[authors: Jonathan M. Cohen and Barry I. Buchman]
With Hurricane Sandy only days in the past, many businesses already are beginning to rebuild and start the process of recouping the losses they sustained. Many of these businesses will find that insurance that they already own may pay for some or all of their losses.
Hurricane Sandy no doubt will go down in history as one of the Nation’s most costly natural disasters. Some experts already have estimated that property damage alone could be measured in the tens of billions of dollars. News reports show that companies across New York, New Jersey, and other affected states suffered severe property damage and lost profits from interruptions in their businesses. The ripple effects could cost businesses billions of dollars more. Companies all around the country and the world could be affected as their critical supply chains are cut off or disrupted.
Depending on the circumstances and the insurance those companies purchased, insurance may help businesses nationwide to recover hurricane-related losses. For companies directly affected by the storm, first-party property policies might cover losses resulting from damaged buildings, vehicles equipment, inventory, records, and other property. Typically, first-party property policies provide broad coverage for damaged or lost property so long as the cause of damage is a “covered cause of loss.” And, typically, modern first-party property policies include all risks of loss as covered causes, absent express policy language to the contrary. Although some businesses’ property policies may exclude or limit coverage for damage caused by floods, many policies contain broad flood coverage. Moreover, even if policies exclude coverage for floods, losses resulting from wind damage or other storm-related harms (such as a resulting fire or power interruption) still may be covered.
Affected companies also may be covered for lost profits that result from damage to covered property. For companies directly affected by the hurricane, business interruptions may result as the companies attempt to rebuild or reopen. “Business interruption” coverage provides protection against these types of losses by paying for lost profits resulting from damage to a company’s own facilities. Policies also may cover the extra expenses that a company sustains in addressing the impact of the Hurricane, such as the costs of shifting production away from a damaged plant to other facilities. Many policies also cover interruptions caused by: (a) government-ordered closures, (b) blockages that prevent ingress or egress to a company’s facilities, and (c) damage to other entities that supply critical services to a company, such as electricity, gas, or water.
Because Hurricane Sandy affected some of the country’s most significant economic and manufacturing centers, closed important sea ports and airports, and disrupted important highways and seaways over a broad swath of the Northeast, businesses well outside of the hurricane’s path could sustain losses. For instance, thousands of companies rely on other companies in the directly affected area for supplies of parts, ingredients, or services. Because the hurricane may disrupt those supplies, companies outside of the affected area could be unable to produce their own products or services or might incur extra expenses to find alternative suppliers or supply routes.
Some of these companies that sustain losses because of supply chain disruptions also may have coverage to help pay for these losses. Many first-party property policies contain coverage for “contingent business interruptions” – that is, lost profits resulting from the inability to get materials from a supplier or to sell its products to a customer due to property damage sustained by that supplier or customer. Many such policies also pay for extra expenses to defray the increase in costs sustained to replace an affected supplier or circumvent a blocked supply route. Some of these contingent business interruption provisions may even provide coverage based on damage to indirect suppliers and customers.
Regardless of which type of loss and coverage a company may need to address, there are four simple steps that most companies can take to maximize their insurance recoveries.
First, businesses should collect, organize, and review their insurance policies. This process should include an effort to identify and obtain policies issued to other businesses, such as current and former affiliates, that also may provide coverage.
Second, most property policies require policyholders to provide notice of potential claims and to submit “proofs of loss” quickly, and these policies also often have express deadlines for when any lawsuit against the insurer must be brought if there is a dispute. These deadlines can be very tight, often requiring businesses to take significant actions within as little as 30 days or less. It therefore is critical that businesses promptly give at least precautionary notice, absent contrary business reasons, to all of their insurers under all potentially triggered policies. Then, businesses should consider approaching their insurers about postponing or tolling any other deadlines by agreement. Insurers in these circumstances often are willing to agree to extensions of these types of deadlines.
Third, businesses should carefully document their damages and losses, including property damage, lost revenues, and additional expenses. If they do not already have protocols in place for tracking this information, companies immediately should put them into place and follow their protocols carefully. Because the way that a company characterizes these damages and losses can matter if an insurance dispute arises, companies should consider involving their legal departments and insurance counsel in preparing and implementing appropriate protocols.
Fourth, because of the complicated coverage questions and potential procedural traps in successfully making insurance claims, businesses should consider consulting with experienced professionals early in the process, including insurance brokers, accounting consultants, and coverage counsel. By doing so, companies can avoid common pitfalls in preparing a potential coverage claim and can be prepared to respond to insurer inquiries or coverage denials.
The coverage provided by a business’s insurance policies can be an important and valuable tool in paying for the losses and costs resulting from Hurricane Sandy. Companies can maximize the benefits of their insurance, and minimize the likelihood of protracted disputes later, by acting proactively now to assess and preserve their rights.