TAKEAWAYS
- Commercial property policies typically include a wide range of coverage extensions, including “contingent” coverages that apply even when the policyholder’s own property is not physically damaged.
- Your business may be able to recover from losses sustained as a result of the recent Big Sur slip-out. Understanding your rights and obligations requires a thorough review of your business’s policies to determine what coverages may apply.
After heavy rains on March 30, 2024, a section of the southbound lane of famous Highway 1, which sits atop dramatic cliffs near Big Sur, collapsed and crumbled into the Pacific Ocean. The incident occurred near Rocky Creek Bridge (17 miles south of Monterey) and caused nearly 1,600 people to be stuck there overnight—stranded motorists slept either in their cars or sheltered at nearby hotels. Fortunately, there were no injuries. The Monterey County Department of Emergency Management was able to transport locals and tourists via convoys using the northbound lane the next day.
Due to inclement weather that followed the slip-out, convoys of local residents and essential personnel were suspended, and Monterey County issued an evacuation warning to the area. Now, under close supervision, that warning has been lifted and a hazard advisory remains in place because “the repair work continues to limit access in and out of Big Sur.”
Weather-related closures are not new to this heavily traveled route. Highway 1 experiences frequent closures due to similar, extreme weather-related collapses, mud flows and rockslides. Three previous slides within the last year (Dolan Point, Regent’s Slide, and Paul’s Slide) require ongoing, massive repair projects to the highway. The state’s Department of Transportation (otherwise known as Caltrans) does not have an estimate of when the highway will fully reopen. Until then, crews will continue working to stabilize these areas.
The California Department of Parks and Recreation announced that all state parks in Big Sur are closed for day use and camping. Such closures have immediate impacts on adjacent businesses including hotels, restaurants and shops, which have remained largely empty. Supply chains that rely on the highway to transport goods will suffer, too, as they have been forced to cease operations or re-route. The Big Sur Chamber of Commerce president, Kirk Gafill, told the San Fransisco Chronicle that “total losses to Big Sur businesses since the latest slide have exceeded $1 million each day.”
Obtain and Review Your Insurance Policies.
Your business may be able to recover from losses sustained as a result of the slip-out. Understanding your rights and obligations requires a thorough review of your business’s policies to determine what coverages may apply.
Commercial property policies typically include a wide range of coverage extensions, including “contingent” coverages that apply even when the policyholder’s own property is not physically damaged. Contingent coverages apply when the policyholder sustains losses as a result of damage to third-party property (such as the property of critical suppliers of goods and services or, as here, dependent property like Highway 1).
For example, it is common for a commercial policy to provide “Civil Authority” or “Ingress/Egress” contingent business coverage extensions, which may cover loss of business income and extra expense due to denied access or a forced evacuation. Typically, these coverages will kick in when a businesses’ supply and customer chains experience disruptions caused by physical damage to and closure of transportation infrastructure and a prohibition of access to or from the affected area.
Closures along Highway 1, the evacuation mandates and convoy interruptions may trigger civil authority or other loss of ingress/egress coverages under some policies and some situations. If there is a “causal link” between the order of the civil authority and the loss (e.g., a complete loss of access to the property), coverage may be available. Sometimes looking back in time to what was the “efficient proximate cause” of the slide or the physical damage can be important. For example, did the wildfires destroy ground cover making the terrain susceptible to rain-induced slides, in turn making the wildfire the efficient proximate cause of the damage?
Another coverage extension, known as contingent “extra expense,” is usually defined as one in excess of normal operating costs that are required to keep the business going. Alternative routes for businesses reliant on the highway may lead to such coverage.
Lastly, “leader property” coverage (also known as “attraction property” coverage), can cover a policyholder’s losses sustained as a result of another business’s closure if that property attracted customers to the insured’s business. For example, if a shop or restaurant relies on tourists visiting the California state parks, it may be able to recover for lost business as a result of California’s state park closures.
A thorough review of the insuring provisions is critical to determine whether, and the extent to which, such coverages may apply. Even though you might have a potentially available coverage, you always have to watch out for the exclusions. Many policies exclude earth movement and landslides unless a coverage extension was purchased. Insurers have also started to assert “loss of use” exclusions to try and deny coverage even though such an exclusion should not have any basis for application in a scenario such as this.
Provide Notice and Calendar Deadlines.
First, verify and abide by calendar deadlines in your policy for giving notice to the insurer. There is no need to specify the cause of loss at the initial notification stage, so it is safe to notify them immediately. Next, calendar the time (and set reminders weeks in advance) to file a sworn proof of loss and file suit in the event you disagree with the insurance company’s coverage determination, as sometimes the deadline to file suit is years into the future. Any tasks required to be done within a “reasonable” amount of time should be done as soon as practicable. Missing deadlines can be fatal to an insurance claim.
Additional Challenges
Understand your policies’ sublimits, applicable deductibles and waiting periods. Property policies will frequently have various sublimits of insurance, each of which will have its own deductible. Business Interruption or Time Element coverage often has a waiting period and additional deductible—so it is essential to understand both in your coverage pursuit.
Finally, to recover under a contingent business interruption policy, insurers will require proof of physical loss or damage. Policies often lack guidance on how exactly to prove loss of business due to a covered peril, so make sure that you are documenting your losses in detail to prepare your claim. Engaging experts, coverage lawyers and working with your broker or a forensic accounting firm can assist with this process.
