Business interruption and contingent business interruption claims loom as a large issue following ‘Superstorm’ Sandy, as thousands of businesses of all sizes deal with flooding, physical damage, power outages, government orders and supply chain disruptions.
Finley T. Harckham, shareholder in the Insurance Recovery Group at law firm Anderson Kill & Olick, says he expects “huge battles” between business policyholders and insurers over whether interruption losses are covered.
“It all depends on the policy and triggers,” he tells PC360. “Much of the coverage is tied to physical damage—damage covered under your policy.”
Business interruption covers businesses for losses stemming from unavoidable interruptions in their daily operations as a result of physical damage, but if damage was due to an uncovered peril—flood, for instance—coverage may not be available.
Also, businesses may have coverage for loss resulting from evacuation by order of civil authority, triggered when authorities close off access to a damaged area. Damage to the insured’s own property is not required to trigger coverage but the order typically must result from property damage of a type covered by the insurance policy.
Businesses that are not themselves forced to close may be able to tap contingent business interruption coverage, which is triggered when policyholders do not themselves suffer physical damage but still lose revenue after a property loss sidelines a major supplier or customer base. Contingent BI is a standard provision in many property insurance policies, though many small businesses are not aware of it, Harckman says.
“For larger companies, business interruption dwarfed property losses after Hurricane Katrina,” Harckman says. “Sandy won’t be Katrina-like but there are some parallels.”
Harckman recommends businesses research their policies as they assess income losses from Sandy’s destruction and delays.
"Too many businesses do not think about insurance unless their premises are damaged—or if they do, they fail to calculate the full range of loss," notes Harckham. "Small businesses in particular may not even be aware of their business interruption coverage, let alone their contingent business interruption coverage."
Dan Gerber, co-chair of Goldberg Segalla's Global Insurance Services Group, agrees that causation will be an issues in business interruption claims, adding, “Most policies that exclude storm surge flood coverage afford limited coverage for flooding caused by sewer or drain back-up. Here again, causation will be an issue. A determination is required as to whether the loss resulted from initial flooding or perhaps debris in a drain.”
Gerber adds, “One of the key issues is determining appropriate restoration periods. This is the period when a business is again able to commence normal operations. Generally, coverage is only afforded for loss up to the point of restoration of normal business.”
Agents and brokers may also face litigation. Gerber says some can expect scrutiny over the coverage they have recommended to clients, resulting in some errors and omissions claims.
Al Tobin, managing principal of Aon Risk Solutions’ Property Practice, says Aon expects “direct property damage, power outages, blocked buildings and civil authority to cause large business interruption losses.”
“Most commercial policies provide flood coverage; however, some policies contain specific language limiting or even excluding coverage in flood-susceptible areas,” he says. “All organizations should review their existing policies immediately.”