Firms weigh risks vs. profit in climate threats
Companies struggling to meet payroll find insurance hard to justify before disaster strikes; then it’s hard to recover
Afew years ago, Sam’s Safety Equipment, a local oil and gas outfitter in Spring Branch, found itself strapped for cash as the oil bust that started in late 2014 slammed customers of the familyowned company and subsequently its sales. Kevin Doffing, the second-generation owner of the small retailer, was worried and looking to save money wherever he could.
Flood insurance became an obvious place to cut costs, since the business had never flooded during a history that extended more than a halfcentury. But just a few months after canceling the policy, the Memorial Day flood of 2015 washed through their store, damaging thousands of dollars in inventory and forcing the business to temporarily close for repairs. The store flooded again the next year during the Tax Day floods and again when Hurricane Harvey inundated Houston in 2017.
“It was a complete disruption of our business for a couple weeks,” Doffing said of the Memorial Day flood. “You don’t really feel it until you hit the next bump in the road, and you don’t have the cash.”
As the frequency and intensity of storms increase along the Gulf Coast region,
local small business owners have struggled to prepare their business to weather the disruption. Owners of small to medium-sized companies simply don’t have the money to prepare, nor do they want to face the prospect that a storm could devastate their livelihood because it’s a crushing possibility, disaster recovery experts say.
“It’s tough for a small business to step up strongly in this area because it might feel risky, but it’s the very thing that can mitigate the risk,” said Anne Cope, the chief engineer for the Insurance Institute for Business and Home Safety, a nonprofit financed by property insurers and reinsurers. “People don’t want to think about the hazards.”
But the stakes are high for businesses that don’t choose to prepare. Nearly 40 percent of small businesses never reopen following a natural disaster, according to the Federal Emergency Management Agency, and another 25 percent will fail within a year.
Difficulty preparing
After the Memorial Day flood and the oil downturn, Sam’s Safety Equipment managed to bounce back. Doffing and his family got smarter. They began to elevate their inventory to prevent as many losses during flooding events and ripped out the carpet, opting to cover the concrete floor with easily removable area rugs instead.
Still, they were unable to reinstate their flood insurance. The rate became too expensive once the business had a history of flooding.
“We started taking rinkydink precautions,” Doffing said, “but if the water comes up, there’s nothing we can do with the building.”
The repeated business interruptions caused by the storms ate through the business’ cash. Then, as oil and gas companies relied more on technology and less on workers, demand for their products such as welding hoods and industrial respirator masks waned. Some manufacturers began selling products directly to customers, bypassing retailers altogether. Finally, this summer, Sam’s Safety Equipment closed for good.
“It was extremely painful,” Doffing said. “The flooding didn’t help.”
But Mother Nature wasn’t quite through with the Doffings. Their building flooded again during Tropical Storm Imelda, destroying inventory they had planned to liquidate.
Disaster recovery experts say what happened to Sam’s Safety Equipment is not uncommon. Putting money toward disaster preparedness — something that you may or may not need — before the first disaster occurs, is tough to justify when you’re just trying to make payroll.
Jennifer Helgeson, a research economist who is conducting a study with Texas A&M University on how Hurricane Harvey disrupted businesses in Beaumont, has found that small businesses are aware of the risk climate events pose, but sometimes lack the money or even the right to prepare.
Many small businesses lease property, which often restrict how they can modify the building. For example, drilling a steel plate into the building to secure windows during a hurricane might be against lease terms. And while many businesses know to move their inventory to a higher shelves during extreme rain, for instance, their landlords might not want to spend money to improve the roof by securing equipment in case of heavy winds.
“Some of those larger structural issues, where they know in an ideal world what they might be doing, is not so easy for them,” said Helgeson, who works for the National Institute of Standards and Technology in the U.S. Department of Commerce.
Worst-case scenario
But facing the reality of what could go wrong can be slow going as well. It’s scary to think about the worstcase scenario.
Helgeson also found that some business owners see a cost to over-preparedness. Even when risk seems to be increasing, such as when a neighboring business may have flooded, if their building did not flood, they may still be unlikely to spend the money on disaster planning. And, even those who have flooded in the past can be quickly forgetful, she said. After spending so much time getting back to normal operations, preparing for the next storm is just another thing to do.
“There’s a lot of motivation after an event, but it’s exhausting to get things back up and running,” Helgeson said. “People are not exceptionally good at thinking about risk.”