Hurricane Katrina is the most costly natural catastrophe in U.S. history. While the adverse effects on Louisiana, Alabama, and Mississippi residents are evident, this disaster will probably have a tremendous impact on insurers who have not faced an exposure from a catastrophe of this nature. While Hurricane Andrew and the other major storms that followed Andrew significantly affected residential property, Katrina’s wrath affected both a major American city and an entire region. Consequently, the insurance industry faces large and widespread claims and massive and unanticipated losses. Coupled with anticipated aggressive claims positions by insureds, probable pressure from reinsurers, extensive attorney involvement, and clashing personalities, the claims process will be difficult at best.
I. Selected Potential Coverage Claims
A.Business Interruption. Indemnification for losses incurred because an ongoing business has been interrupted by the destruction or damage to the building, offices, or plant are covered under “business interruption” insurance. “Under such a contract, the insurer agrees to indemnify the insured for any loss sustained from liability to continue to use specified premises or to keep the premises occupied by a tenant.” Couch on Insurance, 3rd Ed., 1:61. Business insurance policies typically cover such lost income, but most insurers take the position some physical damages to the premises is needed, and only pay for losses during the period of restoration for a limited time period.
Typical business interruption language is similar to the following:
“A.Business income or extra expense – We will pay for the actual loss of “business income” you sustain due to the necessary suspension of “operations” during the “period of restoration,” but not to exceed 12 consecutive months. The suspension must be caused by direct physical loss of or damage to property at the “described premises” . . . caused by or resulting from a Covered Cause of Loss.”
Those making a business interruption claim should be prepared for delay in disputes over the “business income” lost by the policyholder. Insurers can be expected to demand detailed documentation of the loss, which must fit within the policy terms.
“Business Income means the:
1.Net income (net profit or loss before income taxes) that would have been earned or incurred; and
2.Continuing normal operating expenses incurred, including payroll if there had been no direct physical loss or damage.”
Zurich North America, Small Business Policy (Ed. 5-02).
Insurers usually take the position that property policies provide business interruption coverage only when the property damage itself is covered, and deny business interruption coverage for claims based on damages that are excluded, such as flood damages Most insurers take the position their policies require a “covered cause of loss” before business interruption coverage is available. Other related coverages include extra expense coverage, which provides the insured with “necessary costs” to avoid, or at least minimize, the suspension of business and to continue operations either at the listed premises or a replacement or temporary location. Notwithstanding the required direct damage to listed premises, most business policies pay for “business income,” in situations involving Civil Authority:
A.”Civil Authority – We will pay for actual loss of “business income” you sustained and necessary extra expense caused by action of Civil Authority that prohibits access to the “described premises” due to direct physical loss or damage to property, other than the “described premises” caused by or resulting from any Covered Cause of Loss.”
Zurich North American, Small Business Policy (Ed. 5-02). Most “Civil Authority” coverage lasts for several weeks, and seldom exceeds 30 days. Civil authority can include mandatory evacuations.
B.Contingent Business Interruption. Contingent business interruption coverage is a variation on business interruption insurance. It extends coverage for lost profits resulting from an interruption of business to a customer or supplier’s property, either specified or blanket. In almost all instances, insurers take the position that business interruption coverage requires the damage result from the physical damage to the insured’s own property that would permit recovery of business income losses. Typical contingent business interruption language covers such income losses to property that prevents the insured’s supplier of goods and/or services from rendering its goods and/or services, a receiver of the insured’s goods and/or services from accepting the insured’s goods and/or services. Contingent business interruption insurers often attempt to exclude losses resulting from interruption of utility services, including phone, water, electricity, and gas.
Like business interruption claims, recovery for contingent business interruption requires extensive documentation and analysis. In fact, recovery can be challenging because the insured needs to establish the loss impact incurred by another on the insured’s business. In many instances, the documents and proof needed to recover may or may not exist, or may belong to others.
II. Filing the Business Interruption Claim
Before filing any claim, the policyholder should read the insurance policy, and then read the policy again. Otherwise, the policyholder risks not meeting the burden of establishing that a loss was incurred, and that such loss is covered under the policy. An early evaluation of the insurance policy, including coverages, exclusions, and deductibles and relevant law is needed to ensure the formal proof of loss is not misinterpreted, misconstrued, or inadvertently provides the insurer with a basis to contest the claim. Depending on the facts and circumstances, the policyholder should consider retaining a public adjuster, or take the following action, if there is damage to an insured’s property that may provide a basis for a business interruption claim:
Step 1 – Record or preserve evidence of the property damage. There may be a dispute related to covered property damage that could trigger a business interruption claim. Regardless, the insured should take photographs and videotapes of all damaged property, and do so as soon as possible after the loss is incurred.
Do not remove or replace damaged property without the insurer’s approval. The insurers have the right to investigate the claim also, and in some instances, may want to take possession of damaged property.
With a large claim, the insurers’ experts will be investigating as soon as possible, so the policyholder needs to be proactive. The insured (or their expert) should also be present when insurer’s representatives conduct their inspection. Don’t be shy; ask for initial impressions on the situation and the adjuster’s expectations; ask for business cards; and ask the adjuster who may be the insurer’s experts.
Step 2 – Investigate the Insurer. In addition to preserving evidence, insureds should not hesitate to research how their insurer, and the particular adjuster, have handled the same or similar claims. Casual conversations with the adjuster may provide insight into the adjuster’s perspective. Larger businesses, with risk managers, may be able to contact other risk managers that have incurred the same type of loss, either currently or in the past; or may have dealt with the same insurer.
Step 3 – Create a Team. Policies vary greatly. Read the policy again. If the loss is substantial, have legal counsel also read the policy for coverage and exclusions before any claim is submitted. Counsel should be knowledgeable about insurance policies. Counsel should also provide advice with respect to the need for additional expert services, such as an accountant and/or engineer to assist in proving business interruption and the nature and type of documentation needed to prove the business loss. Some insureds retain public adjusters, who often have a “team,” and typically charge based on the insured’s recovery. Do not retain a public adjuster without investigation and references.
Step 4 – Meet With Insurers and Accountants. Because business interruption losses require documentation and analysis, the parties should probably agree to a loss adjustment schedule. Have agendas for meetings. The insured should also be proactive, by suggesting methods and procedures to resolve issues and disputes, rather than responding to the insurer’s methodology. The process should not be adversarial until and unless the claim is denied in whole or in part. In the event of “personality” issues, the insured might consider requesting that the insurer, or claims adjusting company, provide another adjuster.
The policyholder can communicate directly with the insurer or adjuster, and should do so as frequently as possible. In large claims, documents or information should be provided at the insurer’s request, with counsel’s knowledge and approval. Keep written notes to document the dates of the communication and the details of such discussions.
Step 5 – Gathering Proof of Loss. Seldom will an insurance policy identify the documents needed to verify or support a business interruption claim. Even so, the insured has the burden to prove the loss. Thus, the policyholder should anticipate a request to examine the company’s books and records, financial statements, and other financial reports. The actual information needed depends on the nature of the industry or business.
Unless asked for specific information, the insured can decide on the documentation that will support the loss. For example, if historical sales show an upward movement, a growth trend would be supported; likewise, showing that prior projections were accurate may support existing projections for future income. Make sure that all requests are in writing, with written responses to identify documents requested and considered. General requests for information should be met with requests for more specific requests. Educating the adjuster or accountant for the insurer about the industry and your specific business may be helpful. With smaller businesses, the insurer also asks for state and federal tax information.
The policyholder’s expert should be retained by legal counsel to preserve the attorney-client/work product privileges, at least initially. The policyholder’s expert should actively participate in gathering information and providing an analysis throughout the process. No written reports should be rendered until the insurer provides its expert analysis of the loss, including the business interruption claim.
Step 6 – Formal Proof of Loss. Business interruption claims typically depend on the time during which operations are shut down multiplied by the quantity of goods or services normally produced or sold, which is further multiplied by the value of such goods or services (which is usually expressed as “net profit”). The policyholder should meet with counsel and other experts needed to submit the proof of loss. Make sure there is a claims analysis from the insurer’s accountants to understand the methodology and information considered. As in other situations, different methodologies, and the use of different information, can lead to varying conclusions. The formal claim should also have input from accounting, risk management, and other groups within the company’s structure. The actual claim should be a complete document which references and attaches source documents. It should be easy to read without confusion, and take an approach and theory that could be used to establish the loss in court. If the insurer denies all or part of the claim, the policyholder should make sure the reasons are specific.
Be ready for unanticipated variables and hurdles. For instance, insurers may take the position that there is no business interruption loss if either the insured’s suppliers or customers are likewise unable to operate. The insurers might argue that certain businesses do not have loss because their operations are seasonal, or because the loss merely results in a delayed sale when real property (buildings, etc.) are involved.
CONTINGENT BUSINESS OPERATIONS
1.Physical property damage or loss
2.To a supplier, customer, or dependant’s property (specified or blanket)
3.Peril loss is the type covered under the insured’s policy
4.Covered loss causes an interruption
5.For a defined period (period of restoration)
TRADITIONAL SITUATIONS FOR
CONTINGENT BUSINESS INTERRUPTION COVERAGE
1.Merchandise from a single or few manufacturers
2.Materials from a single or few suppliers
3.Customers are attracted by a neighboring property
4.Bulk of insured’s products sold to a single or few businesses