After the Storm: Maximizing Insurance Assets to Recover from Natural Disasters

Morgan Lewis
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Severe weather events are causing catastrophic damage and business interruption losses to businesses each year around the world. The energy industry is particularly vulnerable, including entities in the exploration, development, transportation, generation, and/or distribution business. Leveraging all available insurance coverage and pursuing claims are critical first steps in recovery.

Financial losses resulting from severe weather are a significant and urgent problem. Recently, Hurricane Ida and its remnants caused devastation across the United States, starting in the South and stretching into the Northeast, leaving over one million customers in the dark. For example, the entire city of New Orleans was without power due to catastrophic transmission damage that the severe storm caused to the city’s energy provider. By some estimates, approximately 95% of oil and gas production in the Gulf Coast region was shut down. Industry observers predict that the damage caused by Hurricane Ida will likely be the largest insurance claims event in 2021.

Similarly debilitating, the West Coast has been hit with a series of wildfires and other natural disasters. The recent Bootleg Fire in southern Oregon took out power lines that supplied electricity to California and left the Golden State without a critical source of power during a heatwave that was already putting a strain on the grid. The energy supply problem from that fire forced California grid operators to issue an urgent alert across the state asking customers to conserve power to avoid mandatory rolling blackouts. Similarly, parts of California have been dealing with the Caldor Fire as it races toward Lake Tahoe.

Of course, severe weather is not isolated to the summer months or to a particular region. Early in 2021, a highly publicized winter weather event hit Texas with extremely cold temperatures that generated a prolific amount of ice and snow, devastating the region and causing substantial property damage and business interruption losses. Compounding the problem, power grids failed across the state, unable to sustain the higher-than-normal energy and heating demand. The power outages were caused by property damages caused by the storm at power generation facilities, gas pipelines, and wind farms. In addition, public water utilities were also affected, causing frozen water lines, breaks in water mains, and bursting pipes, leaving tens of millions without water. The winter weather event is expected to be one of the largest insurance claims event in the history of Texas.

Understanding and maximizing insurance assets following a natural disaster is often a complicated process filled with significant hurdles and hidden challenges. But leveraging all available insurance coverage and pursuing claims are crucial first steps toward recovery.

IDENTIFY ALL AVAILABLE INSURANCE POLICIES

It is important that energy providers understand their insurance and take proactive steps to locate and analyze all available coverage in the event of an extreme weather incident. If a policy was misplaced, lost, destroyed, or a copy was never received by the policyholder, promptly request a copy from the insurer or insurance agent or broker. Reviewing the particulars of your company’s policy is important, as the type and scope of coverage actually available is controlled by the specific terms and conditions of each policy.

PROPERTY DAMAGE COVERAGES

Commercial Property. First-party commercial property policies typically provide coverage for physical loss or damage to business premises and other property owned or leased by the policyholder.

Business Interruption. Also contained in first-party commercial property policies, business interruption coverage reimburses the policyholder for profits that the policyholder would have earned but for the interruption to its business. Property policies typically cover loss of business income from physical loss or damage occurring through the period of rebuilding, repairing, or replacing damaged property. For example, losses caused by physical loss or damage because Hurricane Ida forced an energy provider to shut down facilities or operate at a diminished capacity, may be recoverable under business interruption insurance.

Extra Expense. Such policies will typically cover the reasonable and necessary extra costs to temporarily continue as nearly normal as practicable the conduct of the insured’s business. Examples include the extra costs of temporarily using property or facilities of the insured or others; rental of temporary equipment, machinery, or generators; additional employee or staffing expenses; costs for outsourced or alternative manufacturing, production, transportation, or supply chain services; increased cost of freight; and other costs incidental to the insured business.

Contingent Business Interruption. Contingent business interruption insurance, also known as supply chain coverage, provides insurance for losses resulting from disruptions to a business’s suppliers or customers. Such insurance may cover losses stemming from disruptions from specific suppliers scheduled in the insured’s policy. Supply chain insurance also usually requires that the supplier suffer the type of physical loss or damage that would be covered with respect to the business’s own property.

Service Interruption. Service interruption insurance covers property damage and business income losses caused by the interruption of utility services to covered premises. The scope of service interruption insurance can vary significantly with respect to the specific utilities covered, including water, communications, and power supply, and may require an accident or loss or damage at the utility supplier’s facilities that prevents the delivery of its usable services.

Civil Authority. Civil authority insurance generally covers losses resulting from an order of a governmental authority that interferes with normal business operations. Civil authority coverage may apply even when there is no physical damage to the policyholder’s own property.

LIABILITY COVERAGES

Commercial General Liability. Commercial General Liability (CGL) coverage typically protects a business from sums for which it would otherwise be liable to pay as damages because of bodily injury, property damage, or personal and advertising injury. Generally, CGL covers negligent or unintentional acts resulting from a business’s services, operations, or employees that cause harm to another. Importantly, legal defense fees may also be recoverable under a CGL policy under a broad duty-to-defend standard.

Directors and Officers Liability. Directors and Officers (D&O) insurance protects past, present, and future directors and officers from damages resulting from alleged or actual wrongful acts committed in their role with the business.

Errors & Omissions. Errors and Omissions (E&O) coverage is a type of professional liability insurance. It can protect companies, their employees, and other professionals from claims that they made a mistake or acted negligently in executing their professional services.

PRESERVING CLAIMS AND RECOVERING INSURANCE PROCEEDS

Soon after the power outage or property damage has occurred, a policyholder must quickly assess and alert its insurance provider to preserve any potential claim. Most insurance policies include specific procedures on how and when a claim must be documented and submitted. Importantly, most policies will have certain timing deadlines.

Maintain Records

Securing and keeping detailed records of damaged machinery, dates and times of service interruptions, or injuries caused by a severe weather event is necessary to be able to maximize insurance coverage. Obtain copies of fire or police reports and collect photos or videos of damage. An energy provider should be prepared to maintain detailed records of how their business was impacted and for how long. For example, did the natural disaster cause a power outage? If so, how long were services unavailable? Did the extreme weather damage generation equipment or pipes? Were customers injured because of a loss of heat or power? The impacts of an extreme weather event will likely not be instantly apparent but understanding the types of risks and keeping detailed records will be important when it’s time to submit a claim.

In the immediate aftermath of, or during, a natural disaster, energy providers will be dealing not only with assessing their own damages, but also meeting the needs of their customers. Business interruption coverages reimburse insureds for losses during the time that the business was interrupted. These coverages therefore require thoughtful valuing and documenting of the losses. The duration of business interruption coverages may depend on when normal operations could have been restored with due diligence.

In addition, property loss includes more than just property that was damaged but also any property rendered unusable because of the weather event. Depending on the policy language, there may also be an obligation to preserve and protect property from further losses, including mitigating damage and sue and labor provisions. To this end, an energy provider should document all necessary steps taken to mitigate losses and to restore damaged property.

Provide Notice

Providing adequate notice is a key step in preserving rights under an insurance policy. Most notice requirements in policies use the terms “prompt,” “immediate,” or “as soon as practicable.” Once it becomes clear that there has been a potentially covered loss, an energy provider should take steps to provide notice to all its insurers from which it might seek coverage. Notice should include the following information:

  • Name and address of insured
  • Location of loss
  • Date and time of loss
  • Contact name, phone, and email address
  • Description of the loss

Provide Proof of Loss Under First-Party Property and Business Interruption Policies

Assessing the full extent of loss and damage from severe weather can take time. However, commercial property policies will generally require that a sworn proof of loss be submitted within 60 to 90 days absent written agreement by the insurer. Other policies only state that a sworn proof of loss must be submitted within a set number of days after the insurer requests such proof of loss. Therefore, while it is important for a policyholder to promptly provide notice of its losses to its carriers, it is equally important for the policyholder to accurately and timely document those losses with an initial sworn proof of loss, which requires an accurate legal framing of the claim as well as documentation concerning the existence and amount of losses.

Given the extraordinary hardships energy providers will likely face during and following an extreme weather event, they should consider and be prepared to seek an extension for submitting any initial proofs of losses with their insurance carrier as necessary. Policyholders should carefully document any insurer’s refusal to agree to a reasonable extension request.

Cooperation with the Insurer

First-party commercial property insurance policies often require the policyholder to cooperate with the insurer’s investigation of the claim. This requirement is typically found in a policy provision titled “Duties in the Event of Loss.” This language may permit the insurer to interview the insured and its employees through an “examination under oath” (EUO). The policy may also require the insured to make the property available for inspection, take reasonable steps to protect the property, and reasonably cooperate with the insurer’s claim investigation. Cooperation does not mean capitulating to unreasonable requests by the insurer or responding to requests designed to limit or deny coverage but reasonable cooperation is generally required.

Be Proactive

The unfortunate reality is that future extreme weather is likely inevitable. As companies in the energy industry manage the ongoing impacts of Hurricane Ida, Tropical Storm Henri, and the fires across the Pacific Northwest and California, they should not overlook the substantial financial relief that may be available under insurance policies. Given the complexities of insurance coverage and acknowledging that energy providers are focused on providing necessary services for customers, it is important to think proactively and critically about assembling an insurance recovery team.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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