Considerations on Insurance Recovery for Property Damage and Business Interruption Losses for REITs

The peak of hurricane season passed on September 10, but the threat of tropical cyclones remains and will continue through the November 30 end of the Atlantic hurricane season. Hurricanes pose a particular threat to REITs with significant commercial real estate holdings, as tropical storms not only can cause damage to property owned by REITs, but can also cause damage and prevent customers from patronizing retail stores and other tenants. REITs should therefore review their insurance policies with their attorneys to assess whether their insurance policies provide adequate coverage for the risk of loss posed by tropical cyclones.

Key Insurance Coverages for Hurricane Losses for REITs

• Business Interruption (BI) Insurance. Covers profits lost due to the interruption of business caused by physical damage to, or loss of use of, property covered by the policy. 
• Contingent Business Interruption (CBI) Insurance. CBI covers economic losses arising from supply chain disruptions, even if there is not direct property damage.
• Service Interruption Coverage. Covers losses caused by interruption of utility services resulting from damage to a utility’s property. 
• Civil Authority Coverage. Covers losses resulting from a government order restricting access to a business’s property or the closure of airports, roadways, bridges, or ports.
• Extra Expense Coverage. Covers expenses necessary to resume normal business operations and mitigate losses.
• Ingress/Egress Coverage. Covers business income lost due to physical damage to property of others that prevents ingress/egress to the covered business.
• Cyber/Data Security Insurance. Covers losses arising from a network security breach that results in the unauthorized disclosure of confidential data. A company’s network security systems (or those of its vendors) may be impaired or disabled during a natural disaster, making the company more vulnerable to cyber attacks.

Key Early Steps to Avoid Mishaps That Can Diminish or Prevent Insurance Recovery

If a REIT is impacted by a hurricane or tropical storm, avoid some common pitfalls by taking the following steps:

• Gather All Policies and Closely Review Their Terms. As policy terms vary and may be subject to different interpretations, consult with coverage counsel to assist in evaluating coverage. It will be vital to review all available insurance policies to assess the potential coverages available.
• Provide Prompt Notice. Promptly and proactively assess and document losses, evaluate insurance coverage, and act to comply with any contractual conditions that are necessary to obtain coverage.
• Collect and Preserve Evidence of Business Losses and Damages. Record all costs, expenses, and damages for which coverage might be sought. If property owned by the REIT sustained damage, take photographs and videos of property damage and business interruptions to the extent possible and retain damaged property and equipment. Maintain proof of business performance prior to, during, and following the disaster so lost profits can be established. All such expenses, including expenses associated with filing the insurance claim, should be tracked.
• Be Careful About Internal and External Communications Regarding the Loss. If litigation over insurance coverage becomes necessary, insurers may gain access to internal communications such as emails and memoranda regarding the REIT’s claims for insurance. Involving coverage counsel in these communications may ensure that they are protected as privileged in the event of litigation over coverage. REITs also should identify a single point of contact or spokesperson for all communications with insurers.
• Coordinate Mitigation Efforts With Insurers. While it is important to mitigate losses, it is also important to communicate with insurers regarding such efforts when possible. This will minimize the chance that the insurer will apply hindsight to second guess the reasonableness of the mitigation procedures that a REIT puts in place.
• Engage Coverage Counsel. Claims from tropical cyclones are complex and may contain potential coverage-defeating traps. Experienced coverage counsel is critical and will work with the REIT's brokers to ensure that the insurance recovery for the loss is maximized.

Coverage Issues Related to Hurricanes

• Policy Exclusions and Proximate Causation Issues. Property policies typically cover “all risks” or specified “named perils” that are not otherwise excluded. Exclusions generally target specific causes of loss, such as flood, mold, bacteria, and pollution. REITs should consult with counsel to assess whether, in light of any applicable exclusions, their insurance policies provide adequate coverage for the risk of hurricanes.
• Sub-Limits and Deductibles. Most policies contain a sub-limit and/or an additional deductible for particular risks. Many include sub-limits or deductibles for losses arising from a “Named Windstorm” or a “Hurricane.”
• Multiple Occurrences vs. Single Occurrences. Insurance policies typically provide for a deductible for each “occurrence” that results in a loss, as well as a per-occurrence limit below the total aggregate limit of the policy. Because hurricanes often impact an extremely wide area, and sometimes make multiple landfalls, REITs may incur damage at multiple properties and at different times. REITs should consult with coverage counsel to discuss ways to enhance coverage under “occurrence” provisions.
• Loss Valuation Issues. Insurance policies often provide varying methods for calculating property losses and appraising property values, which can have a dramatic impact on the amount of coverage provided for a hurricane loss. Furthermore, when rebuilding/refurbishing properties after a disaster, REITs generally must comply with building code regulations currently in force, but some policies do not cover additional costs incurred to bring a property up to current code.
• Acts of God/External Infrastructure Exclusions in Cyber Policies. Cyber policies are relatively new to the market, and it remains unclear to what extent insurers will rely on “acts of god” and other exclusions to deny coverage for cyber breaches in the wake of tropical cyclones.