The “Polar Vortex” created severe cold weather conditions and record low temperatures across most of the United States. Many businesses suffered property damage or loss of business as a result of weather-related shut downs, road closures, supply chain interference, etc. Property Claims Services, a unit of the Insurance Services Office, Inc. (“ISO”), has assigned CAT numbers to the “Polar Vortex.” CAT numbers are usually reserved for named storms, earthquakes and other readily identifiable insured events. What impact does this have on coverage under first-party property and business interruption insurance for damages and losses from the Polar Vortex? One implication for commercial policyholders with significant deductibles is that all such damages and losses, even if they are tens or hundreds of miles apart, may have arisen from a single occurrence, meaning they are more likely to exhaust deductibles that are applied on that basis.
As with previous large-scale weather events (Hurricane Katrina, Super Storm Sandy), the Polar Vortex will spawn many commercial insurance claims. Experience shows that insurance companies will resist many of these claims, especially the large ones. For example, notwithstanding the assignment of CAT numbers to the Polar Vortex, insurers may not agree that a single deductible applies to all damage or loss a policyholder suffers, and instead seek to apply multiple deductibles, greatly diminishing or even eliminating coverage entirely.
Many of the claims will be Business Income (or Business Interruption) claims, seeking loss of business profits arising from property damage or other commercial dislocations. The following is a short summary of some of the coverages provided under Business Income insurance and the coverage issues that can arise. The aim is to make commercial policyholders aware of the types of coverage they may have purchased and that may apply to losses stemming from the Polar Vortex, so that they may give proper notice now and, at the appropriate time, pursue the coverage.
Business Income (or Business Interruption) Insurance
Business Income insurance is designed to cover a policyholder for profits lost, and unavoidable expenses incurred, during a hypothetical “Period of Restoration” needed to repair or replace damaged or destroyed property used in the policyholder’s operations. Most policies provide little guidance as to how the amount of a Business Income loss is to be calculated: essentially, they state that Business Income is to be calculated from historical figures. This leads to many sources of potential conflict, including: determining the appropriate benchmark to measure the profits that were lost, such as whether the wider effects of the catastrophe should be considered; when the “Period of Restoration” begins and ends; and what constitutes a sufficient “interruption” of the policyholder’s operations.
Contingent Business Income Insurance
Contingent Business Income coverage is designed to cover a policyholder for loss of income caused by damage to or destruction of property owned by others, for example, suppliers and customers. An example would be coverage purchased by a car maker to protect it if its sole supplier of a key component suffers damage to its factory, and the car maker suffers a Business Income loss from its inability to complete manufacture of cars. Coverage under these provisions varies widely, with some provisions limiting coverage to “direct” customers or suppliers, and others covering customers or suppliers “of any tier” (e.g., customers of customers). Problems may arise in computing the Period of Restoration and the amount of loss because neither the policyholder nor the insurance company can monitor the “due diligence” of the third party. In addition, insurers may argue that the Period of Restoration ends if the policyholder secures an alternative supplier or customer, even though part of the loss continues.
Contingent Extra Expense Insurance
Contingent Extra Expense coverage is designed to pay for increased costs incurred after the disaster to minimize or avoid a Contingent Business Income loss. Accordingly, if a business incurred additional expenses to avoid or minimize a Contingent Business Income loss, it may have coverage for those costs under Contingent Extra Expense coverage.
Service Interruption Insurance
Service Interruption coverage is designed to provide coverage for Business Income losses attributable to dislocation of utility or telecommunications service. Losses due to service interruptions may be particularly prevalent as a result of the Polar Vortex because it caused many widespread power and communication outages.
Policyholders should take several practical steps to preserve these coverages, maximize recoveries, and minimize the chances of disputes with insurers. These steps include:
Protect and Preserve the Assets – Emergency and temporary repairs should be documented and, if practical, reviewed with the insurer in real time.
Attend to Notice and Timing – Make sure all notices have been issued to all insurers that could be called on to pay. If necessary, obtain written extensions to proof-of-loss filing requirements, and any other time-related requirements.
Reserve all Rights – Do not allow the insurer to classify or characterize your claim before you have had a full opportunity to review and analyze. For example, coverage, sublimits and deductibles can be affected by determinations regarding how damage and loss were caused, so you must be sure you understand these policy provisions and the cause(s) of your loss. If you let it, the insurer will dictate your claim to you.
Form a Team – Assemble a team of all personnel involved in the claim, including counsel, a public adjuster, consultants and accountants. The insurer will have such a team, often behind the scenes, so having your own team in place from the outset will help level the playing field.
Documentation and Accounting – Keep exact and exhaustive records of all communications, meetings, and exchanges. Submit documentation to the insurer regularly. Set up processes to track all invoices, costs, and expenses of any kind related to the claim by category.
Attempt to Involve the Insurer Before Repairs – Preempt disputes regarding the cost and necessity of repairs and replacement of damaged property by attempting to obtain the insurer’s prior approval. If the insurer is silent in the face of repair or replacement decisions, document it for the record.
Work Toward a Resolution – All claims should settle. If yours does not, make sure it is only because the insurer is being unreasonable and that the record reflects this. If you end up in litigation, the record should show that you gave the insurer every opportunity to adjust the claim based on the facts, and that the insurer chose to be aggressive and unreasonable.
Draw on the Business Side – Insurance is expensive. You should expect fair treatment on the claims side. Business contacts, such as between risk managers and brokers, should be utilized when possible. If the insurer does not live up to its end of the contract, consider renewal with a different insurer.