Northern California is in the midst of what is anticipated to be one of the costliest collections of wildfires in history. Cal Fire estimates that 217,566 acres of property have burned, including 5,700 structures, not to mention the tragic loss of 40 lives to date. The cause or causes of this conflagration remain under investigation, with reports of arson combined with dry conditions and extremely high winds (gusting at speeds in excess of 75 mph). How the investigations play out may affect how carriers respond—with possible arguments over the actual cause of loss and thus applicable limits or deductibles.
California is no stranger to wildfires. According to one study, seven of the 10 costliest fires in United States history took place in California. The combination of California’s history with severe drought, heavily wooded vegetation, and human negligence—approximately 95 percent of all wildfires in California are caused by people—makes the state especially prone to fire. As the wildfires in California subside, catastrophe modeler, RMS issued an initial estimate of economic and insured losses totaling between $3 billion and $6 billion, which would make the wildfires the most expensive in history.
The fires are also expected to wreak havoc on major portions of the region’s renowned $57.6 billion wine and related tourism industry, with at least eight wineries reduced to ash and others closed due to fire and smoke hazards. The direct physical damage to wineries, from vines to tasting rooms, combined with collateral damage to distributors, storage facilities, hotels, and other supporting businesses, is expected to cause severe economic damage to this highly integrated sector. And it could not have happened at a worse time—the height of the harvest season, when tourism peaks and wineries generate much of their revenues. (To put this in perspective, California wineries drew 23.6 million visits and $7.2 billion in tourist expenditures in 2016, according to the Wine Institute.) When the losses are tallied, the closures of wineries, hotels, restaurants and other tourist attractions due to evacuation orders and hazardous air conditions, combined with direct fire damage, are expected to have significant impacts to numerous wineries and related businesses, impacts that will likely be amplified by widespread economic loss throughout the region.
As businesses begin the process of recovery, and look to their insurance carriers to mitigate their losses, they will be confronted by a number of critical issues. Early attention to these issues, and the choices that must be made, is the surest way to maximize insurance recovery. Here are some guiding principles, taken from decades of experience representing insurance policyholders in California and around the globe.
1. Gather All Available Insurance Policies, and Consider Alternative Avenues for Coverage
The first step is always to gather all available insurance policies for your business. Contact your broker or agent if you don’t have them on hand. Of course, the initial focus is on property policies, but note that crop protection policies, homeowners’ policies and vehicle policies may also be relevant. In addition, gather any insurance certificates or policies that may have been supplied by a contractor, transporter, a lessee or a customer, that may also provide coverage to your business.
2. Provide Notice to All Potentially Pertinent Carriers
Policies often contain conditions to coverage that require notice within a certain time frame, e.g., “as soon as practicable.” Notice need not be detailed, but should identify potential losses, e.g., property damage and business interruption loss, with details to follow. Notice may be provided through your broker or agent. If you intend to incur major expenses to mitigate or reduce your loss, inform your carrier of this and seek prior consent, if possible.
3. Review Policies for Potential Coverage
In the aftermath of so many recent natural disasters, policyholders have had to deal with perils such as flood or named storm that are excluded or subject to reduced sub-limits. However, when it comes to fire, commercial property policies almost universally provide coverage.
That said, because of the composite structure of commercial property policies—with different sub-limits and deductibles for specific perils, and a bevy of confounding waiting periods, deductibles and sub-limits for business interruption coverage that are stated in terms of time periods rather than dollars—it is extremely important to understand exactly what coverage is available before formulating your claim.
4. Document Your Losses
Photograph and keep careful notes of damages to your property and the property of others affecting your business. This includes suppliers, distributors, storage facilities, utilities, service providers, and key customers. For financial losses, carefully document lost or delayed sales, and track “extra expenses” incurred to keep the business running or to reduce loss of business (e.g., providing more expensive product where contracted product is damaged). Keep a separate account to record expenses related to the fire and retain all receipts.
5. Evaluate Your Business Interruption and Contingent Business Interruption Coverages for Potential Issues
Your policy should cover your loss of income caused by direct physical loss to your property, but that is only the starting point. Most modern commercial policies also provide extended coverage for certain categories of loss caused by damage to third-party property. This includes damage to utilities and other services, to property that permits entrance or exit to your property, and to property of customers or suppliers. The latter coverage, for damage to upstream and downstream vendors and customers, is called Contingent Business Interruption coverage.
Although reports suggest that nearly 80 percent of this year’s crops were harvested before the fire, and many of the wineries affected carry crop insurance which may cover damage to lost or damaged grapes, damage to property of suppliers, bottling facilities, distributors, storage facilities and other critical vendors may be the basis for coverage under Contingent Business Interruption provisions. Experienced counsel should review your policy carefully to determine how to present your claim to maximize these coverages.
6. Prepare a Loss Timeline
Understanding and documenting the timing of your loss may well turn out to be the most important step you can take to maximize coverage. Your policy will likely include a waiting period, stated in terms of a number of days or weeks—ranging from 1 to 45 days—before business interruption coverage applies. Some policies treat waiting periods as qualification periods, allowing coverage from day one of the loss once the qualification period is satisfied. Other policies treat the waiting period as a deductible, which may conflict with the policy’s other deductible provisions. Longer waiting periods can dramatically decrease insurers’ coverage exposure when facing large-scale catastrophes, so you can expect that insurers responding to the wildfires will take aggressive positions in this regard.
In addition, your policy may extend your coverage for the period following the actual physical restoration of your business. Policies may include an extended period of liability which extends business interruption coverage for income loss suffered during a specified period of time (e.g., 30, 60 or 90 days) after the damaged property has been repaired. This is particularly useful to provide income after the property is repaired in order to recoup customers that were lost during the period of repair.
Your policy also may extend coverage for loss of business as a result of governmental orders, such as evacuation orders, curfews, highway and other transportation-related closures, air hazard alerts, and the like, which prevent or impair access to the insured’s property. Many of these types of orders have been put in place in connection with the current wildfires. Policies may require that the government order be the result of “physical damage of the type insured,” rather than a preventive or public safety measure. Policies also may require that such physical damage be within a certain distance of the insured property. Several coverage issues tend to arise with respect to civil authority coverage, including whether there first must be actual physical damage, how to measure the distance between the insured location and the site of physical damage (if off-site), and whether a governmental order actually prohibited access to the insured premises.
7. Engage Appropriate Experts
It’s usually prudent to engage professional claim consultants, such as forensic accountants, particularly if you have business interruption loss. Additional experts may be needed to model any unique financial aspects of your business. Expert fees are frequently covered under property policies, subject to sub-limits. Cooperate with the insurance company adjuster, but don’t forget that the adjuster works for the insurance company, not for you. If you need an advocate, hire your own. Engaging counsel early in the process can help avoid costly mistakes and maximize your coverage. And don’t just rely on your broker or agent; they are always well-intentioned, but do not always have the resources or expertise you need in pursuing your coverage rights.
8. Check to See if You Are FEMA-Eligible—Government Funds Might Be Available for Nonprofits Providing Critical Infrastructure and Essential Services
FEMA and other government-based programs may provide funds to off-set your losses if you are an eligible not-for-profit that provides critical infrastructure or essential services. Critical infrastructure and essential services include: hospitals and other medical-treatment facilities; fire, police and other emergency services; power, water and sewer utilities; educational institutions; libraries, museums and zoos; and community, senior citizen and day-care centers. The program and application process can be complicated and daunting, and strict time limits apply. But a successful applicant can see FEMA reimburse no less than 75 percent of the eligible costs for emergency protective measures and permanent restoration costs.
To summarize, be aware that the value of your insurance policy and your rights as a policyholder may depend on the actions you take and the way you present your loss. Be attuned to the deadlines and your obligations, and engage professionals experienced with your industry and the insurance recovery process. Do not give your carrier an opportunity to escape its coverage obligations based on the failure to meet conditions and deadlines.