Businesses directly impacted by Hurricane Ian can turn to their commercial property insurance policies to cover property damage, loss of revenue, ongoing expenses such as rent and wages, and additional expenses incurred to mitigate their losses, such as the cost of renting alternative space while their property undergoes repairs.
Businesses not directly affected by the hurricane can look to their commercial property insurance policies to cover lost revenue and additional expenses incurred as a result of hurricane damage to their suppliers and distributors. .
Covers to look for are outlined below, but remember that the devil is in the details. You must ensure that you properly document your losses attributed to the hurricane or your insurer will deny your claim. A brief call to a cover lawyer can help you set up a system to document and prove your losses.
A. Business Interruption Coverage
Business interruption insurance is designed to cover lost business profits and certain ongoing expenses as a result of a covered loss. For example, if your business were damaged and had to remain closed for several weeks while repairs were made, your business interruption coverage would pay you for your lost income and for certain ongoing expenses, such as rent and employee salaries, until you can reopen your business.
The most common policy forms cover lost profits and continuing expenses attributable to “direct physical loss or damage” to “insured property” at the “insured premises” or premises near the insured premises caused by a “cause covered loss”. The three key questions under this policy wording are: a) is there direct physical loss or damage to the insured premises, b) was it caused by a “cause of loss covered” and c) has the insured proved that he suffered covered losses?
The terms “insured property” in the “insured premises” are generally defined in the policy. “Insured premises” is often defined by address, but in some cases it may include real and personal property used, leased or controlled by the insured. This language comes into play if your business has employees or contractors working in a building that was damaged or closed as a result of Hurricane Ian. In this case, you can recover your lost income and wages while your client’s property undergoes repairs.
This language was tested when a janitorial and building maintenance contractor serving the World Trade Center towers was unable to work because the towers were destroyed in the terrorist attack of September 11, 2001. In this In this case, the policy defined “insured property” to include “the Insured’s interest in all real and personal property owned, controlled, used, leased or intended for use by the Insured.” The insurer argued that there was no coverage because the contractor’s head office was elsewhere and he suffered no damage. The court disagreed with this finding that the insured “used” enough of the World Trade Center towers to trigger coverage.1 Such arguments can help service providers obtain business interruption coverage even if they still have full access to their own offices.
Courts often require policyholders to demonstrate their loss of profit with a reasonable degree of certainty.2 This standard is not as intimidating as it seems. Typically, policyholders work with forensic accountants and attorneys to prepare and document this part of the claim. However, even adjusters can be hampered by an insured’s inability to properly document why a particular action or cost was incurred in the midst of a crisis. This is especially true when a business continues to operate, but to a reduced degree. For example, if your company’s records only show that you were unable to fulfill orders due to “maintenance” issues, your insurer will quickly deny your claims because they won’t know if the loss resulted from a regular maintenance or something caused by the hurricane. Depending on your type of business, it may be worth reviewing your business processes to assess whether any changes need to be made to ensure your losses are fully documented. Documentation of other decisions related to the choices made in the context of the crisis can be extremely helpful.
B. Coverage in the event of possible business interruption
Contingent business interruption insurance covers loss of income and certain ongoing expenses resulting from a covered cause of loss at the premises of third parties, such as major suppliers or distributors of your products and services. For example, if your main supplier or distributor’s building was closed due to storm damage, your potential business interruption insurance could be triggered. Coverage would pay for the extra cost of getting replacement goods, for example.
Like business interruption coverage, this type of coverage often requires “direct physical loss or damage” at the third party’s premises. Another variation of this coverage covers losses due to the closure of something the business depends on. For example, many malls have coverage that is triggered when a key business in the mall suddenly closes and undergoes repairs.
It may be difficult to document the reason for the third party’s inability to perform their duties. It is therefore important to keep the documents received from the third party – and in some cases to request them in an affirmative and timely manner – to be sure that it is possible to substantiate the claim.
C. Civil Authority Coverage
Civil authority coverage covers loss of income and certain ongoing expenses when a civil authority prohibits access, entry or exit from your establishment due to a covered cause of loss. For example, if the mayor or chief of police closes all street access needed to access your building due to flooding, this will trigger coverage.
Many policies require direct physical loss or property damage, other than insured property, caused by a covered cause of loss within a certain distance of your place of business (for examplewithin one mile of the insured property), and have time limits for the start of coverage (for example12 to 72 hours after the decision to deny access) and at the end of coverage (for examplethree to six weeks after the order is issued).
Given the typical requirements of this coverage, an order documenting the prohibition of access, entry or exit from an insured’s premises can be critical. Obtain copies of any formal orders. These are often available on government websites now and may be harder to find later. Keep copies of newspaper articles and similar media.
D. Coverage of Additional Expenses
Certain types of additional expenses, such as renting a new building while your main business premises are being restored, are easy to identify. But this is not true for all expenses that may be covered. For example, if the claim includes cleaning costs, the insurer may claim that the cleaning would have been done anyway. While it may be possible to explain after the fact how this cleaning was more extensive or totally additional, it is far better to document the need at the same time. In fact, one of the first recommendations of forensic accountants is to establish a specific general ledger of accounts or sub-accounts to track all expenses associated with the crisis and to establish processes to keep documentation justifying expenses and the reasons for which they are engaged. This ensures that the documentation remains accessible.
E. Cover for calculating your losses
Some policies provide coverage for claims preparation costs and crisis management costs. Claims preparation costs generally include professional fees incurred to prove the cause of a loss and the amount of the loss, such as forensic accountants and, in some cases, attorneys. Crisis management costs, most commonly found in directors and officers (D&O) and cyber liability insurance policies, can cover the cost of hiring a crisis management company. Both are often subject to low sub-limits, but are nonetheless worth including in any claim where policy wording permits.
In the summer of 1993, the Mississippi River flooded, affecting nine Midwestern states and causing $6.5 billion in crop damage. As a result of the flood, Archer Daniels Midland Company and its subsidiaries (ADM) incurred additional expenses and lost revenue due to increased transportation and raw material costs. Insurers paid $11 million for losses but denied another $44 million in claims leading to a lawsuit. The policy covered additional costs “incurred by the insured as a result of direct physical damage caused by perils insured under this policy and not excluded elsewhere in this form…”. Since ADM’s facilities were not damaged by the flood, the insurers refused the request for reimbursement of the additional costs. The trial court and appeals court rejected the insurers’ arguments because there was no wording in the policy requiring the policyholder to suffer physical damage to their property as a precondition for coverage. . Similarly, the policy covered “loss of income and necessary additional expenses resulting from the necessary interruption of the insured’s business caused by damage to or destruction of real or personal property, by the risks insured by the policy , of any supplier of goods or services resulting in the inability of such supplier to supply an insured location.” The insurers argued that because ADM had contracts with grain dealers rather than the farmers whose crops were damaged, there was no coverage. Both the trial court and the appeals court rejected this argument because there was no wording in the policy that required contract confidentiality with vendors. In the end, ADM was able to recoup its losses.
Even if your business is not currently able to fully document its losses as required by your insurance policies, it is important to provide prompt notice in the event of a claim, as some policies require prompt notice as a precondition to the cover. Don’t miss what may be your only opportunity to recoup your losses by failing to provide timely notice.
1.Zurich American Ins. Co. v. ABM Industries, Inc.397 F.3d 158 (2nd Cir. 2005).
2.Polytech, Inc. c. Affiliated FM Ins. Co.21 F.3d 271, 276 (8th Cir. 1994)
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.