The Long Road Back: Lessons from a Disaster

Barry DiNola was working in the polishing room when his wife, Mary Jane, suddenly walked in. “Are you burning something?” she asked. Alarmed, the owner of Yardley Jewelers in Yardley, Pa., shouted for an employee to check the basement. There, curtains of smoke hung suspended in mid-air. After alerting upstairs tenants and calling 911, DiNola, his wife, and an employee grabbed what they could and fled.

The fire at Yardley Jewelers started late on a Wednesday afternoon, Oct. 1, 1997. The blaze, which began with a carelessly extinguished cigarette, crept through the walls of the 128-year-old building, growing into an inferno as it reached the second-floor apartments. All through the evening, DiNola and a crowd of onlookers stood in the glare, watching the fire department struggle to contain it.

By 11 p.m., fire extinguished, firefighters permitted DiNola, his wife, fellow jeweler and family friend John Cryan, and store employee Judy Sordean to enter what had been the store. They made their way through smoking muck, grabbing salvageable merchandise, dropping it in garbage bags. At the time the fire started, about half of DiNola’s inventory was on display; all the watches and pearls were destroyed, but quite a bit of jewelry survived. The remainder—loose stones, mainly—was stored in the safe, which withstood the heat.

No time for self-pity. In the next 12 hours, Barry DiNola made several important phone calls. The first was to his insurance agency. Then, after a night spent at the local police station—where every piece of recovered jewelry had to be photographed—he called his accountant, Stephen DeAngelo.

“He sounded devastated, physically and emotionally drained,” says DeAngelo. Yet, “Barry didn’t sit there wallowing in self-pity.” The DiNolas “picked themselves up and said: ‘We’ve gotta get back on track.’ ”

DiNola was lucky. Though he experienced a catastrophic fire—losing his equipment, his building, and much of his merchandise—within days, he was able to begin rebuilding his business. He had two key advantages: adequate insurance coverage and thorough records to establish his loss.

Jewelers Mutual of Neenah, Wis., insured DiNola’s inventory and personal business contents (microscopes, computers, display cases, etc.). DiNola had business-interruption insurance, which indemnifies for a 12-month period. He had property insurance on his building. He even had insurance to provide for income to take the place of the commercial and residential rent he would forfeit in the event of a catastrophe. DiNola, says insurance broker Rick Franchi, “did everything that should’ve been done—the right way.” Franchi immediately contacted a claims adjuster.

Establishing loss. The day after the fire, claims adjuster Tom Fuhs arrived at the scene. Fuhs had to establish whether the fire was of suspicious origin (it wasn’t) and whether the building could be “rebuilt without complete demolition.” While Fuhs was there, a township official handed DiNola a notice saying the building had to be boarded up and the sidewalks around it closed. The official also demanded an engineer’s report on his desk in 48 hours. The insurance adjuster hired a structural engineer to inspect what remained of the building. The engineer recommended demolition. Fuhs obtained three demolition bids; the lowest was for $31,000. DiNola’s property insurance covered both the engineer’s fee and the cost of the demolition.

After establishing the cause and extent of the property loss, Fuhs and Franchi filed a “Proof of Loss” form, a document used in the insurance industry for first-party losses. They requested an advance payment for DiNola from Jewelers Mutual. The jeweler received his first check from Jewelers Mutual within a week.

The fire that devastated Yardley Jewelers was unusual. According to Bill Herrbold, vice president/claims for Jewelers Mutual, of the roughly 2,500 commercial claims the company handled in 1997, only 40 were for fires, and Yardley Jewelers was the only total fire loss—i.e., burned to the ground.

Inventory and record-keeping. DiNola’s business records were thorough, up-to-the-minute, and electronic. “The fact that Barry had his inventory on computer certainly made our job, and his, a lot easier,” says Fuhs. “His record-keeping was outstanding.” Many jewelers, the adjuster points out, do not have computerized records. Since fires usually happen when the owner is off the premises, their paper records go up with everything else.

Nor does storing such records in a safe guarantee their survival, since water seepage turns them to papier mâché if the safe’s not fireproof. Where inventory records cease to exist, notes Franchi, recovering the value of the inventory often takes months and involves contacting vendors for invoice records. This is one reason why insurers, including Jewelers Mutual, require policyholders to keep detailed records and take inventory at least once a year.

DiNola not only had his inventory on a computer database but also kept copies at a separate location, with sales and inventory records from up to about a week before the fire. But a few days after the blaze, poking through the ruins, DiNola chanced on his seared computer. The jeweler extracted the hard drive and had it installed in another system. Miraculously, he found all information intact, up to the last thing sold before his wife smelled smoke.

“An Amish barn-raising.” Four days after the fire, DiNola and accountant DeAngelo compiled a “To Do” list. “We laid everything out and wrote down who was going to do what, and when,” recalls DeAngelo. Since, like most jewelry stores, Yardley Jewelers does most of its business in the last three months of the year, and the fire occurred in October, “the objective was to get him back open in a temporary location as soon as possible.”

Five days after the fire, even area jewelers plus friends and family members “sat down with steel wool and oil and went over his equipment—the engraving machine, the buffing machine, anything we could salvage,” recalls John Cryan of John S. Cryan Jewelers in Southampton, Pa. (DiNola’s equipment began rusting within 24 hours.)

DiNola’s fellow jewelers caucused to determine who had tools and equipment to spare. Suppliers provided merchandise on long-term memo. Cryan also arranged to replace DiNola’s Gemological Institute of America diplomas, his merchandise catalogs, and essential books. DiNola estimates the value of his on-premises library, entirely consumed in the fire, at $5,200.

“We took care of the merchandise, he took care of getting the building squared up,” says Cryan. He also requested assistance for DiNola through the Pennsylvania Jewelers Association. That brought calls from as far away as Pittsburgh from jewelers offering display cases, case trims, or just assistance. People pitched in “like an Amish barn-raising,” says Cryan.

A temporary location was secured a few doors down Main Street in Yardley with funds from DiNola’s business insurance. That location opened the third week of November.

Sorting losses into categories. Recovering from catastrophic loss involves looking at the different parts of a business to determine the dollar value involved. DiNola’s inventory records established the value of his merchandise loss. Establishing the value of his equipment, tools, books, and displays was more difficult.

DiNola could only approximate what it would cost him to replace tools, books, microscopes, office equipment, and display cases. “Barry gave us a whole list of contents,” says Franchi. It was a much more substantial list than he was used to getting in such situations.

When determining the value of contents, retailers often overlook property such as books and catalogs, as well as the cost of installing new mechanical systems such as plumbing and lighting. Nor do they consider such things as case trims, which are expensive to replace. Also often overlooked are boxes, bags, and packaging materials.

Like almost all jewelers, says Franchi, DiNola was fully insured for inventory but not fully covered for the contents. When DiNola and the insurance adjusters totaled up what it would cost to replace the contents of Yardley Jewelers, the amount exceeded $200,000. DiNola was insured for a third of that. To get the business up and running—to replace computers, desks, and the rest—he borrowed an additional $100,000.

“I’m a jeweler, not a Realtor.” The DiNolas owned their building. They had tenants in four apartments upstairs and leased retail space to three other merchants. DiNola assumed the property was fully insured, meaning Jewelers Mutual would provide the amount it took to replace the building. Not so, as he eventually learned.

DiNola’s property insurance provided funds to rebuild up to an appraised value. Once DiNola sat down with architect Lynn Taylor, then with builders, he learned that building costs would substantially exceed his property insurance coverage.

“I never realized that the place would cost that much to rebuild,” he says. “I based my [property] appraisal on what it cost when I bought it. I’m a jeweler, not a Realtor.” When DiNola and architect Taylor sat down to talk with builders, “we were initially a quarter-million dollars apart between the estimates [for rebuilding] and what we were insured for.” After further negotiation, “we still ended up being a hundred thousand apart.” DiNola ultimately used inventory and business-interruption monies to fund reconstruction.

Township ordinances and code compliances added to the costs, as did the need to conform to directives from a local architectural review board. The building had to look as if it belonged in a town founded several decades before the Revolutionary War. “To do all the fancy trim and cornice work, that’s what cost a lot of money,” says Di Nola.

Writing it off. When an insurance company writes a check for inventory lost in a catastrophe, it’s considered the equivalent of selling the inventory from a tax standpoint. Any profits in the sale have to be reported to the Internal Revenue Service for that fiscal year.

“If you have $100,000 in inventory and you get $100,000 [from the insurer],” says accountant DeAngelo, “the IRS views that as you selling it at cost. If you get 80% of it, that would be a normal tax loss.”

Where tax reporting after a catastrophe gets more complicated is with the loss of items that are “contents” rather than inventory. At that point, notes DeAngelo, tax rules change. “In the case of contents, if the insurance proceeds exceed the adjusted basis of the property, a tax gain is realized. However, tax rules allow deferral of this gain if replacement equipment is purchased within the statutory time frame [two years].”

DiNola gained, says DeAngelo, because “the value of the insurance was more than the value of the contents on an adjusted basis. A lot of his tools and equipment were old. He had written them off already. So, he had a tax gain. But he didn’t have to pay tax on that gain.”

Aftermath. In April, workers began bulldozing foundations in the empty lot at Yardley’s main intersection. Yardley Jewelers reopened on Oct. 27, 1998, a year and three weeks after the fire. The Sunday before, DiNola threw a barbecue for 700 customers, friends, and townspeople.

In the long months after the fire, DiNola sat down with his logbook and was able to track all but two of the roughly 200 pieces he was repairing the day his wife smelled smoke. Had nothing been recovered, repair items would’ve been covered for replacement as part of his inventory. But, of course, a check would hardly assuage some customers for the sentimental loss of a family heirloom.

The fire continues to touch the lives of all concerned. DiNola, who had previously suffered several heart attacks, says that if another such disaster hit his business, “I’m outta here.”

“It made me reflect quite a bit,” says fellow jeweler Cryan. In the weeks after the fire, “anytime I saw something sitting out on a bench, not being worked on, I put it in the safe. I made double and triple computer back-ups. I bought a fireproof filing cabinet.” And that’s where Cryan’s catalogs and inventory books are stored today.

Lessons of the Fire

Those involved in the fire at Yardley Jewelers offer these suggestions for minimizing disruption in the event of a catastrophe:

  • Have complete electronic records, stored in at least two locations. “If you’re using computerized records, you need to back up frequently,” suggests accountant Stephen DeAngelo. “And you need a disaster-recovery system. If you have all your data at that one physical location, you’re in bad shape. Back up your data at least weekly. And have [backup] data taken elsewhere.” Elsewhere could be a safe deposit box, your home, or another jeweler’s safe.

  • Make a list of the contents of your business. Insurance broker Rick Franchi advises jewelers to block out some time and “take an inventory of everything that isn’t inventory.” List anything and everything you would need to replace if disaster struck. List what it cost and where you bought it.

  • Be aware of hazardous chemicals. Advise the local fire department of chemicals or equipment in the store that may be especially dangerous in the event of a fire, such as hydrochloric acid, oxygen tanks, and torches. “Make sure the fire department knows where the stuff is,” says Franchi.

  • Insure to replace. When covering the contents of a business, it’s wise to purchase a replacement-cost policy as opposed to replacing at actualized value. A replacement-cost policy “means you replace it at current value,” claims adjuster Tom Fuhs explains. Such policies are more expensive than actualized cash value policies but could prevent you from having to borrow or enable you to borrow less.

  • If you own your building, get a current appraisal of its value for property-insurance purposes. Barry DiNola of Yardley Jewelers suggests that rather than have a real estate appraiser come in, “go talk to a builder. Spend a few dollars with [a construction company] and have them do a detailed estimate of what it would cost to rebuild it—especially if it’s a historic building.”