Insurance for Property Damage and Business Interruption Losses
By all accounts, businesses and communities in New York, New Jersey, and Connecticut suffered crippling storm-related damage in the aftermath of Superstorm Sandy. Businesses may be severely damaged, with some unable to reopen for months, if at all. Other businesses may face enormous financial losses even without suffering any physical damage because of power outages, evacuations, halted public transportation, and government shutdowns or damage to facilities of key suppliers or customers. In addition, municipalities may experience decreased tax revenues due to business closures. Thus, the economic impact of storm-related losses for businesses and municipalities combined will be in the billions of dollars. At least one forecasting firm predicts that Superstorm Sandy will cost $60 billion. As businesses and communities seek to rebuild, their financial needs will be tremendous.
Many businesses and municipalities may have a valuable resource available in the form of property insurance that can play an important role in helping them recover from this disaster. This insurance may provide coverage not only for physical damage to and loss of property, but also for: financial losses arising from an inability to conduct business (either at all or at the same levels as before); the extra expenses incurred in dealing with the effects of a disaster, including expenses incurred in advance to minimize any damages and losses; and the costs incurred in establishing the extent of the losses.
Scope of Losses and Coverage
It is critical that policyholders assess as quickly as possible (i) the extent of their losses and (ii) the scope of coverage for those losses. Insurers will seek detailed proof of the loss claimed under the policy and documented evidence of the expenses incurred in responding to that loss. Policyholders will need to understand fully the scope of coverage afforded by their policies in order to maximize the potential for recovering all covered losses.
Policy Conditions and Requirements
Policyholders should be wary of potential time traps in their policies. For example, a policy may obligate the policyholder to provide the insurer with notice of a loss “as soon as possible” or “as soon as practicable” after a loss or other insured event. Some policies require that notice be given in as little as 30 or 60 days. The consequences of failure to give prompt notice differ, but a failure to give prompt notice may completely bar a policyholder’s claim.
Property Insurance Policies
Insurance for storm-related losses can be provided under several different types of insurance policies, but the most common are first-party property policies that protect a policyholder’s place of operations and inventory and provide coverage for lost or damaged property. Many property insurance policies are sold on an “all risk” basis, meaning that they cover losses to real property caused by any peril not expressly excluded. Because of the breadth of coverage afforded by an “all risk” policy, once a policyholder shows that it has suffered a loss, the burden of proof shifts to the insurer to show that the loss is not covered. By comparison, a second type of property insurance—a “named peril” policy—covers only those perils expressly listed. Because both types of policies may contain exclusions to coverage, it is important for a policyholder to carefully review all aspects of a policy to determine if coverage for the specific loss is clearly excluded.
Additional Coverages, Including Business Interruption and Extra Expense
In addition to covering property damage, many property policies also provide some or all of the following coverages designed to help the policyholder recover for other losses caused by the storm:
Business Interruption: reimburses the policyholder for the profits (i.e., the amount of gross earnings minus normal expenses) that the policyholder would have earned but for the interruption of the policyholder’s business. Business interruption coverage generally requires that an “interruption” result from damage to covered real or personal property. Policyholders, for example, have obtained reimbursement under such coverage when widespread disasters such as Hurricane Katrina and the 9/11 terrorist attacks caused business interruption.
Utility Service Interruption: provides coverage for losses that the policyholder incurs due to the interruption of utility services that result from physical damage to the property that supplies the utility. For example, if a storm results in your business losing electrical service, and your business then incurs losses because of the interruption of service, you could make a claim under this coverage. This coverage usually is provided through an endorsement to a property policy and may require that the interruption of service have lasted a minimum amount of time—usually 24 hours. Utility Service Interruption coverage also can vary widely with regard to what types of utilities are covered.
Civil Authority: protects the policyholder from losses caused by the inability to access its premises when a civil authority denies such access because of covered damage to, or destruction of, property belonging to third parties. Some civil authority coverages require physical damage to the policyholder’s own premises—others do not. A “civil authority” for purposes of this coverage may extend beyond federal and state governments. For example, after the 9/11 terrorist attacks, some policyholders successfully argued that the baseball commissioner’s cancellation of games constituted an order of a civil authority.
Ingress/Egress: protects the policyholder against lost business income and extra expense when the policyholder’s premises are inaccessible for reasons other than an order of civil authority. This type of coverage typically requires that the property damage be located within a certain radius of the policyholder’s premises. Such coverage may be implicated if, for example, roads or public transit providing access to a policyholder’s premises are closed and there is also property damage in the premises’ immediate area.
Contingent Business Interruption: protects against economic losses caused by the inability of the policyholder to receive a supplier’s goods or services or the policyholder’s inability to supply goods or services to customers, thereby preventing the policyholder from producing and/or selling its product in the marketplace.
Extra Expense: indemnifies the policyholder for the reasonable and necessary increased costs of conducting its business operations due to property damage caused by an insured peril. One example of such expense would be costs incurred in the installation and maintenance of electric generators so the company can continue to do business while awaiting restoration of electric service from public utilities.
Insurer Defenses to Coverage
When a policyholder makes a claim for coverage, insurers may raise challenges to the availability of coverage. For example, the insurer may assert that an exclusion, such as the “flood” or “water” exclusion, bars or limits coverage. The “flood” or “water” exclusion may be very broad so as to include loss due to flood, mudslide, and other types of water damage (e.g., sewer backup or seepage). A common dispute with regard to the application of the “water” exclusion arises when a policy covers one common cause of loss (e.g., wind) and excludes another (e.g., flood). Whether an exclusion applies to a loss may depend substantially on what the cause of loss is determined to be, particularly when damage can be caused by multiple forces such as wind or floods, as is common with natural disasters. The question of which exclusions may apply also will depend in part on the wording of the exclusions and the applicable state’s law.
Companies should not assume that insurer defenses will necessarily defeat coverage. Each policy requires a careful analysis, based on the specific policy language involved, the facts of a company’s particular losses, and the law of the applicable jurisdiction. Careful advance planning is suggested, if time permits, before any claim is made to the insurer.
Policyholders should remember to look beyond the coverage provided under the ordinary “property policy,” to coverage that may be provided under other policies, such as those providing insurance for “environmental,” “maritime,” and “warehouse” losses. Liability policies also may be implicated if, for example, a third party files a lawsuit alleging property damage or bodily injury due to overflow from a sewage treatment plant or municipal facility. It is important for a policyholder seeking to obtain insurance recovery to review all of its insurance policies to determine the extent of its coverage.
Obtaining and Maximizing Insurance Recovery
Pursuing an insurance claim following a disaster often is a complex and challenging process, especially when management and employees are faced with post-disaster challenges both at work and at home. Policyholders should consider obtaining the assistance of coverage counsel, because there are many issues that can significantly affect the existence or amount of recovery under an insurance policy. For example, certain causes of loss may be excluded from coverage, while others are not. Resolution of that issue may depend not only on the law of a particular state that will be applied and the facts presented by a claim, but also on the way in which the facts are presented to the insurance company or, ultimately, to a court, if insurance litigation is necessary. An attorney may be able to analyze how the resolution of these issues will impact insurance recovery and help the policyholder present its claim in a way that maximizes protection under the insurance policies in light of the coverage issues.
The following is a checklist of important factors to consider when analyzing a potential storm-related insurance claim.
Checklist: Insurance-Related Steps to Take to Maximize Coverage
Dickstein Shapiro LLP exclusively represents policyholders in coverage disputes. Firm attorneys have successfully resolved some of the most significant coverage cases in the country. Since the beginning of 2007, our insurance coverage attorneys have recovered more than $5 billion on behalf of policyholders in matters involving a wide range of coverage types, claims, and industries. Firm attorneys have handled many disaster-related coverage matters, including those related to Hurricane Katrina and 9/11. Dickstein Shapiro also works extensively on matters involving the Federal Emergency Management Agency (FEMA) and has the ability to interface directly with key decision makers at FEMA. This allows for a more comprehensive pursuit of any claims that may involve programs administered by FEMA.
We would be happy to further discuss with you the insurance implications for disaster-related loss. For more information, please contact:
John E. Heintz(202) 420-5373
Thomas J. Freed(203) 905-4529
Jared Zola(212) 277-6684
New York, NY