Commercial Insurance Issues Raised by Superstorm Sandy

Disputed hurricane and windstorm insurance claims have been a common occurrence in Florida and the southeast U.S.  Unfortunately, businesses and residents in New York and New Jersey face the prospect of similar coverage battles after the waters from Sandy subside.  The destruction left by post-tropical storm Sandy may not rival Hurricane Katrina, but likely will surpass Hurricane Andrew as the second costliest storm in U.S. history.  New York has not seen property damage and business interruption claims of this magnitude since the terrorist attacks on September 11, 2001.

Sandy literally hit home for me.  My hometown of Staten Island, NY suffered nearly half of the fatalities from the tri-state area.  The coastal New Jersey towns of Atlantic City and Seaside Heights – where I spent time during the summers as a child – suffered extensive property damage and severe business losses.  And, of course, lower Manhattan – where I worked as a federal law clerk and then volunteered as a pro bono lawyer helping victims and small businesses after the 9/11 attacks – once again faces a challenging repair and rebuilding effort.

Fortunately for businesses that are properly insured, the damage and lost business income caused by Sandy should be covered by insurance.  First-party property policies will cover property damage not caused by flooding, which damage will be covered by the federal flood program.  Other specialized policies, such as event cancellation, multi-peril, and inland marine policies, may provide additional coverage.  Companies should consult with their insurance brokers to collect copies of all potentially applicable policies.

Businesses need to make sure to put all of their property insurers on notice immediately, to avoid forfeiting coverage rights.  Not long ago, New York had the strictest insurance notice law in the country.  The New York legislature has loosened notice requirements in recent years, but delaying even a few weeks in providing notice to insurers could put a claim in jeopardy.

It is important to check the specific notice requirements in the policy to make sure notice is given in the right way (i.e., written as opposed to over the phone) and to the right mailing or e-mail address.  Insurance companies have different claims departments for different types of losses, and some policies require a property loss to be reported differently than a liability loss.  It is critical to follow the exact notice instructions in the policy.

After notice is provided, most first-party property policies require the policyholder to timely submit a proof of loss that contains a sworn statement as to the amount of the loss.  The proof of loss deadline typically is short – some as short as 60 days after the loss – so policyholders who need more time to prepare the proof of loss should obtain an extension in writing from their insurers.  Like a failure to provide timely notice, failure to submit the proof of loss within the prescribed deadline can result in forfeiture of coverage.

Property policies also require companies to cooperate with their insurers in the investigation and assessment of the claim.  Companies need to provide their insurers access to property and information so that the insurer can determine the cause and extent of the loss.  But companies also need to be cautious in communicating with insurance adjusters.  Although part of an adjuster’s job is to collect information to enable the insurer to promptly pay the claim, it is also part of the adjuster’s job to look for ways to deny coverage for the claim (such as developing evidence of pre-existing damage), minimize the scope of repair work (such as by obtaining admissions from the company regarding what does and does not need to be repaired or replaced), and deflect responsibility to other parties (either by blaming the company by failing to mitigate damages, or by seeking to shift responsibility to the federal flood program).  Anything you say to an adjuster can and will be used against you if the claim becomes disputed, so be careful about what is communicated, and make sure the information is controlled and coordinated through a point-person assigned to deal with the insurer.

Companies should understand the different types of insurance coverage that are available within their property insurance programs, so that the claim can be presented in a manner that will maximize coverage.  Although many businesses, particularly those along the coast, suffered extensive property damage, the bulk of the insured losses stemming from Sandy will be lost income claims, referred to in insurance policies as “business interruption” losses.  Over the coming months, companies will need to determine the extent of their income lost due to Sandy.

Companies also will need to determine the availability and extent of coverage for “contingent business interruption” claims, which cover income losses caused not due to direct damage to the business but rather due to indirect harm caused by damage to a key supplier or other business partner.  Other coverages that will come into play include “civil authority” coverage, which pays for business losses caused by a restriction to access to premises due to evacuation orders or mass transit closures, and “extra expense” coverage, which covers reasonable and necessary increased costs of operating the business post-loss (such as use of temporary space or back-up power generators).

There is no doubt that the “wind v. water” issue that has been litigated for years in the Katrina cases will once again be a battleground for Sandy claims.  Insurers will argue that some or all of the Sandy losses are due to flood, and thus uncovered by private insurance.  One thing we learned from Katrina is that private insurers love to stick the federal flood program with the repair bill, even when a combination of wind and water caused the damage.  Not only is this causation issue critically important for businesses that lack flood coverage, or that have lower limits on their flood policies, but the determination as to the cause of loss can also impact a policyholder’s ability to collect on its business interruption claim.

Companies should also be aware of how their policy limits and deductibles will apply to Sandy-related losses.  Many policies contain sublimits for certain types of coverage that are lower than the full replacement cost limit for property damage claims.  Policies also differ as to the minimum waiting period before business interruption coverage starts, and the maximum period of coverage (called the “period of restoration”) during which lost or reduced business income is covered.  It is important to keep in mind that business income losses occur not only when the business is completely closed, but when it is hobbled by restricted access or diminished operational capacity.  The time at which the company is determined to be fully recovered (or when the insurer believes that the business should have fully recovered) often is an area of dispute.

Finally, many policies contain hurricane or windstorm deductibles – some as high as five percent of insured values – that may apply to this loss.  Large hurricane deductibles have been standard in Florida for many years, but are relatively new and untested in the northeast.  Hurricane deductibles should not apply to Sandy losses, since Sandy was not a hurricane when it made landfall in New Jersey.  The insurance departments in New York and New Jersey have warned insurers not to apply hurricane deductibles, but some may try anyway, and some policies contain windstorm deductibles that insurers may argue apply even in the absence of a hurricane.

Companies need to be safe and smart in how they go about their recovery from Sandy.  This includes their insurance recovery, which can make the difference between a company that rebuilds and emerges stronger than before, and a business that is damaged beyond repair.