Many small firms risk ruin because of poor insurance against flooding. As climate experts predict higher rainfall, what should businesses do to avoid a murky future?

Floods that wreaked havoc across parts of Gloucestershire and Yorkshire two years ago, destroying many small businesses, may have been an unprecedented event. But if climate change pundits are correct, changing weather patterns and prospects of increased rainfall could put many more businesses at risk of flooding; and not just those situated close to rivers and coasts. Justin Butler, managing director of Ambiental, a Bristol-based flood risk assessment consultancy, explains:

"We are in a flood-rich period, where clustering effects increase the likelihood of certain areas being hit by two big storms back to back. A sudden increase in surface water, beyond the capacity of many drainage systems, puts businesses in urban and rural locations at risk from flooding," he says.

An increased danger will impact on the costs of business insurance, with premiums already rising at a pace that many smaller firms cannot afford. While insurance costs are based on several risk factors and assessed on a case-by-case basis, Douglas Barnett, head of customer risk management at AXA Insurance, argues that business owners could improve their position by taking the necessary steps to protect their operations and reduce the chance of having to make a claim. 

"Companies that have made real efforts to avoid or mitigate business risks, and can demonstrate an effective business continuity plan, will find insurance more accessible and premium costs reduced," he says. "That applies to businesses operating in high-risk areas, too."

A knock-on effect of failing to take out insurance, he adds, is the impact it could have on a company's ability to secure bank loans or other vital forms of business finance. But in spite of repeated warnings, business owners have been slow to respond to the potential dangers.

Russell Burton, managing director of Lichfield-based risk management firm RAB Consultants, says: "They simply don't believe that it will happen to them. They also see things such as risk assessment, business continuity plans and insurance cover as extra costs that they can't afford, particularly in the current business climate. But being involved in a major crisis can be devastating, and without adequate planning or insurance they may not recover."

Business continuity planning has become easier through better access to flood information. Ambiental has been involved in a detailed mapping exercise to identify areas at risk of surface-water flooding, which has the potential to affect every urban centre in the country.

Ambiental's Butler says: "The risks have always been there; they've just never been mapped before, but this information will allow businesses to carry out a more detailed risk assessment, which will also be looked upon more favourably by the insurance companies."

Prevention is always better than emergency response, and in the wake of the record £3bn of insured losses in 2007, the Association of British Insurers insisted that the £1.5bn of government money allocated for spending on flood defences between 2009 and 2011 would not be enough. But with public spending cuts now a certainty—whichever party wins the general election—the onus to protect businesses will fall increasingly on their owners. 

There are valuable resources that can help. Businesses can sign up for the Environment Agency's free Floodline Warnings Direct service (environment-agency.gov.uk/homeandleisure/floods), which provides alerts direct via land line, mobile phone, email, SMS text message and fax. And new business continuity planning software, developed by experts within the UK insurance industry, can be downloaded free at https://robust.riscauthority.co.uk/.

AXA's Barnett adds: "The most important thing is to understand the specific risks to your business, and to have a plan that is simple, up-to-date, and relevant. Is your company information safe, and are your supply and distribution chains protected? If operations are disrupted, do your continuity plans include outsourcing as an option, and in the capacity that your business needs?  Are staff prepared and trained to deal with a crisis? In short, business owners must envisage the worst-case scenario and have it covered."

Peace of mind after the storm

The floods in 2007 brought a double whammy for the Dale family, whose two Tewkesbury-based businesses, Dale Process Engineering and workwear firm Alpha Safety Supplies, were based on the same site and inundated with four feet of water.

Director Joanna Dale says that unlike many other local companies the family had been prepared for a crisis. "Risk assessments had been carried out, our crucial computer information, including accounts, orders and sales figures, was always backed up and stored offsite, and we had business interruption insurance in place," she explains.

Unfortunately, the computer information was stored nearby at a colleague's home, which was also deluged, and the data was subsequently lost. Of their 16 employees, half had to move into temporary accommodation.

"When the floodwater eventually subsided, we were left starting from scratch, with no usable premises, no means of trading, and no idea where we were up to with outstanding orders and payments," Dale adds.

The insurance claim was for just over £1m, and it took a fortnight for the business interruption cover to take effect. And when the Environment Agency adjusted its risk status for the company—from moderate to high after July 2007—premiums more than doubled, from £9,000 a year to £20,000.

"Business was just getting back to normal when the recession hit, so those costs have been very hard to bear. And there is no guarantee that the same thing will never happen again," says Dale.

This chilling prospect prompted her into taking further continuity measures and launch an online business, ethicalworkwear.com, selling ethically sound fair-trade and organic products that would allow the company to continue operating should the worst happen again.

"We redoubled our efforts to protect the computer information, moved all our paperwork and engineering drawings to the first floor, and when the premises were rebuilt, we replaced our lost MDF furniture with solid wooden furniture," Dale adds. "We are as protected as we can be, and in a stronger position than we were in 2007."

Where water mixes with whisky

Operating in a flood zone is an unavoidable risk for Scotch whisky producer Glen Moray, as water from the nearby river Lossie is central to the distilling process. Situated a precarious 10 yards from the river bank, this Elgin-based company, which has been producing whisky since 1897, bears the brunt every time the river floods, typically once every four or five years, and most recently following a spell of torrential rain in September.

The firm's business continuity plans ensure that when its premises are breached, the outcome is a three- or four-day disruption to production rather than a major crisis, explains distillery manager Graham Coull.

"There are two parts to the distillery; a production area and a warehouse section; and the latter is on the ground floor," he says. "We know the weather patterns here and that after 18 to 24 hours of heavy rain the river will flood. We also have 20 well-prepared members of staff, who can act quickly to move equipment to safety. Instead of losing stock, all we lose is some production time."

In a region subject to regular flooding and a steady pattern of insurance claims, premium costs and excess levels have been rising steadily. To a degree, these are costs that the business has to absorb, says Coull, but there are limits, and what he and other local business leaders want to see are better flood prevention measures that avoid the need to make claims in the first place.

"A flood alleviation plan for the area is being developed and that will help," he adds. "We would also consider investing in our own defences. We can't avoid the risk of flooding, but with an effective business continuity plan and better flood barriers, the risk would become more manageable and affordable."