Retail distribution centres and warehouses: the importance of business continuity planning and adequate insurance

You may have read about the recent fire at an Amazon warehouse in Staffordshire last November. This particular warehouse occupied 700,000 square feet and whilst the fire was contained to a specific area it managed to spread across two floors destroying large amounts of stock in the process.

Another fire at Gap’s New York Distribution Centre occurred in September 2016, leaving 25% of the building damaged beyond repair and the remainder with significant smoke and water damage.

A few years ago in 2014, the online retailer ASOS was hit by a devastating fire at its main distribution warehouse which caused an estimated £22 million of loss and damage.

With so many brands now retailing over the internet, large distribution centres and warehouses have become integral to the supply chain and sale of merchandise to customers. A major fire, flood or other disaster can be potentially devastating especially if such events occur in the run up to high sales periods such as Christmas. The UK retail sector generates sales in excess of £300 billion which is why it is essential that businesses, both large and small, consider the impact of damage at key retail sites such as distribution warehouses.

Significant risks include fire damage, water damage from flooding, theft and product recall.

Any of these incidents have the potential to cause severe business and supply chain interruption not to mention associated brand or reputational damage.

Whilst there are numerous considerations for retailers to take into account when ensuring adequate insurance coverage for loss of stock and business interruption losses, the starting point has to be good and effective business continuity planning, which helps the business to understand its critical functions and activities and makes it more aware of the risks it faces.

Every business will face different and often complex problems when faced with a disaster.  For some businesses supply chain logistics are crucial whereas office based enterprises are more likely to be focused on systems recovery and information technology issues.

Without effective business planning, service disruption can result in, amongst other things:

• Loss of income (business interruption);
• Loss of reputation or even customers;
• Disruption to or failure of the supply chain;
• Financial, legal or regulatory penalties;
• Complete failure of a business.

Top tips for managers and those with responsibility for business continuity planning and insurance include the following:

1. Identify the critical business functions;
2. When developing a strategy to deal with the risks to those business functions bear in mind the following:

• Providers;
• Performance;
• Processes;
• People;
• Premises;
• Profile (or brand); and

3. Work on a ‘worst case’ basis i.e. what if there is a total loss?
4. Consider providers for alternative accommodation/IT systems and understand how such measures would be implemented.
5. Consider the adequacy of your business insurance and in particular the business interruption insurance and material damage insurance. It is necessary to examine loss of revenue or insurable gross profit due to an insured event at an organisation’s own premises in addition to considering potential risk and exposures from damage at the premises and facilities of suppliers, customers or utility organisations. Ensure that your business interruption insurance policy includes:

• Cover for profits (i.e. income that the business would have earned);
• Cover for fixed costs (e.g. rent and utilities and other ongoing expenses);
• Temporary relocation cover;
• Cover for the increased costs of working (i.e. expenses allowing the business to continue operation);
• Cover for additional expenses such as cleaning costs and professional fees;
• Cover for denial of access to your premises or a third party premises;
• Cover for damage to public utilities.

6. Produce an emergency pack which is made available to key members of staff (stored safely both on and off site) and which includes:

• A copy of the business continuity plan;
• A list of employees with full contact details;
• Lists of customer and supplier details;
• Contact details for utility companies and emergency measures such as industrial generators, glaciers and building contractors;
• Insurance details;
• Building plans and drawings etc.

The importance of adequate and appropriate business interruption cover coupled with effective business continuity arrangements can have the effect of lessening the impact of a major disaster and cannot be underestimated at any time of the year.

Edwin Coe has in-depth knowledge of Property Damage and Business Interruption losses.

For further information regarding this topic or any other Insurance Litigation dispute, please contact Nicola Maher – Partner, or any member of our Insurance Litigation team.

If you aren’t receiving our legal updates directly to your mailbox, please sign up now