The Atlantic Hurricane Season officially runs from June 1 to November 30, though peak activity usually occurs in August and September. With the beginning of tropical storm activity just around the corner, now is the time to prepare your company and review your insurance coverage for what may lie ahead in the coming months.
Consensus Predictions for 2011
While estimates from various forecasters differ, the consensus predictions at this time expect a relatively average hurricane season this year with about 12 to 14 named storms, roughly 6 or 7 of which may become hurricanes, with perhaps 2 to 4 developing into intense hurricanes. Even one storm, however, may be enough to cause massive losses.
Steps to Prepare Your Company
Though it is impossible to predict precisely if, and where, this year’s storms may make landfall, it is prudent for companies with significant exposure to the Eastern and Gulf coast regions to prepare as if a storm is headed their way. With that approach in mind, here are some steps that can be taken now to prepare ahead of time, which should be part of the company’s disaster and business continuity plan.
Review Your Policies, and Adjust Them If Necessary
The time to review your company’s policies is now, not after a storm has passed. Scenario planning is an excellent way to identify potential gaps in coverage as well as challenges the company might face in the aftermath of a storm. For example, preparing a hypothetical claim for a Category 3 storm at a key facility should present a fairly realistic picture of potential losses and how the policies will likely respond. To the extent that this process identifies any deficiencies in coverage, or perhaps asset schedules and related policy information that needs to be updated, now is the time to take care of these details to avoid disputes in the future.
Understand Key Coverages
- Protecting the Company’s Property: A company’s commercial property policy is usually the starting point for protecting its tangible property. Ensuring that the policy carries adequate limits, based on a current fixed-asset verification, is critically important. Additionally, the policy should be carefully examined for exclusions, deductibles and internal sublimits that may reduce available proceeds. Further, some policies also place conditions on where insured property can be located to be covered, such as within a certain distance from a covered location.
Protecting the Company’s Income: Covering tangible property itself is usually not enough to make most businesses whole in the aftermath of a natural disaster. It may take weeks, months—even years—to fully restore the company’s revenue produced by these assets. Thus, there are a number of “time element” coverages that serve to protect against such losses. These include:
- Business Interruption Coverage: “Business interruption” coverage protects a company against the revenue lost as a result of covered damage to the company’s own property. For example, if a hurricane causes damage to a company’s facility, which then results in downtime while the property is being repaired or rebuilt, business interruption coverage provides protection against this lost revenue.
- Contingent Business Interruption Coverage: Hurricanes typically cause widespread damage to affected areas. As a result, a company’s key suppliers or customers might also suffer outages that affect the company’s ability to conduct its normal business operations. Contingent business interruption coverage protects against losses due to these disruptions.
- Civil and Military Authority Coverage: In the aftermath of a disaster, and occasionally beforehand with approaching storms, government authorities may issue evacuation orders and other constraints on access to certain areas. After the September 11 terrorist attacks, parts of Manhattan were off limits for several days. Likewise with Hurricanes Katrina and Rita. Most commercial property policies provide coverage for losses arising out of prohibitions against access due to orders from a “civil or military authority.”
- Service Interruption Coverage: Service interruption coverage is designed to protect against losses that result from the interruption of utilities such as water, power, communications or similar services.
Prepare for Initial Post-Storm Activities
Steps taken in the immediate aftermath of a storm are critical to preserving and maximizing a company’s insurance recovery, as well as ensuring that the company’s business levels return to normal as quickly as possible. From the standpoint of insurance, these steps include: (i) notifying all carriers in accordance with the policies; (ii) forming a claims team, utilizing both internal personnel from the risk management, operations, legal and accounting functions, as well as external claim consultants and coverage counsel; (iii) setting up separate accounts to track post-claim losses and expenses incurred in the recovery efforts; and (iv) establishing and observing effective claim management procedures to avoid disputes and streamline the process, such as preservation of the carrier’s salvage rights, protecting covered property against further loss, and seeking advances against the ultimate loss payment.
Hurricanes Can Wreak Havoc on Your Business, but the Insurance Process Doesn’t Have to Be Stormy
Hurricanes that make landfall often cause enormous damage. Having a properly managed insurance recovery process, however, can mitigate a storm’s impact on your business.