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Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. 

Jessica: Good morning, afternoon, or whatever time it is for you, and welcome back to Insured Success. My name is Jessica Gopiao. I am a senior associate and member of the Reed Smith's Insurance Recovery Group based in both Miami and Orange County. I am here with Rich Lewis and John Ellison, and we'll let them introduce themselves before we get started. 

Richard: Hi, I'm Rich Lewis. I've been handling property and business income cases for about 30 years. Handled them from 9/11, Katrina, Rita, some of the storms in New York, and I've also written a book on business income insurance disputes that I keep updated and been writing it since 2006. 

John: Hi, everybody. I'm John Ellison. I'm a senior partner in the Philadelphia and New York offices in the firm's insurance recovery group. Along with Rich and about 80 others of us, we handle first-party property and business income losses around the globe and have been doing it as long and probably with as much success as any other firm. So hopefully some of our experience today will translate well to assist you if you ever are in the unfortunate situation of having to deal with a natural disaster insurance claim. 

Richard: All right, so just as a matter of background, we're going to be talking about first party or property insurance, and that generally covers tangible properties such as buildings and equipment and machinery and intangible property being the expectation of profit or additional costs you have to incur to keep in business. There are a number of foundational issues that come up in most property claims. The first is most people buy replacement cost insurance, And that is insurance that gives you new for old. And there is often a delta between what your property is worth when it is destroyed and how much it would cost to replace it. And what a lot of people discover for the first time with a property claim is that under policies, the insurance company only needs to front you what's called the actual cash value. And you have to arrange to get the replacement cost. And sometimes that is difficult. other issues that come up the carrier may want to repair damaged equipment or and you want it replaced in general you know if the way to handle this is to ask the original equipment manufacturer if they will honor any warranties if the equipment is repaired and they generally say they won't and if you're not put in the same position that you had prior to an event that's not the rule the rule is that you should be put in the same position. And that usually means replacement property, not repaired. As for the time element part of property, the general rule in business income is that it's to do what you would have done, but for the event. And that's, So for business income, that's the profit and the unavoidable continuing expenses. Extra expenses are expenses that you incur to keep in business, and there's usually coverage for extra expenses. One thing to note at the outset, and I think we're going to talk about it a little bit, is that disputes under property policies generally evolve over time. It's not like a liability claim where you may get a reservation of rights or a denial letter that identifies exclusions right up front. Generally, what happens in a property insurance dispute is what will be called the independent adjuster, who is usually aligned with the insurance company, will come out and visit and look at your destroyed property and will say, well, I'm going to be your ally on this. I'm going to help you file this claim. But the problem is that the carrier has the ultimate say. And so often it'll be six months to a year before the The policyholder says, I got hit in the face with a board. Everything was going right. And then the carrier denied coverage or wants to do X or Y is not what we want to do. The last point before I turn it back over is there's relatively little case law in property insurance context. My book has about 1,300 business income cases written up, and that's every business income case that's ever been decided. it. And John can tell you there's probably 1,300 pollution exclusion cases just on one exclusion in the liability context. So that allows both the carrier and the policyholder to have some room for maneuver and some creativity as to how they approach resolving the claim. 

Jessica: So the next thing that we're going to talk about is what to do in the short term. As I said before, I'm a part of the Orange County, California office in Miami office. Our practice handles a lot of hurricane claims in Miami, as well as wildfire claims in California. The hypothetical year is say a wildfire or hurricane comes through, what is the first thing that you should do? Review all potentially applicable policies regardless of title. So if you have a first party property insurance policy, that's probably the most straightforward policy that you would look at. But take a look at your entire portfolio and try to see if maybe that could also provide coverage where available. Another thing is to just pay attention to the coverages and limitations relative to that particular type of natural disaster at issue. you. And then understand that policyholders are typically obligated to comply with certain conditions or duties. So the first step, review your policies. The second step, one of the most straightforward and typical obligations that an insured has is to provide notice as soon as possible. So give notice ASAP. A lot of policyholders make the mistake of waiting until they have all the information before providing notice. Just don't do that. When preparing a notice, make sure that it's in writing, and include as much information as you have at that time, and then maybe like a catch-all to provide for all other losses that could be discovered after you do a little bit more investigation. You can always supplement your notice with information as it goes along, provide updates once that's available. Because ultimately, there's no harm in providing notice. But then on the flip side, the failure to do so can preclude coverage. The last thing that I'll recommend before I flip it back over to Rich is we just always recommend immediately gathering whatever documents that you may have for any financial or business impacts caused by the event. Because it's not just property damage that could be covered under your policy, you can also get something like business income coverage, or extra expense coverage. And then just briefly, business income coverage is designed to pay for the policyholder's loss of profits and the policyholder's unavoidable continuing expenses as a result of that natural disaster or whatever that covered event is. In this episode, we're talking about natural disasters. The other one is extra expense coverage. So that pays for both the policyholder's costs to mitigate or avoid or minimize the business income loss. And then And depending on the form of your policy, you could also have coverage for the costs that the policyholder would not have incurred, but for that loss. 

Richard: Yeah. And as to highlight something Jessica said, you have to look at every type of policy that might apply. One of my first big property cases was under an inland marine policy, which seems like a contradiction in terms, not something I would have looked at, but that's where the coverage was. Another issue that will come up very early on is whether you need some assistance in calculating your loss. And there are organizations called loss adjusters. And you'll probably, if you have an event like this, they will be ringing your doorbell or sending you emails. They are people who focus in on adjusting the amount of property damage, the amount of business income loss. So the business income is something that John will cover. That's usually a forensic accountant. The loss adjusters can be somewhat shady. You have to maybe ask somebody who's a reputable one, you may or may not need that kind of help, but they certainly know their way around property insurance policies and how to put claims together in a way that insurance companies appreciate. 

John: Yeah. And so I'll pick it up there. And Rich just alluded to the use of forensic accounts, which is a pretty common practice for any, sort of sizable claim or if any business is going to be interrupted from functioning at full capacity for any extended period of time, it is highly advisable to look to involve one of the many qualified forensic accountants that are out there that do this kind of work. It's often a complicated exercise to put the claim together, but what forensic accountants who do this type, of work really bring to the table is they know how to format and collect the data and present it to the insurance company in a way that the insurance company expects to receive it. And if you have a good forensic accountant on your team. That can expedite exponentially how fast you'll get a response from the insurance company and just advance the dialogue. But one of the things you have to be careful about with forensic accountants is worry about attorney-client privilege and whether your communications are protected. And we'll get into that a little bit further down the road. But one other point I wanted to add about the policies, I mean, Rich and Jessica both said, read them, but also look for potential internal limitations periods because property claims, unlike other types of insurance, often have a limitations period built into the policy that would be shorter than the limitation period that exists as a matter of law in whatever state you're located. So you don't want to get tripped up and blow a time deadline by not being aware of of those types of provisions that exist in your policy, and they are in virtually every type of property policy. The time periods often differ, but there is almost always an internal limitation period that you need to know about from the get-go. 

Richard: Yeah, and that's super important. It's called a suit limitation, and it's counterintuitive because sometimes a BI loss, a business income loss will take two or three years to develop, and the suit limitation says you have to sue within two years of the damage. It's not you have to sue within two years of the denial. It's two years of the damage. And so you have to pay attention to that. You can get an extension of a suit limitation, but it has to be in writing. 

John: And always make sure it's in writing. And I wouldn't even take an email, but that's better than nothing. So let's shift quickly and we'll try and cover this really briefly. That's sort of what you do in the short term. Now, what do you do in the medium term after the loss has happened and you're trying to get your business back together? It is critical to designate somebody inside your company as sort of the point person for collecting and collating all data about loss that is being experienced as a result of the impact of the disaster. And that has to start really from almost day one. But as soon as you've sort of figured out what insurance you have and what notice you need to give, the next thing you need to do is start collecting all of the data. If you can set this up internally on your computer system, you know, have some sort of tracking ability where things get tagged or immediately put into files so they're collected in real time as they're happening because the hardest thing you will ever have to do. And unfortunately, we've all had to do this with clients before, is try and go back and recreate the costs that you incurred if you don't do that from day one. Doing that as a backward-looking exercise is unbelievably difficult and time-consuming. So you will save your business and yourself a whole lot of headaches if you set up a process early on in the adjustment of the claim so that you're getting that data collected as it's being generated. And then you have it to pass on to your forensic accountant, to the insurance company, et cetera. 

Richard: Yeah, I think John mentioned it, but another thing that we found is that you try to designate someone within your organization who will be present on every call, in every meeting with the insurance companies so they'll know that people aren't telling different things to the carriers and the message remains consistent. And you also want to pick somebody, one of the things we'll say several times in here is you plan for trials so that you can avoid a trial. You don't want to go to court on these things, but if you plan it out and you pick someone who would be a competent, good witness who can take the jury through all the steps in the claim adjustment, that's planning for trial so that you don't have one. Along the same lines, what we always say is just bat everything back over the net. You will get a ton of correspondence from the carrier. Make sure you answer it in a timely manner. Make sure, and that sends a message to the carrier that you're not going to go away. One of the things that Gene Anderson, who taught both John and myself, is insurance companies ration by hassle. They deny everything or they make it very painful to collect and hope that people walk away. And people who can put up with the hassle and keep batting the ball over the net by responding to letters show the insurance company that they're not going to go away and they get paid at the end of the day. 

John: Just, Rich, one other thing. Yeah, I mean, the squeaky wheel gets the grease is definitely a phrase that applies in the insurance context. So don't be bashful about seeking the coverage you're entitled to get. One other thing I just want to mention real briefly before Rich moves on to the next topic is make sure you have your broker involved in the dialogue too. Because of the different roles that people play here, forensic accountants, people who work at the company, outside counsel, et cetera, the one entity that can really speak to your insurance company on a business level is your broker. And many of them have some leverage to be used on your behalf to get a claim paid. They also have channels of communication inside an insurance company that other people do not have. So an important part of your team, in addition to all these other disciplines, is your insurance broker. And they often can move things in a way that other entities can't. So make sure they earn their money. 

Richard: Yeah. And the last thing with regard to correspondence is what you want to do is preserve your room for maneuver and try to pin the carrier down. I had a case one time that involved one of four cereal manufacturing plants in a city. It burned down and the carrier thought, well, we have to look at all four plants together and what their performance was because the carrier thought, well, the other three will pick up the slack. And that's not what happened. And the disruption caused by trying to get a fourth factory back online caused the other three to lose business. And when we learned that, the carrier was already pinned down by their position in writing. All right, so let's switch over and maybe we talk about other mass catastrophe issues. And maybe John can start us off with, you know, what happens with carrier positions in a mass catastrophe. 

John: Sure. Yeah, well, this is a perfect segue from what Rich just said. Often insurance companies, you know, your business will have its one and only, hopefully one and only claim related to a natural disaster. But, you know, let's pick on Travelers today. If Travelers is selling insurance in South Florida when a Category 4 hurricane hits, they are going to have thousands and thousands of claims rolling in at the same time where you have your single claim. So what do you do to sort of advance the ball? One is communicate promptly and regularly to make sure you stay on the radar screen of the insurance company. And the other thing you can do, which was what Rich was just saying, is force them to take a position. In addition, policyholders are entitled to get an answer from their insurance company in a reasonable period of time. We usually qualify that as 30 to 60 days, something along those lines. There is nothing that prevents you from forcing them to answer your questions and take a position on what kind of coverage they're going to provide you or why they are not going to provide it. And again, the squeaky wheel gets the grease. So stay at it. it's not fun to do it takes a lot of commitment and time but believe us from having lived through these claims for decades now and trying to help people get what they're entitled to the more you push the more you're going to get back that's just the way it works. 

Richard: One of the big issues that always comes up in a mass catastrophe is something that I call the wider effects of the loss. And the first time I saw this was after 9/11, where I had a client that did a lot of entertainment outside in basketball courts and tennis courts and golf ranges over on the west side of Manhattan. And the carrier came to them and said, well, you know, the first week after 9/11, everybody was watching CNN, so we're going to give you nothing for that week. The second week, we'll give you half of your BI loss because people were starting to get back out. Third week, we'll give you three quarters. And the fourth week, we'll give you the full loss. They had a 30-day civil authority claim. And the policyholder said, well, yeah, okay, that sounds right. That sounds fair. And that is exactly the opposite way in which carriers had handled the wider effects of the loss. lost. Historically, they've looked at the expectation as of the moment before the loss. But this issue can be huge. Look at the way Katrina affected. Almost all the carriers involved in Katrina claims in Houston and New Orleans said, well, there were no people there. Everybody left New Orleans. So we're only going to give you half of your BI claim. And that, again, is contrary to the way the carriers had handled these claims historically. And that is one of the reasons that I'm sure we're going to talk about in a few minutes, why you should consider getting some expert help early on. Because a lot of these issues, these legal issues are not intuitive. They sound, you know, if they're presented to you in a reasonable way, a reasonable business person may say, okay, yeah, that sounds right. But it's contrary to the way in which the law has said these things are to be calculated. Okay. A couple other big issues that sometimes come up, shortages in labor. So, you know, the carrier will say, well, a BI claim is usually measured in the hypothetical time needed to repair something. Well, what about in Katrina or some mass catastrophe where there's not enough labor or materials to build it? That is that you're entitled to consider that. You're entitled to consider that when making your claim. It's not hypothetically, had there been no hurricane, but it's hypothetically based on the conditions that exist on the ground. Another issue that comes up frequently is the value of location. So, for instance, it came up in a famous case called the Duane Reade case, where the Duane Reade had a store in the bottom of the World Trade Center, which was destroyed. And the carrier said, well, we'll give you the time needed to replace the Duane Reade across the street and not in the World Trade Center, which was going to take 13 years to build. I had some involvement in that case. And that one Duane Reade at the bottom of the World Trade Center made as much profit as all of the Duane Reades combined the other Duane Reades in New York. And if you've ever been to New York, there's a Duane Reade every other block. There's probably hundreds of them. And so that was not putting Duane Reade in the position that it existed before. And so you should be entitled to recover based on the value of the original location that was destroyed. So let's switch to what you can do in the long term. 

John: Yeah and what I'm about to say is not a commercial for Reed Smith, but it is a commercial for policyholder counsel generally. And that is in a natural disaster situation, you can bet your life that every major insurance carrier that is involved selling insurance in that market has coverage counsel working for it behind the scenes. They're often not visible. You won't see them in the beginning of the claim. You may not see them for a long time as the claim gets processed and the paperwork is exchanged back and forth between your business and the insurance company, but they're there, advising the insurance company on what positions might be available for them to take to minimize the payment they want to make because that's always what they're trying to do. 

Richard: I have been involved in lots and lots of property claims and so has John, and I have never seen a reservation of rights letter drafted by an in-house employee. They're always drafted by counsel. So the date you get a reservation rights letter, the insurance company has counsel. 

John: That's 100% true. And while I say this, and I mean this sincerely, some clients don't think, believe me when I say it, but when the insurance companies don't know that we're involved in a claim, that's often when we're doing our best work. And what that means is we can help guide the process anonymously as far as the insurance company is concerned to get you through the trappings of the policy and the hurdles and all these other obstacles that we're talking about here. Just by having private conversations with one another, the insurance company doesn't need to know you're having those conversations with us or some other policyholder counsel. And that's exactly what they're doing with their coverage counsel in responding to the things you're submitting to them. So we're really just talking about an equality of arms here. But ideally, the insurance company would never know that the policyholder has counsel involved because with the assistance that they can provide behind the scenes and out of the eyes of the insurance company, that often leads to a quicker and better resolution. The other thing it sets you up for in the event you are going to have a big fight is you can begin to protect your communications under the veil of attorney-client privilege, which would not be available if a lawyer wasn't involved. And that can also protect communications with the forensic accountants and any other sort of consultants you might need to bring in to properly put your claim together to present it in the best way possible to the insurance company. So there's lots of good reasons. It doesn't mean that the policyholder attorney who knows what they're doing won't come marching in and say, you know, like, I'm General Patton now. I'm taking over everything. You work as part of a team. Everyone has their role. And that's the best way to get these claims paid as quickly and as completely as possible. But Jess, I think is going to cover another option here that we sometimes look at, which is somewhat unique to property insurance. 

Jessica: Yeah, it's another way to kind of expedite potentially getting some payment under your policy. So it's called appraisal. Appraisal is a method of to determine the amount of loss under a property insurance policy. So determining amount of loss is a pretty important term here because it's not determining coverage. It's usually when an insurance company and the policyholder agree that there is at least some coverage, but they just don't necessarily agree on the specific A lot of the property insurance policies contain an appraisal provision that can be invoked by either the policyholder or the insurance company. And in some states, including in Florida, you can try to compel appraisal by filing suit so long as the policy language determines that the appraisal is mandatory and all post-loss conditions are complied with. There are a lot of, I think, really good benefits of appraisal. Not only is it informal, but it's less time consuming. It's really not as expensive as potentially going to court. I mean, Rich had mentioned previously to prepare for trial to avoid trial. And then it also would involve an expert assessment of what the amount of loss actually is. 

Richard: Right. So there is an appraisal clause in almost every property insurance policy. And one of the things you need to weigh is, you know, you don't want to get jumped in an appraisal. You don't want the insurance company to start an appraisal before you filed suit because the court will, in my experience, the court will defer to the appraisal and let the appraisal happen. And the problems with an appraisal from our perspective are, you know, the way it involves, there's an umpire and there's an insurance company appraiser and there's a policyholder appraiser. And there is a vast disparity in the experience level of insurance company appraisers and policyholder appraisers. There's one appraiser named Peter Hagen who works for JS Held who says on his website that he's been involved in 3,000 appraisals. I don't know of a policyholder appraiser who's been in more than 10, and it's very difficult to get any intelligence on who are the good appraisers or who are the good umpires. The other thing that is strange about appraisal is there's no guarantee of discovery. You will not get any files from the insurance company that show how they've valued your claim or what they've done with regard to your claim. But as Jessica said, it is much cheaper, and it is potentially faster. The last drawback on appraisal is it doesn't decide issues of coverage. So it just decides issues of amount. And the carrier can say, okay, well, we've discovered that it would be a $10 million loss, but we're denying coverage on these five grounds. And then where are you? You're stuck in the same place you were before the appraisal. 

John: I think that brings us back to the line we've repeated a few times, prepare for trial to avoid trial. I always think of these as prepare for the worst, hope for the best. Most of these cases will not end up in trial. I mean, trials are a single-digit percentage of the number of claims that are made at best. I mean, it could even be less than 1% for all I know. But the insurance company who knows that the policyholder is prepared to see the claim through and is presenting its information and conducting itself in a business-like and serious manner is going to get treated better and is likely going to be able to avoid trial. Because the insurance company knows they're dealing with, in a natural disaster situation, they're dealing with thousands of other claims. We may as well make this one go away because we have plenty of other people we can pick on who aren't doing it the right way. So hopefully what we've said today gives you some pointers and useful information to put your business in the best situation it could possibly be in after suffering a terrible incident like a natural disaster. But we want to thank you for the time you took to listen to us. Jess, Rich, and I are all reachable through the Reed Smith website if you have any follow-up questions, and we'd be happy to chat or email with you. And we hope you enjoyed this version of Insured Success. Thanks very much. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. 

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