even if the firm is temporarily out of business. Depending on the policy, firms not directly damaged but simply have a "loss of use" or if the firm is closed by police or government agencies the partners may still be able to claim benefits against their business interruption insurance. Look for a civil authority provision in your policy.

In addition to business interruption insurance, you may want to consider an extra expenses rider. Such insurance reimburses the firm for reasonable funds it expends, over and above normal operating expenses, to avoid having to shut down or borrow money during the re-establishment period. These expenses are often paid under the business interruption insurance if it helps decrease a firm's business interruption costs. For example, the firm locates office space, but some construction work is required before the firm can move in.

Extra expenses insurance will cover the costs, because it helps to get the firm up and running -- and out from under the provisions of its business interruption insurance -- in a timely manner.

When purchasing such policies, be sure that the coverage period and amount is sufficient to cover your firm's expenses, including payroll, for several months. Be warned, there is often a waiting period of several days before the policy takes affect after the disaster strikes, as well as a substantial deductible. You must have financial resources to meet obligations during the waiting period. If the firm needs business interruption insurance in case of flood, you will likely need to purchase it through the Federal Flood Insurance program.

The good news is that many firms actually located within the World Trade Center had business interruption insurance as a result of the 1993 attack. Firms that have purchased their insurance through the New York State Bar Association can get more information on the claims process from the Bar's Web site.

When planning for disaster, the financial aspects are critical. Getting adequate insurance coverage is expensive and many firms have been tempted to save money by purchasing less than they need. Consider raising the deductible on property coverage and the length of time before the business interruption insurance kicks in instead.

A property deductible of $10,000-$20,000, for example, can substantially lower premiums while providing for the extended needs of the firm over several months of interruption and rebuilding. The only way this works, of course, is if the firm has put aside some money for the proverbial rainy day and/or is in a position to borrow and repay money. Figure the combination of insurance, cash and loans that work for you for both the short and long-term survivability of the firm. And make those decisions before the crisis.

Attorney Catherine Pennington Paunov is the owner of Pennington Consulting. Based in Staten Island and St. Petersburg, Fla., it provides computer and technology consulting to law offices and non-profit organizations.

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