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Business Insurance
Wednesday, August 1, 2007
No escrow from Eskom

The recent three-day power failure in Bedfordview (early May) seriously disrupted businesses there, especially in the sprawling Eastgate Shopping Centre. And as winter draws near fears are growing that power outages will increase in the face of higher draws on energy.

The shopping centre is home to over 200 different stores. These, as well as countless other businesses in the Bedfordview, Primrose and Germiston areas, have suffered substantial losses of revenue and additional costs. All types of businesses have been affected from manufacturers with key production processes and service organisations that rely on telephone networks and IT, to restaurants that need fridges and freezers to be in constant good working order.
Following the Bedfordview power failure, the National Energy Regulator of South Africa (Nersa) has moved to assure South Africans that Eskom will be able to meet the country’s electricity demand this winter. A study conducted by Price Waterhouse Coopers (PWC) as far back as 2004 indicated that energy companies around world found that security of supply was a major issue. For this particular study, PWC spoke to 148 utility companies in 47 countries – illustrating that this is not only a South African concern.
Guy Scott, CEO of Risk Services at Aon South Africa, suggests businesses protect themselves by re-evaluating their insurance protection and risk management procedures. “Companies should begin by identifying the likely impact and potential costs of any supply failure,” he says. “Cover is available for companies through a business interruption policy. So-called ‘Failure of Public Utilities’ is a readily available policy extension for commercial and corporate businesses, covering the interruption of water, gas and electricity.
“As a result of the Bedfordview power failure, we have had clients request their policies be extended to cover reduction in turnover, ultimately causing a loss of gross profits. Additionally, cover can be taken out for the loss of wages and salary,” says Mr Scott.
Beyond all this, one of the key actions for businesses should be the development and maintenance of a Business Continuity Management Plan. This should be designed to identify the mission critical activities of an organisation and develop procedures that ensure continuity, whatever the circumstances. It is essential that existing plans be kept up to date and are tested frequently to ensure they remain appropriate and robust.
Mr Scott advises that the plan should include risk management procedures, for example, instantaneous switching capabilities of the electricity supply.
“Insurers will want to be satisfied that potential eventualities and the likely maximum loss that could be incurred have been identified,” he says. “Evidence of tested business continuity plans will be crucial.”
Large industrial sites should consider the interruption potential from internal distribution systems, where an on-site transformer or sub-station could be a key component. Separate breakdown cover and business interruption insurance may be required in this event.

Copyright © Insurance Times and Investments® Vol:20.7 1st August, 2007
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