Every year, tornadoes in the United States cause dozens of fatalities and inflict billions of dollars in property damage. The EF5 tornado that struck Moore, Oklahoma on May 20 was the most powerful and destructive storm yet of the 2013 season. Although the Moore tornado is only one of 343 tornadoes already reported nationwide through May 23, more than 1300 occur annually in the United States, based on a three-year average.1 While the damage from the Moore tornado alone is expected to reach between $2 and $5 billion, aggregate insured losses from all tornadoes in 2011 and 2012, by one estimate, totaled approximately $40 billion.2 Such losses can be devastating for individuals and businesses alike. With so much at stake, commercial and residential policyholders should be diligent and exercise appropriate care in procuring and pursuing insurance coverage for tornadoes and other perils.
For corporate policyholders affected by tornado damage, here are seven issues to consider when making and pursuing a tornado claim.
- Notice and Proof of Loss. In addition to giving notice of a loss, it is up to the insured to document any claimed damage in filing a written “proof of loss” with the insurer. Be aware of the applicable deadlines within the policy, as filing of the “proof of loss” will trigger the insurer’s obligation to pay under the policy. If additional time is needed, ask for an extension. 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. Corporate policyholders should also be aware of (1) any contractual limitations provisions, requiring the insured to bring litigation against an insurer within a specified period of time, as well as (2) applicable statutes limiting the enforceability of such contractual limitations provisions.
- Business Interruption. Most commercial property insurance policies allow some amount of coverage—not only for the cost of repairing or replacing damaged property—but also for the actual loss of net income resulting from covered loss or damage and continuing through the period reasonably required to repair or replace the damaged property. In some cases, this period is extended to include the additional time needed to restore the insured’s business operations to the state that would have existed had no loss or damage occurred. While “business interruption” coverage usually requires the claiming insured to have sustained physical loss or damage to its own property, some policies provide so-called “contingent” coverage such that, if covered physical loss or damage to a customer or vendor results in the interruption of the insured’s business, the subsequent loss of net income is insured. Still other policies provide “extra expense” coverage compensating for the additional or “extra expense” 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 remaining open. In order to maximize coverage, policyholders should be familiar with the particular coverage and limits afforded by applicable insurance and prepare the “proof of loss” accordingly.
- “Efficient Proximate Cause” and “Concurrent Causation.” While “tornado” damage is rarely expressly excepted from coverage, perils such as faulty workmanship, ordinary wear and tear, depreciation, deterioration, or damage resulting from mold, corrosion or wet/dry rot are frequently excluded under commercial property insurance. Consequently, in the event of a tornado or other storm, questions may arise as to whether, for example, damaged roofing was the result of the tornado or long-term depreciation, or even both. Over time, courts have developed legal doctrines to determine coverage when excluded and non-excluded causes contribute to a loss. Some jurisdictions 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. Corporate policyholders should also be aware of and avoid, if possible, “anti-concurrent causation” clauses whereby a loss is excluded if an excluded peril or event contributed concurrently or in any sequence to cause the loss.
- Valuation of Loss and Damage. Coverage for even non-excluded 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.
- “Loss” Versus “Damage.” Subject to the terms of the specific policy, commercial property insurance generally covers “physical loss and damage” to insured property. In some cases, property that is not “damaged” may nonetheless be “physically lost” for purposes of coverage. For example, when a partial collapse of a roof or the infiltration of gas vapors or other contaminants renders an otherwise un-“damaged” property unsafe or unusable, such conditions may qualify as “physical loss” under a commercial property policy. In pursuing coverage for tornado claims (as well as any other commercial property claim), policyholders should seek coverage for not only what is “damaged” but also what is physically “lost.”3
- Code Upgrade Coverage. If changes in applicable building codes or other regulations prohibit the rebuilding of damaged property without upgrades to comply with current standards, corporate policyholders should determine if the applicable commercial property policy contains “increased cost of construction” coverage. Many policies containing so-called “upgrade” coverage will insure 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 some cases, additional business interruption loss resulting from compliance with applicable building standards may also be insured.
- 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.4