Over the past weekend, a series of tornadoes and severe storms caused significant injuries and property damage across seven states, including Texas. In Garland and Rowlett, northeast of Dallas, wreckage from businesses and homes, trees, power lines, cars and other debris litter the streets for miles. Apart from the personal devastation felt by affected individuals, the economic cost of these storms, measured in lost revenue and replacement expense, may collectively amount to billions of dollars.1 For those unfamiliar with pursuing significant insurance claims, it is important to seek professional advice before having substantive discussions with insurance carriers and adjusters. The terms of individual commercial or residential policies may contain complicated provisions, and coverage may be compromised by a failure to understand or comply with policy terms. In particular, as communities seek to recover from these destructive storms, commercial and residential policyholders should be familiar with the terms of their individual policies and consider the following five tips for maximizing coverage for tornado-related claims:
1. Manage Communications with the Insurer
The policyholder should review and comply with all policy terms governing notice, proofs of loss and consent. In the event that policy conditions cannot reasonably be met despite the insured’s reasonable diligence, the insured should obtain advance consent or an extension from the insurer, which should be documented in writing. In some cases, and particularly those involving business interruption claims, it may be appropriate to retain a forensic accountant or other professionals to assist in preparing necessary documentation to support the claim. The cost associated with professional services performed to prepare a “proof of loss” may also be compensable under a commercial property policy. The policyholder should communicate regularly with the insurer regarding the claims process, either directly or through a designated intermediary such as an insurance broker or counsel. The insured’s representative should determine from the insurer’s adjuster exactly what the insurer’s expectations are, including requests for information and the anticipated timing for fulfillment. The insured should establish and document corresponding expectations regarding the anticipated schedule for receipt of insurer’s position regarding coverage. All substantive communications from the insurer should be confirmed promptly and in writing, including (1) requests for information; and (2) positions regarding coverage. The insured’s representative should respond to requests for information from the insurer on a timely basis and confirm receipt of the requested information in writing. Relevant information regarding the claim, including documentation concerning the amount and cause of the loss or damage should be preserved and not destroyed.
2. Make the Most of Your Property Damage Claim
Coverage for loss and damage may be limited by the “valuation” provisions in a commercial property policy. Most commercial policies will compensate for damaged structures on a “replacement cost” basis—the cost to rebuild or replace the structure at the same location with new materials of like kind, size and quality—provided that the repair or replacement occurs within a specified period of time. If the damage is not replaced within the specified period of time, coverage may be limited to “actual cash value”—which is the “replacement cost” less applicable depreciation. In order to realize the full benefit of a commercial property policy, insureds should comply with the deadlines required to receive full replacement value and avoid any deduction for depreciation. In some cases, this may be possible by applying the proceeds of a commercial property policy to a qualifying capital project in another location. Advances against the anticipated value of a claim for property damage or business interruption may be requested from the insurer to enable the timely repair or replacement of covered property.
3. Be Aware of Other Potentially Applicable Coverages
In addition to insuring the cost of repairing or replacing damaged property, many commercial property policies will include other provisions insuring, for example, (1) business interruption, i.e., the actual loss of revenue (less non-continuing expenses) resulting from covered loss or damage and continuing through the period reasonably required to repair or replace the damaged property; (2) extra expense, i.e., the added cost of continuing normal operations after a loss when damage to property does not completely “interrupt” the insured’s business but nonetheless increases the cost of operations; (3) sue and labor coverage, i.e., the cost incurred to protect and preserve insured property against imminent loss or further covered damage after an occurrence has begun; or (4) code upgrade coverage, i.e., covering the cost of demolition, if any, and the added cost of repair or reconstruction of covered property, necessary to comply with the minimum requirements of laws or ordinances governing the repair or reconstruction, provided that the physical loss or damage caused the enforcement of such laws or ordinances in the first place. In order to maximize coverage, policyholders should be aware of and pursue, when appropriate, these and other potentially applicable coverages.
4. Know Where Your Duty Stops and the Insurer’s Begins
Under most “all-risk” commercial property policies, the insured is only obligated to demonstrate loss or damage to covered property during the applicable policy period, without proving or disproving causation. It remains the insurer’s burden generally to show that the insured’s loss or damage was caused by an excluded peril. In the event of a tornado or other storm, questions may arise as to whether the insured’s loss or damage was the result of a tornado, some other excluded peril such as faulty workmanship, ordinary wear and tear, depreciation, deterioration, or a combination of excluded and non-excluded perils. Courts in most jurisdictions have developed legal doctrines to establish what is covered when excluded and non-excluded causes contribute to a loss. Some follow a “concurrent causation” approach whereby damage, that may have resulted from multiple causes, is compensable if the insured can trace or allocate the damage to a covered peril. Other jurisdictions follow an “efficient proximate cause” theory whereby damage is insured if the non-excepted cause is the “prime” or “moving” cause of the loss, notwithstanding other more remote or intermediate, excluded causes of loss. Policyholders should be familiar with the approach applicable to their own commercial property policy in preparing and pursuing claims.
5. Consider Appraisal
Many commercial property policies contain “appraisal” clauses allowing the insurer or the insured to submit disputes over the amount of loss or damage to a panel of appraisers, often consisting of two party-appointed appraisers and a third “neutral” appraiser. Corporate policyholders should be familiar with and weigh carefully how the terms of an applicable “appraisal” clause—which are increasingly favored by courts—may impact the insured’s pursuit of a tornado or other commercial property claim. For example, insureds should be vigilant to ensure that the scope of any appraisal process is appropriately limited to the valuation issues authorized by the appraisal provision itself. Policyholders should also determine whether the appraisal clause permits the insurer, the insured or both to litigate coverage issues after appraisal has been conducted. Familiarity with these provisions may ensure that the insured’s extra-contractual claims are preserved even after appraisal is complete or may even limit the insurer’s right to deny coverage after initiating appraisal.