Insuring
Against The Storm: Securing Coverage for Business Disruptions
and Property Losses Caused By Hurricane Sandy
The unprecedented confluence of weather conditions that
caused Hurricane Sandy to ravage the Eastern Seaboard has
devastated communities and businesses. While the human cost of
the disaster is still being tallied, businesses have already
begun the task of restoring operations. The next step is to
ensure the continuity of businesses essential to the welfare
of those affected.
In addition to the destruction of
premises and inventory on the ground, companies in the
storm-damaged areas—and elsewhere—must cope with supply-chain
disruptions, the interruption of other essential services, and
sometimes the loss of important markets, as well.
Insurance may help mitigate such losses. But to secure
the coverage for which they have paid, businesses must act
immediately to itemize and document broad categories of
losses, and meet contractual deadlines.
The
Importance of Acting Quickly
Commercial all risks insurance commonly
covers damage to property and inventory and loss of profits
due to business interruption. It may also cover supply-chain
disruptions, loss of markets, and even liabilities arising
from inabilities to meet commercial obligations. To secure the
benefits of coverage, however, it is critical to take
immediate action:
- Identify all available insurance and comply
immediately with notice and proof of loss
obligations. Commercial insurance typically
requires the policyholder to notify the insurer of a loss
"as soon as practicable." Thereafter, the policyholder must
file a detailed, sworn "proof of loss," often within 60 days
after the loss. It is essential to begin the process of
documenting and quantifying such losses at once, ideally
with the help of experienced coverage counsel and forensic
accountants. Failure to meet these deadlines can result in a
loss of coverage or lead to disputes with insurers that, at
a minimum, will complicate insurance recovery efforts.
Document and quantify all elements of actual
and potential loss. You may have insurance for
categories of loss you have not even considered. Insurable
losses include destruction or damage to real property,
equipment, inventory, furniture, data and records; losses from
interruptions of business due to lost productive capacity,
interruptions of labor, loss of access to facilities, loss of
utility services, and civil authority directives ranging from
the closure of premises to evacuation orders; interruptions in
supply chain; and loss of markets. Even companies outside the
storm-damaged areas that are dependent on suppliers or markets
in the affected areas may be entitled to coverage.
Types
of Insurance That May Respond
Just as it is critical to
capture each element of the loss, it is important for you to
identify every potential source of insurance to cover it. Your
coverage may not be limited to first-party property insurance.
Losses of business property and
inventory. At its most basic level, commercial
insurance provides coverage for the lost value of property and
inventory. Damage to buildings, facilities, manufacturing
equipment, computer systems and data may all come within the
scope of first-party property coverage and should be carefully
indexed. The value of salvage must also be taken into account.
Direct and contingent business
interruption. Often more valuable than insurance for
damaged property, commercial property insurance also may
include a so-called "time-element" provision for lost profits
due to business interruption. This coverage is triggered when,
in addition to suffering direct property damage, a
policyholder's ability to produce goods and services is
interrupted or impaired.
Importantly, to gain the
benefit of such coverage, you must first establish that you
have suffered direct physical loss to property or, in some
cases, that your business has been required to shut down under
orders issued by civil authorities. It is important to consult
your policy to understand the scope and limits of such
coverage.
In addition to direct business interruption
coverage, many policies also provide "contingent business
interruption" coverage for specific supply-chain or market
impairments. Such insurance extends coverage even when you
have not suffered direct physical loss or damage to property,
but have suffered interruptions in supply or services or loss
of markets for your products or services due to property
damage suffered by your suppliers or customers. Such coverage
may even extend to your indirect suppliers—so you will need to
consider all the links in your supply chain.
Loss mitigation, prevention and documentation
expenses. Many commercial policies contain provisions
for salvage, loss mitigation, and coverage of "extra expenses"
incurred to limit or mitigate business interruption losses.
Business interruption coverage may require you to take unusual
steps to expedite restoration, or incur special expenses to
account for losses. Such costs may fall within the express
coverage of the policy, or coverage may be mandated or
inferred by applicable law. In addition, some policies include
so-called "sue-and-labor" clauses providing coverage for
expenses necessary to prevent further losses, including
business interruption.
Coverage for Loss of
Services. Some policies—but not all—specifically
cover the loss of utility services, including power, gas,
water, and sewerage. This is perhaps the most widespread cause
of business interruption in the wake of a storm. Policyholders
should review their policies immediately to determine whether
they have this coverage.
Other Types of
Insurance. Some policyholders may have purchased
specialized coverage for supply-chain interruptions or trade
disruption. Like contingent business interruption insurance,
such policies do not necessarily require direct physical loss
to trigger coverage. Such coverage will be relevant to
companies in and out of the affected areas that have suffered
indirect disruptions because of the storm.
Policyholders may also look to general, excess and
umbrella liability policies, and directors and officers
liability insurance, to cover liability claims from third
parties arising from failures to supply goods or services or
meet other contractual obligations, or to take necessary
precautions to secure supply chains or personnel safety. Such
policies often will fund the costs of providing a legal
defense in addition to any liability that is ultimately
assessed by court decision or settlement.
Finally,
policyholders should not overlook the possibility of coverage
as an "additional insured" under policies issued to
contractors, joint venture partners and others. The extent of
such coverage will vary based on the nature of the
relationship and the specific terms of the relevant policies.
Orrick's Insurance Practice
Orrick, Herrington & Sutcliffe has an
industry-leading insurance recovery practice, representing
policyholders exclusively. We help evaluate coverage; prepare
large and complex claims for presentation to insurers;
negotiate and resolve coverage disputes; and, when necessary,
handle large coverage claims in litigation, arbitration and
alternative dispute resolution. With 50 full-time equivalent
attorney professionals in six offices including leading
Chambers-rated attorneys, Orrick's insurance practice
is listed in the top tier by U.S. News & World
Report.
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