Risk Scenario

Fire on the Mountain

A wildfire torches a chip manufacturing company's recovery outlook.
By: | July 9, 2013
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One

The October mountain air was dry and chill through the driver’s side window as Rudy Mitchell drove to work up a back mountain road.


He preferred this drive to his workplace, a middle-market food manufacturer based in the foothills of New Mexico’s Sangre de Cristo Mountains, just east of Sante Fe.

The company, Los Montanas, had worked for 15 years to grab a foothold in the expanding high-end snack food segment.

Its line of organic corn chips seasoned with Native American-sourced spices were in a solid niche. Annual sales now were around $24 million. As vice president, all Rudy had to do was keep quality in line and massage the company’s distribution network.

Invigorated by the strong, dry wind blowing from the east, Rudy vaulted up the factory’s back steps to the wooden deck outside of his office on the second floor.

Rudy turned to take in the view of the Sangre de Cristos, still reddened by the morning light.

It was then that he saw a fat column of grey smoke billowing up from behind the mountain ridge. It looked like it was about 15 miles away.

The column of smoke seemed to grow. Rudy fancied that he could see the reflection of flame in it.

This was no small wildfire and with the wind blowing the way it was, it appeared to be going places.

Rudy took one more look at the smoke and ran inside his office, where he turned on his television to monitor the fire’s progress.


The news was bad. The front of the fire was moving at about four miles an hour and it was roaring. Most of the media coverage focused on a government armaments facility that was located about seven miles north of the Los Montanas factory.

Fire crews were being dispatched in an attempt to set backfires and establish fire lines to protect the federal site.

“What about us?” said one of Rudy’s administrative assistants.


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Rudy called local fire departments, trying to get information on what they might do to protect the factory.

The news was grim. Directions from the U.S. Forest Service called for all available firefighting resources to be directed to saving the government facility.

Several Los Montanas workers were volunteer firefighters. Defying federal mandates, they convinced their departments to save the factory.

Company workers, using equipment provided by two local firefighting companies, wet down the brush near the factory. They soaked the factory — half of the exterior structure of which was wood — as well as they could.

But they didn’t have the support of aircraft to dump tons of water on the hills nearby.

At 1 pm the word came. All Los Montanas personnel were to evacuate the area.

The fire was now three miles away. Sizable embers were falling on the roof of the factory and the 20 remaining employees and the firefighters had to give up and drive away.

Rudy stopped about three miles west of the factory to watch the fire.

Red and yellow flames were rising above the factory when Rudy and his coworkers were ordered by state troopers to leave.

Part Two

The work Rudy and his coworkers had done helped, but not enough. Fully one half of the factory was rendered inoperable.

Scenario_FireOnMountainHappily for the suburbs of Sante Fe, the wind had died down after the fire scorched the factory and the fire was slowed by roads to the west.

The Los Montanas executive committee met at the CEO’s house as soon as the extent of the fire damage could be determined.

The company’s head of operations, Red Oates, used the occasion to demonstrate his commitment to his job.

Oates had spent the last year developing a business continuity and disaster readiness plan. He had a scheme to get the undamaged part of the factory up in four weeks and the remainder in six months.

“I’m going to need our entire workforce, but we can do this,” he said. “I’ll be darned if I’m going to stand around while we lose market share.”

“That goes without saying,” the CEO chimed in. “I’ve already told the mayor, the Chamber and local news that we are paying our employees during the shutdown.”

The CEO turned to the CFO.

“Can we cover that sort of outlay until we’re back up 100 percent?”

“We’d have to…look into that…” the CFO started to say.

“The insurance implications from the fire are unclear at this point…..and might be for a while,” Rudy stuttered.

“And why is that?” the CEO said, arching his eyebrows.

“Well Jim, as you might recall,” the CFO said. “We laid off our risk management department back in 2009, and we need to do some work to get some clarity on our policies.”

“What kind of clarity?” the CEO said, his face reddening.

“P..p..property, the property claim is underway,” the CFO managed to get out. Luckily, the company’s broker had phoned just after the event to remind the CFO of the extent of the company’s coverage in that area.

“But we are a ways ‘til we can get any clarity on the business interruption,” Rudy said.

“Which is part of the property coverage… we think,” Rudy said.

“There’s some accounting we have to do on lost sales and…” the CFO said.

The CEO cut the CFO off.

“I’m going to manage what I can measure,” he said, turning away from both Rudy and the CFO and back to Oates.

“Go ahead with your plan, Red. At least someone at this table has one,” he said.

Rudy felt sick. Machismo was fine, but some cerebral exercise would be nice. I have no idea how we are going to pay for this, Rudy thought.

The company was in the dark about what they could possibly claim for business interruption: Rudy and the CFO knew that much.

It looked like the year after the risk manager got fired the company hadn’t renewed its payroll coverage and put a $10 million deductible on its property coverage; ostensibly to save on premium.

Essentially there was no financial backup to fund Red Oates’ plan or the CEO’s employment proclamations.

Rudy got a call a week later that didn’t help. The New Mexico Environment Department had been doing some post-fire testing on some nearby streams.

Their field investigators suspected that industrial chemicals had leached from the factory site into waterways.

Rudy scanned the company’s property policy with the CFO.

“Looks like, we have a pollution exclusion in our property policy,” Rudy muttered, “And we never got a separate environmental policy.”

“What’s a pollution exclusion?” the CFO said.

Part Three

Rudy is in his office, staring out to the factory floor. It is six months after the fire and his nerves are on edge.


Below him, Red Oates is standing with his team, watching some outside mechanics finish work on a chip baking machine.

Rudy looks at his watch. He has to get to a meeting. Watching Oates is too painful anyway.

The meeting is to inform the CEO of the measures the company needs to achieve Oate’s plan.

The company’s business interruption claim still hadn’t been filed. The delays in getting the business interruption claim handled, coupled with the inadequate coverage for payroll, have blown a $10 million hole in the company’s reserves.

The company can’t advance now without getting a $20 million loan to cover the 18-month period until it might achieve its pre-fire sales levels.

Lack of coordination between finance, operations and the CEO’s office has strained relationships to the breaking point.

Rudy and the CFO never were able to communicate to the CEO the cost to the company of not having a dedicated financial recovery team or plan.

The CEO’s viewpoint is that doing more with less is how you win. His assumption is that the CFO, Rudy and the broker should have been able to make things work.

But the company’s lack of a financial recovery plan in the wake of what became known as the Chimayo Fire has had an awful cost.

Now, two minutes from walking into the CEO’s office, it becomes clear to Rudy what he should have done.

When the CFO turned to him and said “What’s a pollution exclusion?” Rudy should have started thinking about outside help.

But he hadn’t. He guessed it was fair to say that he froze.

Now there was nothing to do but to walk down this hall to the CEO’s office.

The CEO had his favorite putter in his hand and his back turned to the door as Rudy and the CFO entered.

The CEO heard their footsteps, he had to, but he kept his eye on the putt he was lining up on his carpet.

“I hate golf,” Rudy said to himself.


A previously thriving company meets with a serious setback when it struggles to recover from a wildfire. With its risk management department having been dismissed four years before the event, the company’s leadership falls into confusion in understanding, measuring and filing its business interruption claim and ends up suffering debilitating bottom-line impacts.

1. Who’s on first? Company personnel will come and go, but understanding and communicating which person or department is responsible for making and managing a disaster claim is crucial. Ownership of this process should be well-understood and dynamic, meaning that those responsible are reviewing and understanding how policies will react after catastrophic loss on a regular basis and reporting on their review to the rest of the team.

2. Build a financial recovery team: This team doesn’t have to be comprised of internal staff. In some ways it’s better if outside experts are part of the team. An objective analysis of how the company’s various departments can work together in financial recovery can go a long way to buffer the company from interdepartmental squabbling, clashing egos and disparate departmental goals.

3. Catastrophes happen: Too often, companies are made complacent by modeling jargon. From a statistical perspective, the probability of a one-in-100 year event increases on an annual basis. The odds are that in a 30-year risk management career or over a 30-year mortgage, a significant event has a 25 percent chance of occurring. Those are odds that need to be addressed and managed.

4. Document, document, document: The cost and effort of developing good documentation as an important piece of a financial recovery plan is more than justifiable. As a result of more stringent internal controls and greater scrutiny from reinsurers, carriers are requiring more and better documentation to prove losses. Such crucial elements as future payroll needs and the effects of lost sales need to be much more than numbers on a spreadsheet that is stored and forgotten. A dynamic financial recovery team needs to be conversant with these numbers and understand how the business’s actions and policies will affect them.

5. The buck stops at the top: There is simply no justification for the C-suite to not be apprised of a financial recovery plan or to not have been a significant architect of it. Delegation of the responsibility of creating a financial recovery team must not happen in silos. Such a team needs to be built with the input and knowledge of every key company executive. The plan needs to be kept relevant with annual reviews that are reported to the CEO, CFO and even the Board.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected].

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