Many businesses throughout the United States—and possibly worldwide—may experience the effects of the devastating hurricane that hit the Eastern United States on October 29 and 30, 2012. Early estimation indicates that the storm caused upwards of $20 billion in property damage and another $10 billion to $30 billion in lost business. Numerous national and local businesses, ranging from telecommunications to financial industries, reported an interruption in their business operations due to Hurricane Sandy.
If your business suffered physical damage to tangible property, your property policies should indemnify you for that loss. Even greater than any such property loss, however, may be the loss of income that your business may experience. If your business does, in fact, experience a loss of income due to the hurricane, the business interruption, contingent business interruption or extra expense provisions of your property policy may reimburse you for such losses.
You should also keep in mind that your business may be entitled to additional coverage if it is named as an “additional insured” of a company affected by the recent events.
This Update outlines key issues for businesses considering submitting an insurance claim for property damage or loss of income due to the recent devastating storm and offers practical advice.
Real and Personal Property Damage
This Update focuses on coverage for loss of profits stemming from an interruption of business, but it is very likely that your company’s property policy covers damage to any real and/or personal property that Hurricane Sandy caused. Most property policies provide coverage for “all risks,” unless certain risks are expressly excluded. In that regard, a property policy may exclude coverage for certain aspects of a hurricane, such as flooding. It is crucial, therefore, to thoroughly review your property policies to ascertain the extent to which your company is covered for property damage that Hurricane Sandy caused.
Business Interruption Insurance Coverage
If Hurricane Sandy physically damaged your business’ facilities or equipment, any revenue that was lost due to an interruption of your business may be covered under the business interruption provision of your property policy. Business Interruption Coverage, also known as Business Income Insurance, reimburses the insured for the amount of revenue it would have received during the period of interruption had the covered event and the ensuing physical damage never occurred. This type of coverage is not sold as a separate policy, but rather typically is added as an additional grant of coverage in a property policy.
To recover a business interruption loss, the insured must prove that:
it sustained damage due to a covered loss;
there was an interruption of business (suspension of operations) caused by the property damage;
there was an actual loss of business income during the period of interruption; and
the loss of income was caused by the interruption of business and not some other factor(s).
One of the key areas of potential conflict with an insurer concerns what is known as the “period of interruption” or the “period of restoration.” Under most policies, these periods are defined as “the time of the direct physical damage to the time when, with due diligence and dispatch, the damage could be repaired or replaced and made ready for operations under the same or equivalent operating conditions that existed prior to such damage.” Simply put, the “period of interruption” or “period of restoration” is the amount of time it takes to get a business’ operations back to normal following physical damage to property or equipment. The period of time differs for each insured, but usually depends on the severity of the damage and the nature of the business’ operations. It is important to keep in mind that most policies cover only the time needed to resume production of goods and services, not necessarily the amount of time needed to achieve the level of success the business experienced prior to the covered event.
Contingent Business Interruption Insurance Coverage
If your business did not suffer any property damage because of Hurricane Sandy, but still experienced a slowdown or correction of operations because a supplier’s facilities or equipment were damaged by the hurricane, you may be entitled to reimbursement of lost profits under the policy’s contingent business interruption provision. Contingent business interruption coverage compensates the insured for lost revenue resulting from an interruption of business, stemming not from damage to its own property, but from damage to a customer’s or supplier’s property. For example, if your business depends upon goods produced by a manufacturer that had its operations interrupted by damage to its factory, any loss of income that you experience due to the failure of that manufacturer to supply you with the necessary goods may be covered under your business’ contingent business interruption provision.
However, in order for contingent business interruption to be covered, the type of peril and type of physical damage that the supplier suffered must be the same type of peril and damage covered under your company’s policy. In other words, your business’ insurance policy must provide coverage for hurricanes as well as for damage to property, such as buildings or production facilities.
Extra Expense and Contingent Extra Expense Insurance Coverage
A policy’s business interruption provision may also provide coverage for extra expenses. Extra expense insurance indemnifies the insured for costs in excess of normal operating expenses that the business incurs in order to continue operations while its damaged property is repaired or replaced. Such expenses typically include the cost to rent substitute facilities, move equipment and personal property, as well as overtime wages. Similarly, contingent extra expense insurance reimburses the insured for expenses that result from a contingent loss, such as a contingent business interruption loss.
Notice, Proof of Loss and Filing a Claim
Virtually all property insurance policies require the insured to perform certain duties within a specific period of time following a loss. For example, most policies require the insured to:
give a notice of claim as soon as practicable;
submit a proof of loss within 60-90 days of the loss; and
if necessary, file suit against the insurance company within 12-24 months of the loss.
Failure to comply with these technicalities and timelines may operate as a complete bar to coverage. If your business intends to submit a claim for business interruption and/or damage to real or personal property but is unable to meet the deadlines specified in the policy, you should contact the insurance carrier immediately and ask for an extension.
Potential Coverage as an Additional Insured
Finally, your business may be able to seek a separate avenue of coverage if it is named as an “additional insured” of a company affected by Hurricane Sandy. An additional insured is an entity that is added to another company’s policy by means of an endorsement. An additional insured may either enjoy the same benefits as the underlying policyholder or experience a restrictive form of coverage.
The endorsement section of an affected company’s policy will either specifically name your business as an additional insured or provide a general blanket description that pertains to your company.
The devastating hurricane that struck the Eastern United States on October 29 and 30, 2012 may continue to challenge all residents impacted by it for years to come.
Businesses with operations in the path of the storm may have suffered significant property damage and an interruption of business. Businesses nationwide—and even worldwide—also may have suffered contingent business interruption losses due to the inability to obtain supplies, among other things, from business in the Eastern United States that suffered direct physical property damage. If your company experiences a loss in revenue, it may be entitled to indemnification under the business interruption, contingent business interruption or extra expense provisions of its property insurance policy. In order to secure coverage, it is important that your company submit a timely notice of claim and proof of loss and, if necessary, initiate any legal action against your insurance carrier within the specified period of time.
Your business should also explore whether it is an “additional insured” of an affected company impacted by Hurricane Sandy. If so, it may be entitled to further indemnification.
Please see the checklist that outlines the steps an insured should take to ensure maximum coverage under its policy’s business interruption, contingent business interruption and extra expense provisions.
This Update provides only a general summary of issues related to insurance coverage for property damage or loss of income due to Hurricane Sandy. You can find additional discussions of recent developments, cases, laws, regulations and rule proposals of interest to businesses on our website.