The August 24 earthquake in Napa Valley and the numerous after-shocks caused significant damage to businesses throughout the area. Although the overall financial impact directly attributed to damaged property at local businesses, including damage to structures, equipment and lost or damaged wine – as well as business income losses at local restaurants, tasting rooms, and hotels – remains unknown, early damage estimates put the total of quake-related losses between $250 million and $4 billion.
Historically, the insurance industry’s reaction to natural disasters has not been as positive as insureds would hope. For example, insurance claims from the Loma Prieta earthquake and Superstorm Sandy were the subject of ongoing disputes that went on for many years, and are still ongoing for Superstorm Sandy. Policyholders, therefore, are advised to be proactive in claiming and preserving their rights.
Because of the damage sustained, commercial policyholders may incur significant insurance claims for property damage, loss of business income, and extra expenses in order to continue or resume operations. Businesses should immediately determine whether they have an insurance policy that would provide coverage for business losses and property damage caused by the earthquake. Alternatively, businesses should seek input from a professional who is qualified to assist them in making that assessment.
Most importantly, policyholders should know what their policies say, and what they require, before incurring unnecessary costs. Commercial policyholders should consider the following guidelines while assessing the impact of the earthquake and in preparing an insurance claim:
- First, Protect and Preserve the Assets Emergency and temporary repairs should be documented and, if practical, reviewed with the insurer in real time.
- Attend to Notice and Timing Make sure notices have been issued to all insurers that could be called to provide coverage. If the policy requires a Proof of Loss within a short time frame, it may be advisable to obtain a written extension. Spot any other time-related requirements and ensure they are satisfied or extended by the insurer.
- Attempt to Involve Insurers Before Repairs Attempt to obtain insurer approvals before repair and replacement of property. Be aware of insurers’ rights to salvage property. If insurers are silent or non-responsive in the face of repair decisions – as is often the case – document it for the record. They should not be allowed to second-guess the decision after the fact.
- Documentation and Accounting Keep exact and precise records of all communications, meetings, and exchanges. Set up accounting codes or other processes to track all invoices, costs, and expenses of any kind related to the claim, by various categories. Continue to submit documentation to the insurance company as losses are incurred.
- Reserve All Rights Reserve all your rights to coverage. Do not allow the insurer to classify or characterize your claim before you have had a full opportunity to review everything and properly present your claim.
- Form a Team Form a team of all personnel involved in the claim and hold regular team calls or meetings. Review the policy with counsel; remember that all exclusions and limitations must be construed strictly and narrowly. The insurer will have counsel, adjusters, consultants and accountants. Consider leveling the playing field with your own team. Many policies cover some of these claim-preparation costs.
- Communicate Develop relationships at all levels of your team with their respective insurer-side counterparts. Keep communication open and civil.
- Replacement Cost New Means Replacement Cost New Most policies value property on a replacement cost basis. By definition, what is old is being replaced with something new. This is a natural “upgrade.” Be wary of insurer pronouncements that the damaged property had “preexisting” defects or wear and tear.
- Do Not Forget Code Upgrades Most policies cover code upgrades. Be aware of the underlying codes and whether they will increase repair costs. This is especially important in dealing with buildings not built to existing earthquake codes. Capture all such costs in your claim.
- Prepare the Business Interruption and Extra Expense Claim Carefully Insurers will challenge attempts to recognize net profit for an interruption period. Utilize experts who can draw on market data to prove the “BI” analysis.
- Review Other Agreements That Can Affect the Claim There may be agreements that can impact a hotel claim – a loan agreement, a ground or space lease, a property management agreement, a condominium association agreement, etc.
- Draw on the Business Side Insurance is expensive. You should expect fair treatment on the claims side. Business contacts, such as between risk managers and brokers, should be explored. If the insurer does not live up to its end of the contract, consider renewal with a different insurer.
- Work Toward Resolution All claims should settle. If yours does not, make sure it is only because the insurer is being unreasonable and that the record makes this obvious – so that if you do end up in litigation, it will be apparent that you gave the insurer every opportunity to adjust the claim based on the facts, and that the insurer chose to be aggressive and unreasonable.