The 2016 Atlantic hurricane season, which is coming to a close, has been quite active (translation: destructive and costly). So far, there have been fourteen named storms this season. Six of them were hurricanes, three of which were major hurricanes (i.e., Category 3 or higher). Among other things, the storms caused billions of dollars worth of property damage and related economic losses. Additionally, due to global interdependencies, hurricanes and storms in one part of the world often impact not only businesses in the surrounding areas, but also businesses located thousands of miles away. All companies, including those that are not located in areas most likely to be directly impacted by a hurricane, therefore could suffer substantial losses as a result of a hurricane or major storm. This article provides an overview of steps that companies should take in order to maximize their likelihood of recovery under property insurance policies for losses caused by hurricanes and other storms.
As an initial matter, there are steps businesses can (and should) take before a hurricane or storm takes place that will facilitate the insurance claim adjustment process and increase the likelihood of recovery post-loss.
Pre-Loss Steps
Make sure that you have sufficient insurance. While the process arguably is a bit tedious, companies should review their insurance policies every year to ensure that they have sufficient insurance, in terms of the scope of coverage available under their policies for different types of losses, as well as sufficient policy limits (including sublimits and aggregate limits) to adequately protect all of their business assets and sufficient coverage for economic losses that would stem from property damage losses.
Protect critical insurance documents. Policyholders should keep their insurance policies in multiple -- and secure -- locations. Consider keeping at least one copy electronically, on a backed up server, and one copy off site. It also is a good idea to maintain and to circulate to employees up-to-date lists of vendors that the company has approved to provide emergency storm-related services.
Maintain an up-to-date inventory of your property/assets. Policyholders should maintain, in a safe and secure location, photographs or video footage of their assets – or at least their more valuable assets. Doing so will help avoid, or at least minimize, the likelihood and extent of disputes post-loss regarding: (1) the existence (or number) of assets the policyholder had pre-loss that were totally obliterated or blown away by the storm; (2) the pre-loss condition of the policyholder’s assets; and (3) the pre-loss location of the policyholder’s assets, which could come in handy for a number of reasons, including in connection with disputes regarding causation (e.g., property located on higher floors of buildings are less likely to have been damaged by flood, as opposed to by wind-blown rainwater). It also is a good idea to maintain, in a readily accessible manner, procurement and accounting records that can be used to substantiate the value of their assets (while these are not necessarily dispositive, particularly with respect to policies that provide coverage on a replacement cost basis, rather than an actual cost basis, they nevertheless can be helpful in connection with potential valuation-related disputes).
Take reasonable steps to avoid or minimize impending losses. Most property policies provide coverage for costs incurred to protect property in order to avoid or minimize an impending loss, such as costs to move equipment out of harm’s way or to secure a facility before a storm hits. Mitigation costs often also are covered under common law. (Of course, taking these steps makes good business sense regardless of the availability of coverage for these types of mitigation costs.)
Post-Loss Steps:
After a loss occurs, policyholders should consider taking the following steps in order to maximize the likelihood of recovery from their insurers for their losses.
Assess Coverage and Preserve Your Rights Under Your Insurance Policies
Know Your Coverage. Carefully review all potentially applicable policies to determine what types of losses they cover and to what extent. Many are familiar with some of the basic coverages that tend to apply in the context of hurricanes, including:
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Property Damage Coverage: This covers the cost to repair or to replace damaged or destroyed property (although, depending on the circumstances, your policies might provide for a valuation methodology other than replacement cost value).
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Debris Removal Coverage: This covers reasonable and necessary expenses incurred to remove, clean up, and dispose of debris strewn about the policyholder's property as a result of a covered cause of loss. Examples include tree branches and building components scattered about after a storm.
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Business Interruption Coverage: This covers lost profits resulting from property damage caused by a covered peril. The lost profits generally must be tied to the event that caused the property damage, and the measure of the loss generally is the difference between expected profits during the recovery period after the event and actual profits during that period, less any unrelated losses. Many policies also provide for an extended recovery period that takes into account time needed after the physical damage has been repaired or replaced to ramp up the policyholder’s operations to pre-loss levels.
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Extra Expense Coverage: This covers additional costs the policyholder incurs to avoid or minimize the interruption of its business caused by covered property damage. Examples include costs incurred to relocate operations to temporary facilities during the repair/replacement process, and costs incurred to temporarily repair or replace property. Many property policies also contain Expense to Reduce Loss coverage, which is similar to Extra Expense coverage but requires that the costs incurred actually mitigate otherwise covered losses.
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Expediting Expense Coverage: This reimburses costs spent to expedite the repair or replacement of covered property damage, and includes costs such as overnight freight costs.
Property policies also typically contain a variety of other, less frequently discussed coverages that should not be overlooked. For example, property policies often cover, under certain circumstances, financial losses resulting from physical loss or damage to a third-party’s property (as opposed to physical loss or damage the policyholder’s property).
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Contingent Business Interruption and Contingent Extra Expense Coverage: These coverage grants respectively cover lost profits and additional expenses incurred when a customer or supplier of the policyholder sustains property damage “of the type” covered by the policyholder’s policy, which prevents the customer or supplier from accepting goods from or supplying goods to the policyholder, thereby interrupting the policyholder’s business operations.
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Ingress/egress Coverage: This coverage is for financial losses resulting from damage (from a covered cause of loss) to property located within the vicinity of the policyholder’s premises (often within a specified geographic distance) that prevents ingress to and egress from the policyholder’s premises.
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Civil Authority Coverage: This provides coverage for losses resulting from an order of a civil authority, issued as a result of damage to a third party’s property that was caused by a covered cause of loss that prohibits access to the policyholder’s premises.
Notice, Notice, Notice! If your business has sustained any potentially covered losses as a result of a hurricane, notify your insurers, in writing, as soon as possible. Policies typically specify when and to whom notice must be provided, and sometimes purport to require “immediate” notice or notice within as little as 30 days of loss. In some jurisdictions, failure to provide timely notice can jeopardize your coverage. In other jurisdictions, a carrier must prove actual and substantial prejudice in order to prevail on a late notice defense; however, disputes regarding timely notice tend to be fact-intensive (translation: protracted and expensive), and it is better to avoid them altogether.
Identify and calendar -- and, of course, comply with -- all policy deadlines, and request extensions when necessary. Property policies tend to be chock full of deadlines for complying with certain conditions, such as (1) providing notice of a loss or claim; (2) submitting a sworn proof of loss; (3) repairing/replacing damaged property in order to recover the replacement cost value, rather than an actual cash value, of the property; and (4) filing a lawsuit against the insurer regarding coverage disputes. The notice and proof of loss deadlines can be as short as 30 or 60 days. The others can be one or two years; however, even these longer deadlines can present challenges in the context of large, complex claims, particularly where there has been wide-scale devastation in the area that impacts the recovery process due to labor shortages and increased demand for replacement parts, among other things. Failure to timely satisfy these requirements can jeopardize your coverage and can result in drawn out and costly disputes. Stay on top of these deadlines and request extensions when necessary.
Assess, Quantify, Track, and Mitigate Your Losses
Determine the cause(s) of the loss: The cause(s) of the loss generally determines whether the loss is covered. Additionally, even if the loss is covered, the type of loss often dictates the extent of coverage, as different deductibles and sublimits often apply to different types of losses. For example, many policies have higher deductibles for “hurricane” losses or for “named storm” losses (which, of course, are not the same thing – a hurricane is a type of named storm that has sustained wind speeds of at least 74 miles per hour). Also, different sublimits often apply to different types of losses, such as “flood” losses (to the extent that they are not excluded). Hence, even if your loss undisputedly is covered, there may be disputes regarding what deductibles and sublimits apply. Although insurance companies typically bear the burden of proving the applicability of exclusions and other coverage-limiting provisions, policyholders should independently investigate the cause(s) of loss as part of their overall coverage analysis.
If, as often is the case in the context of hurricanes, multiple causes (such as wind and flood) contributed to a loss, the coverage analysis becomes more complex. Issues to consider include:
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Does the fact that the damage arose from multiple causes even matter? Are any of the causes (or potential causes) of the loss excluded or subject to lower sublimits or higher deductibles?
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Is the damage indivisible, or can it be apportioned among the different causes?
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Were the causes separate and independent? Or were they causally related and dependent on one another?
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Does the insurance policy contain provisions addressing how such losses should be characterized, such as so-called anti-concurrent causation clauses, ensuing loss clauses, or other provisions addressing multi-cause losses? How have courts in the relevant jurisdictions interpreted similar policy provisions?
Experts may be needed in connection with a causation analysis. The good news is that, depending on the circumstances, fees paid to experts retained to help prepare and present a policyholder’s insurance claim often are covered, as discussed in the following section.
Quantify your losses. Consult professionals – such as forensic accountants and engineers – who can advise on and assist with causation analyses, quantification of damages, and claim presentation. Property policies typically provide Loss Adjustment Expense coverage (which sometimes is called Professional Fees coverage), which covers costs associated with the policyholder’s claim preparation activities. Note, however, that fees paid to lawyers, public adjusters, or other advocates for the policyholder typically are excluded. Also, as discussed below, be mindful, that communications with accountants and engineers might not be deemed privileged.
Document your losses. Gather and preserve documentation of your losses, including property losses, related financial losses, and expenses incurred in an attempt to mitigate your losses. Such documentation includes photographs and/or videotapes, as well as purchase orders, invoices, receipts, and other accounting records. Also remember to track expenses incurred in preparing your insurance claim and in responding to your insurer’s requests for documents and information.
Take reasonable steps to mitigate your losses. Property policies tend to contain both sticks and carrots with respect to mitigation. On the one hand, they typically a handful of provisions that require policyholders to take certain steps to mitigate covered property and related revenue losses. On the other hand, as noted above, mitigation costs typically are covered under property policies, as well as under common law. And, of course, it makes good business sense to mitigate losses regardless of the availability of insurance.
Navigating the Claim Adjustment Process
Cooperate with your insurers. Property policies typically require policyholders to cooperate in the claim adjustment process. Additionally, as a practical matter, an insurance carrier is not likely to pay a claim without first receiving sufficient information that supports the policyholder’s claimed losses. It is prudent to communicate with your insurers in order to keep them apprised of relevant developments, including decisions regarding repairing and replacing damaged or destroyed property and decisions regarding the overall recovery timeline, among other things. Insurance carriers typically do not agree to pay costs to which they did not previously consent or about which they were not previously consulted or notified. Additionally, policyholders should comply with their carriers’ reasonable requests for information, and should document their compliance. Property policies also often state that policyholders are required to submit to examinations under oath when requested (although carriers tend to request them infrequently).
Communicate with others carefully. All employees with knowledge of the company’s losses should be advised that communications regarding the losses and the insurance claim might not be deemed privileged, including internal communications that do not involve, or do not take place at the direction of, counsel, as well as communications with third parties, such as insurance brokers, accountants, and engineers. It is best to limit communications to objective facts, and to avoid speculation and legal conclusions.
Request advances and/or interim payments. The claim adjustment process can be lengthy – particularly where losses are large, ongoing, and otherwise complex. For such losses, it can take several months, if not years, to reach a final agreement (or otherwise to obtain a final resolution) regarding the amount of coverage owed. Under these circumstances, request advances or interim partial payments for undisputed amounts.
Do Not Take "No" for an Answer. As a final matter, a denial letter does not necessarily mean your losses are not covered. Similarly, even if your carrier agrees that there is some coverage for your losses, your carrier’s valuation of covered losses is not always correct or reasonable. Do not allow yourself to be shortchanged. Push back when necessary.
