Insurance for Property Damage and Business Interruption Losses
Businesses and communities throughout the Northeast experienced the impact of the February 2013 Nor’easter, also referred to as Winter Storm Nemo, which brought as much as 40 inches of snow and hurricane-force winds to parts of New England. In less than 48 hours, Boston received more than two feet of snow, disrupting transportation and causing wide-spread power outages. President Obama declared an emergency in Connecticut, as certain areas were hit with as much as three feet of snow. The Nor’easter caused travel bans in Connecticut, Massachusetts, and Rhode Island; interstate closures, commuter transportation system and airport shut downs; and cancelled a variety of events. According to the Department of Energy, at the peak, more than 650,000 homes and businesses in eight states suffered power outages.
Businesses may be severely damaged by accumulating snow and ice, roof collapses, and the loss of electricity, with some unable to reopen for days. Even once businesses reopen, the storm’s destruction may prevent employees from traveling to work. In addition, municipalities may experience decreased tax revenues from business closures. Thus, the economic impact of Nor’easter-related losses for businesses and municipalities combined could be significant.
Many businesses and municipalities may have a valuable asset available in the form of property insurance that can play an important role in helping them recover from a winter storm. 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 winter storm, including expenses incurred in advance to minimize or mitigate 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 request detailed proof of the loss claimed under the policy and documented evidence of the expenses incurred in responding to that loss. Policyholders must fully understand the scope of coverage afforded by their policies to maximize the potential for recovering all covered losses.
Policy Conditions and Requirements
Policyholders should be wary of their policies’ potential time traps. 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 depending on the type of policy and the jurisdiction. But, a failure to give prompt notice may completely bar a policyholder’s claim.
Applicable Insurance Policies
Several different types of insurance policies may provide insurance for winter storm losses, 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 insured property caused by any peril not expressly excluded. Once a policyholder shows that it has suffered a loss under a broad all-risk policy, 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 perils” policy—covers only those perils expressly listed. Both types of policies may contain coverage exclusions. It is important for a policyholder to carefully review its policies to determine if the specific loss is covered.
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 recover non-property winter storm losses:
Business Interruption: frequently reimburses the policyholder for the amount of gross earnings minus normal expenses (that is, its profits) that the policyholder would have earned but for the interruption to its business. Business interruption coverage sometimes, but not always, requires that “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. Business interruption coverage provisions typically apply even when a policyholder is forced to relocate in order to maintain business operations or to minimize its overall loss.
Service Interruption: provides coverage for losses that the policyholder incurs from interruption of utility services that result from physical damage to the property that supplies the utility. Property policies frequently provide this coverage, although they may require that the interruption of service last a minimum amount of time. The coverage may be subject to separate and lower limits of insurance than other business interruption coverages. Service Interruption coverage can vary widely with regard to what types of utilities are covered. Depending on the specific Service Interruption coverage purchased, it may apply to several services, including water, communications, and power supply. With no electricity, for example, there may be—like we experienced after Superstorm Sandy—a massive gas shortage (even if stations have gas, with no power they could not pump it), meaning that goods and services could not get delivered and employees could not get to work.
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. Regardless of the “authority” involved, civil authority-related event cancellation may be a significant area of loss in the metropolitan northeastern areas such as New York City and Boston following this winter storm.
Ingress/Egress: similar to Civil Authority coverage, Ingress/Egress coverage may be available when access to (“ingress”) or from (“egress”) an insured’s premises has been prevented or made more difficult because of a winter storm. Unlike Civil Authority coverage, no governmental act is required to trigger this coverage. Many policies cover losses when “ingress” to or “egress” from insured premises is “prevented” because of a covered peril. In the aftermath of the recent Nor’easter, many businesses were unable to operate because millions of tristate area employees could not get to work. Many roads were frozen or otherwise blocked.
The availability of Ingress/Egress coverage varies greatly from policy to policy. Frequently, a policy will cover the loss sustained by an insured “due to the necessary interruption of the Insured’s business due to prevention of ingress to or egress from the Insured’s property, whether or not the premises or property of the Insured shall have been damaged” if the interruption resulted from damage of a type insured against by the policy.
Contingent Business Interruption: typically covers two types of business interruption. First, it protects against economic losses caused by a “direct” supplier’s inability to get its goods to the insured due to damage to, or destruction of, the supplier’s property by an insured peril. Second, it protects against economic losses caused by damage to or destruction of a customer’s property that prevents the customer from accepting the insured’s products.
Extra Expense: indemnifies the insured for reasonable and necessary extra or increased costs of business operations above the norm because of a peril insured against. It may include coverage for, among other things, costs incurred for the insured to temporarily continue business operations “as normal as practicable,” such as the temporary use of the property or facilities of others.
Insurer Defenses to Coverage
When a policyholder makes a coverage claim, insurers may dispute coverage. For example, some property and business interruption policies exclude loss from collapse. However, a loss caused by collapse may be covered if the collapse is the result of one of several specified causes of loss, such as the weight of snow, sleet, people, or personal property on a roof. Also, various courts have interpreted “collapse” differently, with some courts requiring an actual physical collapse of at least part of the covered property, and other courts interpreting “collapse” to include imminent collapse. Some policies also exclude design defect or faulty workmanship, and an insurance company may claim that a collapse resulted from a design defect, not the winter storm. However, because of the variations in policy language and judicial interpretation of such language, policyholders should not assume that an insurer’s defenses will defeat coverage.
Obtaining and Maximizing Insurance Recovery
Pursuing an insurance claim following a winter storm often is a complex and challenging process, especially when management and employees are faced with post-disaster challenges at work and home. Policyholders should consider obtaining the assistance of coverage counsel to address the 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. Experience tells us that even sophisticated businesses unknowingly commit errors in assessing and documenting their losses or interpreting their insurance policies that later limit or even bar potential insurance recovery. A coverage 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.
Dickstein Shapiro LLP exclusively represents policyholders in coverage disputes. Firm attorneys have successfully resolved some of the most significant coverage cases in the country. 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 in the last five years. Dickstein Shapiro also works extensively on matters involving the Federal Emergency Management Agency (FEMA) and has interfaced directly with key decision-makers at FEMA. This allows for a more comprehensive pursuit of any claims that may involve programs administered by FEMA.
Jared Zola, New York / Stamford, CT Offices (212) 277-6684
John Heintz, Washington, DC Office (202) 420-5373
Kenneth Berline Trotter, Washington, DC Office (202) 420-2912
Stephen N. Goldberg, Los Angeles Office (310) 772-8325