Because of the damage sustained, commercial policyholders may have significant insurance claims for property damage, loss of business income, and extra expenses incurred to continue or resume operations. Businesses should immediately determine whether they have an insurance policy that would provide coverage for business losses and property damage caused by the snowstorm. Businesses should look to their property insurance policies as well as any business income/interruption insurance they may have. The following is a short summary of some of the coverages provided under business income insurance and the coverage issues that can arise.
Business income (or business interruption) insurance
Business income insurance is designed to cover a policyholder for profits lost, and unavoidable expenses incurred, during a hypothetical “period of restoration” needed to repair or replace damaged or destroyed property used in the policyholder’s operations. Most policies provide little guidance as to how the amount of a business income loss is to be calculated: Essentially, they state that business income is to be calculated from historical figures. This leads to many sources of potential conflict, including determining the appropriate benchmark to measure the profits that were lost, particularly whether the wider effects of the catastrophe should be considered; when the period of restoration begins and ends; and what constitutes a sufficient “interruption” of the policyholder’s operations.
Extra expense insurance
Extra expense provisions cover a policyholder, at a minimum, for expenses to avoid or minimize a business income loss, e.g., by relocating a production line from a damaged location to an undamaged location. Some extra expense provisions cover the policyholder for all unusual costs incurred simply because the catastrophe occurred, e.g., hiring security to protect damaged premises.
Contingent business income insurance
Contingent business income coverage is designed to cover a policyholder for loss of income caused by damage to or destruction of property owned by others, for example, suppliers and customers. An example would be coverage purchased by an automaker to protect it if its sole supplier of a key component suffers damage to its factory, and the automaker suffers a business income loss arising from its inability to complete the manufacture of cars. Coverage under these provisions varies widely, with some provisions limiting coverage to “direct” customers or suppliers, and other provisions covering customers or suppliers “of any tier” (e.g., customers of customers). Insurers may argue that the period of restoration ends if the policyholder secures an alternative supplier or customer, even though part of the loss continues.
Contingent extra expense insurance
Contingent extra expense coverage is designed to pay for increased costs incurred after the disaster to minimize or avoid a contingent business income loss. Accordingly, if a business incurred additional expenses to avoid or minimize a contingent business income loss, it may have coverage for those costs under contingent extra expense coverage.
Service interruption insurance
Service interruption coverage is designed to provide coverage for business income losses attributable to dislocation of utility or telecommunications services. Losses as a result of service interruptions may be particularly prevalent owing to the snowstorm because it caused widespread power and communication outages.
Because of the predicted flooding, businesses must take extra precautions in assessing their coverage. Property insurance policies often do not cover flooding. Businesses should be cautioned that should flooding occur, insurance companies will inevitably try to attribute as much damage as possible to being caused by flooding instead of the snowstorm in order to minimize any amounts of payments they must make toward claims. Alternatively, businesses should seek input from a professional who is qualified to assist them in making that assessment.
Guidelines for preparing an insurance claim
Most importantly, policyholders should know what their policies say, and what they require, before incurring unnecessary costs. Commercial policyholders should consider the following guidelines while assessing the impact of the snowstorm and in preparing an insurance claim:
- Protect and preserve the assets. Emergency and temporary repairs should be documented and, if practical, reviewed with the insurance company in real time.
- Attend to notice and timing. Make sure to give notice to all insurance companies that could be called to provide coverage. Spot any other time-related requirements and ensure they are satisfied or extended by the insurance company.
- Attempt to involve insurance companies before repairs. Attempt to obtain insurance company approvals before repair and replacement of property. Be aware of insurance companies’ rights to salvage property. If insurance companies are silent or non-responsive in the face of repair decisions – as is often the case – document it for the record. They should not be allowed to second-guess the decision after the fact.
- Documentation and accounting. Keep exact and precise records of all communications, meetings, and exchanges. Set up accounting codes or other processes to track all invoices, costs, and expenses of any kind related to the claim, by various categories. Continue to submit documentation to the insurance company as losses are incurred.
- Reserve all rights. Reserve all your rights to coverage. Do not allow the insurance company to classify or characterize your claim before you have had a full opportunity to review everything and properly present your claim.
- Form a team. Form a team of all personnel involved in the claim and hold regular team calls or meetings. Review the policy with counsel; remember that all exclusions and limitations must be construed narrowly. The insurance company will have counsel, adjusters, consultants, and accountants. Consider leveling the playing field with your own team. Many policies cover some of these claim-preparation costs.
- Communicate. Develop relationships at all levels of your team with their respective insurance company-side counterparts. Keep communication open and civil.
- “Replacement cost new” means replacement cost new. Most policies value property on a replacement cost basis. By definition, what is old is being replaced with something new. This is a natural “upgrade.” Be wary of insurance company pronouncements that the damaged property had “preexisting” defects or wear and tear.
- Do not forget code upgrades. Most policies cover code upgrades. Be aware of the underlying codes and whether they will increase repair costs. This is especially important in dealing with buildings not built to existing codes. Capture all such costs in your claim.
- Prepare the business interruption and extra expense claim carefully. Insurance companies will challenge attempts to recognize net profit for an interruption period. Consider hiring forensic accountants skilled in computing business income and extra expense claims.
- Review other agreements that can affect the claim. There may be agreements that can impact a claim – a loan agreement, a ground or space lease, a property management agreement, a condominium association agreement, etc.
- Draw on the business side. Insurance is expensive. You should expect fair treatment on the claims side. Business contacts, such as between risk managers and brokers, should be explored. If the insurance company does not live up to its end of the contract, consider renewal with a different insurance company.
- Work toward resolution. If yours does not, make sure it is only because the insurance company is being unreasonable and that the record makes this obvious, so that if you do end up in litigation, it will be apparent that you gave the insurance company every opportunity to adjust the claim based on the facts, and that the insurance company chose to be aggressive and unreasonable.
How we can help
Reed Smith’s Insurance Recovery Group has four decades of experience in advising and assisting policyholders in all aspects of first-party property damage and business interruption insurance claims and has authored one of the leading treatises on business income insurance disputes. We have more than 80 insurance recovery lawyers with extensive experience assisting policyholders affected by catastrophic weather events, such as Winter Storm Elliott . If you have experienced damage or loss as a result of the recent snowstorm, Reed Smith’s insurance recovery lawyers can help evaluate applicable coverage for damage to property, loss of business income, and extra expenses caused either directly by the snowstorm or because the property of their customers and suppliers has been damaged.
Reed Smith represents many clients affected by snowstorms and other extreme weather events, and we are familiar with the applicable insurance policies and notice obligations. Even if you have not suffered losses as a result of the snowstorm, now may be the time to evaluate your existing coverages to see if you are adequately protected against future events that might affect your business. Reed Smith can assist you in reviewing your existing coverages to assess whether you have any gaps that should be filled.
Please contact the authors of this alert; the Reed Smith Insurance Recovery Group’s global practice group leader, David Halbreich; or any Reed Smith coverage attorney with whom you routinely work for assistance or with questions.