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Insurance Claims for Large-Scale Hurricanes

Expert Witness: Fulcrum Inquiry
If your business has key suppliers or customers in the Gulf Coast area, your business could be significantly affected. This is true even though your own business property may not have sustained physical damage. This frequently occurs because of strategic supplier and customer relationships, outsourcing agreements, and just-in-time inventory systems. We explain this specialized type of insurance coverage, and provide additional advice regarding hurricane-related claims.

Every year, at least a few large hurricanes cause evacuations, flooding, and other physical damage. Businesses are interrupted because of physical damage to their own facilities, their surrounding communities, or the operations of key suppliers. These natural disasters create special insurance claim issues.

Homeowner Coverage for Water Damage

Most homeowner’s policies cover only wind damage, not flooding. However, if a covered peril (such as wind or lightning) causes damage to a roof which then allows water to enter the home, the resulting water damage from rain coming through that opening will likely
be covered under the standard homeowners policy.

Flood insurance is most often provided by the federal government through the National Flood Insurance Program (NFIP), even if purchased through an insurance company or broker. The Federal Emergency Management Agency (FEMA) manages the NFIP. Some insurance companies may also offer flood coverage other than the NFIP policy, so you will need to check with your broker or agent. The NFIP's coverage generally includes (i) buildings up to $250,000, and (ii) personal property (contents) up to $100,000. However the building and contents coverages are separate, so it is possible to purchase one without the other.

NFIP claims are handled by NFIP adjusters and by insurance company adjusters that are certified by the NFIP to handle flood claims. The NFIP will address questions and complaints by phone (1-888-225-5356).

Business Interruption Claims

Most "all risk" policies cover damage caused by wind and wind-driven rain, but do not cover floods. With hurricane losses on a coastal area, Insurers can claim that the damages were caused by non-covered flooding. This is a fact-specific inquiry, just as occurs for homeowners (see above).

In the case of a complex and long-lasting loss, a business can not quantify its full loss immediately. Nevertheless, your policy contains claim time limits, which may be as little as 30 days. For this reason, it is imperative that the policy be reviewed immediately, and a claim submitted within the required limitation. Extensions are readily granted for major losses, but such extensions should be formally requested and granted.

Business interruption insurance and contingent business interruption losses (described below) require documentation and analysis to fully compensate for your business loss. See Business Interruption Best Practices for recommendations.

Here are some of the less obvious claims that your business may have:

Contingent Business Interruption

If your business has key suppliers or customers affected by a disaster, your business could have insurance for this business interruption. This is true even though your own business property may not have sustained physical damage. This frequently occurs because of (i) strategic supplier and customer relationships, (ii) outsourcing agreements, and (iii) just-in-time inventory systems.

If included in your policy, contingent business interruption covers losses caused when key suppliers or customers experience a disaster that also affects your business. Contingent insurance occurs when the physically-damaged property is NOT owned, operated or controlled by the insured. The contingent property may be specifically named, or the coverage may blanket all suppliers and customers.
The type and cause of physical damage must be the same as insured under the controlling policy. The actual coverage will depend upon your policy language, which can vary considerably. An example of policy language is:

"This policy covers against a loss of earnings and necessary extra expense resulting from necessary interruption of business of the insured caused by damage to or destruction of real or personal property, by the perils insured against under this policy, of any supplier of goods or services which results in the inability of such supplier to supply an insured location."

Most small and middle market businesses will have the form policy issued by the Insurance Services Office (ISO). The ISO "Business Income from Dependent Properties - Broad Form" provides:

"We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the "period of restoration". The suspension must be caused by direct physical loss or damage to ‘dependent property’ at premises described in the Schedule caused by or resulting from a Covered Cause of Loss …"

"Period of Restoration" with respect to ‘dependent property’ means the period of time that:

a) Begins 72 hours after the time of direct physical loss or damage caused by or resulting from any Covered Cause of Loss at the premises of the "dependent property", and
b) Ends on the date when the property at the premises of the "dependent property" should be repaired, rebuilt or replaced with reasonable speed and similar quality."

"Dependent property" should be listed within the policy. If the "dependent property" causing your loss is not scheduled, then the coverage is limited to what is included in the "Additional Coverage", as follows:

"Miscellaneous locations - We will pay for the actual loss of Business Income you sustain due to direct physical loss or damage at the premises of a "dependent property" not listed in the Schedule caused by or resulting from any Covered Cause of Loss. But we will not pay more than .03% of the Limit of Insurance for each day's suspension of "operations" due to loss arising from any one location."

Denial of Access by a Civil Authority

This is normally a component of business interruption insurance coverage. It provides coverage if business operations are suspended as a result of an order of a civil authority (such as an evacuation order) following a loss of the type that is insured for your property. These clauses vary greatly between policies. For example, policy restrictions may require (i) more limited coverage time periods than exists in the rest of the policy, (ii) the policy holder's property be damaged, or (iii) physical damage occur within a specified distance from the insured premises.

Ingress/Egress Restrictions

These claims are predicated on the closure of roads, airports, bridges, tunnels, or other means of transportation. This coverage is similar to the civil authority coverage described above, but does not require that the problem be caused by a civil authority. Based on the policy wording and related court decisions, these claims must be based on a complete denial of access, rather than just more limited access than would otherwise be available.

Beware of overlapping coverage with different limits. Policies may provide coverage under the multiple provisions described above. However, each of these usually have different dollar and time coverage limits. Be careful that your insurance company does not minimize payment by classifying coverage under the most severe restriction(s).

If a check of your policy does not include coverages described above, this may be a good time to consider adding these policy provisions.

Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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