Even though Sandy has lost hurricane status and is rapidly dissipating inland, the extent and implications of her destructive wake grow ever larger, especially for insurers and their insureds. Bigger in diameter than any Atlantic hurricane on record, Sandy will generate claims of equivalent proportions over the weeks, months and likely years ahead.
At this early date, estimates of insured losses from the storm vary widely, but by all accounts will reach into the billions – if not tens of billions – of dollars. The insurance industry will once again face an enormous challenge in investigating, processing, evaluating and paying legitimate claims on a timely basis as a broad swath of the eastern seaboard begins to recover. Our national Insurance & Reinsurance Coverage practice is already preparing solutions to the likely challenges that will arise in Sandy’s aftermath. Along these lines, this is the first of a series of alerts designed to assist insurers with identifying issues and to suggest areas of inquiry as the current trickle of claims quickly becomes a torrent.
Commercial Property Insurance
Commercial property forms can contain “named peril” wording or can insure “all risks” resulting in direct physical loss to insured property. That said, both typically cover weather events, including wind-driven rain. Commercial property forms also frequently contain multiple exclusions, including the perils and categories of damages that are likely to be associated with Superstorm Sandy. Excluded items typically include the following, for which coverage may be available under specialized policies or government-sponsored programs:
- Damage caused by flood
- Damage caused by mold
- Loss resulting from order of government authority that deprives the insured of the use or value of the property
- Loss or damage caused by backing up of sewers or drains
- Loss of markets
- Mysterious inventory loss
- Financial impairment of others
- Data processing failure or breakdown
- Interruption in service of water, gas or electricity
- Loss or damage to property in transit
- Loss or damage to currency, notes, securities or other valuable papers
For obvious reasons, the flood exclusion will loom large in coverage analyses and will undoubtedly tax the government programs in place to address flood-related damage. From the insurers’ standpoint, the question of how to account for “concurrently caused” losses arising from a combination of covered and excluded damages (including but not limited to flood damage) can become a contentious and fact-sensitive inquiry in order to ascertain the “proximate cause” of the claimed damage. Concurrent causation issues have generated litigation, most notably evidenced when Hurricane Katrina produced claims involving a combination of damage to structures caused by both wind and flood.
Resolution of concurrent causation issues will turn on specific language of the policies, particularly if the wordings contain an Anti-Concurrent Cause exclusion. ISO forms, for example, often contain an exclusion that states, in relevant part: “We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”
As experience has shown, states can (and often do) take different approaches to policy interpretation, including the treatment of concurrent causation issues. In doing so, they draw fine distinctions between policy forms (e.g., whether treatment of concurrently caused losses should differ depending on whether the policyholder has a named peril policy or an all risks policy). Given Sandy’s broad path of destruction across many states, insurers will need to examine carefully the law of each jurisdiction involved while assessing coverage.
Property insurers will also undoubtedly face claims involving construction costs attributable to code upgrades that effectively require a property owner to use higher-grade materials or new design elements to comply with building requirements legislated after the structure was built. Many commercial property insurers have included Law & Ordinance exclusions with the intent that such increase in costs due to code enforcement issues should not be covered.
Business Interruption Insurance
Commercial property coverage typically includes business interruption coverage. Business interruption insurance typically covers the reduction in earnings suffered by the commercial premises owner due to direct physical damage to the insured property, less charges and expenses that are not necessary during the time the business is shut down. The time element typically focuses on a reasonable “restoration period” – meaning the length of time it should take for a diligent policyholder to restore the property, but in no event to exceed a specified period of months. Disputes may arise, particularly when the insured business had struggled before the damage occurred or had been subject to seasonal revenue swings. These instances can present challenges in establishing what the policyholder believes is a fair measure of reduced earnings. Likewise, what constitutes a reasonable restoration period may need to account for actual local conditions that might impact the time needed to restore a property. Again, insurers will need to pay close attention to the specific policy wordings and the laws of the jurisdiction involved.
Without question, Hurricane Sandy generated massive losses to businesses that cannot be characterized as a “property” loss or direct physical loss to an insured structure and/or are subject to specific policy exclusions. Examples of business affected by these losses would include ski resorts, game parks and other entertainment venues such as theaters. These non-property losses can be and often are equally crippling to insured businesses and could generate substantial claims. Among these other categories of nonproperty losses are the following, all of which may be covered by specialized forms of insurance:
- Contingent business interruption / supply chain disruption
- Denial of ingress / egress
- Service interruption
- Event cancellation
- Product contamination
- Warehouse liability
- Pollution liability
- Design / construction liabilities