While Superstorm Sandy makes its way through the Midwest and up into Canada, the East Coast of the United States already is tallying the tremendous harm the storm caused, including tragic loss of life and property. Superstorm Sandy has damaged important infrastructure, including roads, bridges, ports, utilities and communications networks.  And Superstorm Sandy has had—and is having—significant economic consequences because of damage to businesses.  Many companies with facilities in its path have been forced to suspend some, if not all, of their operations.  As explained in more detail below, the recent impacts of Sandy, like previous disasters—both natural and man-made—will also give rise to important insurance coverage issues, particularly with respect to business interruption losses. Insurers will need to evaluate carefully whether coverage is afforded given the scope of insuring agreements, operation of exclusions, conditions and limitations on the policy, and the facts of each claim.

Because Sandy has caused widespread damage to commercial property, many companies have shut down and/or suspended their operations in the affected areas.  These business interruptions obviously have resulted in income losses for those companies.  Moreover, some of these business shutdowns, as well as transportation delays and power shortages, will lead to business income losses for other companies operating outside of the areas directly damaged in the storm.  Faced with substantial losses, these companies will likely look to their insurers (if they have not already) to provide insurance coverage for the setbacks they face. 

Commercial policyholders will have to have procured some form of “business interruption” or “contingent business interruption” coverage if they are to have any cognizable claim for recovery of their lost business income.  Business interruption coverage addresses lost profits caused by damage to the policyholder’s property, whereas contingent business interruption coverage extends coverage to include losses suffered by the policyholder resulting from damage to the property of companies that supply the policyholder with goods or services.  Contingent business interruption losses will not be confined to policyholders with operations on the East Coast, although such companies have been the focus of early reports concerning the storm’s impact on business operations.

In looking to insurers to cover business losses, policyholders must recognize that business interruption or contingent business interruption provisions in policies contain important exclusions, conditions and limitations and do not necessarily afford coverage for these events.

Wiley Rein LLP has substantial experience with disaster-related claims, particularly business interruption and other claims following the events of 9/11.  As our experience in advising insurers and litigating business interruption claims after 9/11 bears out, many commercial claims for lost business income will be outside the scope of applicable coverage and/or covered loss will be significantly reduced from the size of the claim as it initially was presented. Moreover, courts generally have acknowledged and upheld the parameters of coverage under commercial insurance agreements, even when this means that there will not be insurance recovery for many effects of a disaster on business operations.

Most fundamentally, because business interruption losses are insured only if there was some covered damage to or loss of physical property, insurers must consider whether the policies at issue contain exclusions precluding coverage.  If the policy itself excludes coverage then there can be no coverage for lost business income, even if the lost income resulted from damage to property.  See, e.g. Diamond Shamrock Corp. v. Lumbermens Mut. Cas. Co., 466 F.2d 722 (7th Cir. 1972) (concluding that the insured was not entitled to recovery for its business interruption loss because the damages were caused by fire, a risk expressly excluded in the policy providing protection against business interruption losses).  Because many property policies contain “acts of god” and/or  flood exclusions, insurers must first determine whether coverage for lost business income is excluded on one or more of these bases.

In addition, courts nationwide consistently have recognized that there can be no insured business interruption loss without a covered damage to or loss of physical property. See, e.g., Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006) (stating that there was no “direct physical loss to property” with the meaning of “business income” or “action by civil authority” coverage provisions when embargo against Canadian beef rendered unshippable to United States beef that the policyholder had purchased and that had been prepared for shipment to the policyholder; the beef at issue was not physically contaminated or damaged in any manner).  Thus, to the extent a policyholder has lost business income due to effects stemming from Sandy, but has not itself suffered any property damage, a policy’s business interruption provision generally will not afford coverage.  Likewise, a policyholder claiming coverage under a contingent business interruption provision would not be afforded coverage unless the company that failed to meet contractual obligations to supply the policyholder with goods or services suffered property damage interrupting its business operations.  Accordingly, insurers should carefully consider whether the interruption of a policyholder’s business was caused by property damage, as is required in widely used language of property policies, or by some other uninsured factor associated with Superstorm Sandy.

While a policy’s business interruption provision only provides coverage where a suspension in business operations is caused by a direct physical loss to the insured premises, a “civil authority” provision in a policy will provide coverage for lost income even when there is no damage to the insured premises.  Because Sandy caused evacuations, shelter orders and the like, commercial policyholders might seek coverage under the civil authority provisions in their policies for lost income and extra expense attributable to actions of civil authorities that prevent access to a policyholder’s property. Policyholders might further look to ingress/egress provisions in their policies for coverage.  Under a civil authority provision, an insurer generally agrees to pay for the loss of business income and any necessary extra expense caused by action of civil authority prohibiting access to the insured premises, whereas a policyholder may recover loss of business income under an ingress/egress provision even where there is no order by a civil authority, so long as access to the policyholder’s premises is prevented.

However, coverage under a civil authority provision is not available where the order only has an indirect effect of restricting or hampering access to the premises.  See, e.g., S. Hospitality, Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137, 1141 (10th Cir. 2004) (holding that the civil authority provision did not apply because the Federal Aviation Administration’s order grounding flights after 9/11 did not itself “prevent, bar, or hinder access to [the insured’s] hotels in a manner contemplated by the policies”); 54th St. Ltd. Partners, L.P. v. Fid. & Guar. Ins. Co., 306 A.D.2d 67 (N.Y. App. Div. 2003) (concluding that there was no coverage where “vehicular and pedestrian traffic in the area was diverted, [but] access to the restaurant was not denied; the restaurant was accessible to the public, plaintiff’s employees and its vendors”).  In other words, even if access to the property at issue is made difficult or otherwise limited by an order from a civil authority, civil authority coverage is not triggered.  For example, road closings by the government based on the storm do not give rise to civil authority coverage unless the government specifically prohibited access to the property.  See, e.g., Syufy Enters. v. Home Ins. Co., No. 94-0756 FMS, 1995 WL 129229, at *2 (N.D. Cal. Mar. 21, 1995) (holding that civil authority coverage did not apply because the general curfew did not “specifically prohibit[] any individual from entering a theatre; rather, the cities imposed dawn-to-dusk curfews to reduce the possibility of rioting and looting”).  Similarly, an ingress/egress provision does not afford coverage if access to the premises is still possible.

There are also important principles limiting the damages recoverable and defining the period of restoration of business operations in business interruption coverage, limitations that policyholder advocates have sometimes sought to challenge.  See, e.g., Abner, Herrman & Brock, Inc. v. Great Northern Insurance Co., 308 F.Supp.2d 331 (S.D.N.Y. Mar. 12, 2004) (no coverage under civil authority provision, which provides coverage "when a civil authority prohibits access to your premises," for alleged business income loss once access was restored to policyholder's downtown premises following 9/11 attacks, despite continued diversion of traffic in area and employees' confusion regarding access to building; fact issue remained regarding whether policyholder incurred business income loss due to employees' inability to work on policyholder's premises following terrorist attacks); Admiral Indemnity Co. v. Bouley International Holding, LLC, No. 02-Civ-9696, 2003 WL 22682273 (S.D.N.Y. Nov. 13, 2003) (New York law) (no business income loss coverage for policyholder-bakery damaged by 9/11 attacks, given lucrative contract between policyholder-bakery and charitable organization for food services; end of “period of restoration” of bakery under business interruption clause occurred under New York law when bakery should have been repaired).  And there undoubtedly will be some policy-specific disputes between policyholders and their insurers over the ability to recover for losses allegedly stemming from the storm.  E.g., Key3 Media Group, Inc. v. Commerce and Industry Insurance Co., No. BC 278751 (Cal. Super. Ct., Los Angeles County July 30, 2003) (California law) (no coverage for losses experienced by policyholder for a conference held shortly after the events of 9/11, because reduced attendance and cancellations by certain exhibitors did not constitute a “cancellation” within the meaning of the policy because the trade show itself was not actually interrupted or limited in its duration).