A wave of violent tornadoes recently pummeled the Southern and Midwest regions of the United States causing widespread damage and destruction. In addition to damaging and destroying homes, office buildings and other property in the area, businesses that have facilities in the South or the Midwest, or that do business with companies located in the affected areas, are likely to incur substantial revenue losses and increased operating costs as a result of property damage caused by the tornadoes. Businesses affected by the recent tornadoes should review their insurance policies to determine the scope of coverage that may be available for their losses and take immediate steps to preserve their rights under their insurance policies.
Coverage for Property Damage
Property insurance policies generally provide coverage for physical loss or damage to real or personal property. In addition to costs incurred as a result of the loss, insurance policies typically provide coverage for those costs incurred by the policyholder to limit its loss.
- Protection and Preservation of Property
Most property policies provide coverage for expenses incurred to protect and preserve property from a covered cause of loss. For example, a typical property policy may provide coverage for costs associated with moving pieces of equipment out of the path of an upcoming storm or securing a facility from a hurricane that is projected to make landfall.
- Debris Removal Coverage
Property insurance policies often provide coverage for reasonable and necessary expenses the policyholder incurs to remove, clean up and properly dispose of debris on the policyholder's property after a covered event causes physical property damage. The policyholder must actually remove the debris and pay the actual costs to be reimbursed under this coverage.
Time Element Coverage for Financial Losses, Including Business Interruption Losses
In addition to providing coverage for direct physical damage to property, property policies also typically cover revenue and other economic losses that arise from property damage. “Time element coverage” pays for the lost profits when damaged property affects a policyholder’s day-to-day operations. The amount covered generally depends on the time it takes to resume normal business operations. Time element coverage for financial losses can arise from damage either to the policyholder's own property or to third-party property. While time element coverage comes in a variety of flavors, three kinds are quite common: (1) business interruption coverage; (2) extra expense coverage / expense to reduce loss coverage; and (3) contingent business interruption coverage.
- Business Interruption Coverage
The purpose of business interruption coverage is to restore the policyholder to the financial position it was in before the property damage occurred, namely to reimburse the business for its lost profits. To recover these losses, the lost profits, at a minimum, must relate to the event that caused the policyholder’s property damage. Once the policyholder demonstrates covered property damage, the measure of the loss generally is the difference between expected profits during the recovery period after the event and actual profits during that period, less any unrelated losses.
Business interruption insurance may cover not only lost profits suffered at the location of the property damage, but also the lost profits at other locations that operate in connection with the damaged location. Coverage for this interdependent business interruption loss can extend to locations that are physically distant from the damaged property if the policyholder can show that the undamaged facility operated in concert with the damaged one.
- Extra Expense Coverage / Expense to Reduce Loss Coverage
Extra expense coverage aims to cover additional costs the policyholder incurs to minimize or avoid interruption of its business. Examples of such coverage are: (1) additional utility costs needed to resume business operations; (2) additional costs to store business equipment; (3) moving costs to relocate to temporary facilities; and (4) costs expended for the temporary repair or replacement of property.
Most policies also contain a related coverage, similar to Extra Expense, typically called Expense to Reduce Loss coverage, to reimburse additional costs incurred to mitigate covered losses, such as business interruption losses.
- Contingent Business Interruption Coverage
Many policies protect against profits lost when a policyholder’s supplier or customer cannot conduct business because of property damage “of the type” covered under the policyholder’s policy. This coverage would provide, for example, recovery to a food processor in New York that suffers lost profits as a result of a supplier’s inability to provide required livestock because of damage to the supplier’s Alabama facility. Similarly, a policyholder’s reduced profits resulting from property damage to the facilities of a customer affected by the tornadoes also may be recoverable. Covered costs also typically include losses incurred when a civil authority prevents access to the policyholder's facilities, or when damage to property in the vicinity of the insured property prevents ingress to, or egress from, the policyholder's facility.
Critical Policy Conditions and Deadlines
Most policies contain time limits and deadlines, some of them quite short, for putting the carrier on notice of a claim, for submitting a final proof of loss, for restoring the business or property to operation, and for filing suit if a claim is denied. Some of these deadlines require the policyholder to satisfy a condition within as little as 30 or 60 days after the loss. Failure to comply, or to substantially comply, can result in a forfeiture of coverage. The following are some important deadlines commonly included in property policies.
- Notice of Loss
Policies may require the insured to notify the insurance company "promptly," "as soon as practicable," or within a specified period after the insured becomes aware of circumstances that may lead to a claim. Providing prompt written notice of a loss is the prudent course, regardless of the notice provisions of the policy.
- Proof of Loss
Property policies often require a sworn proof of loss summarizing the amount and extent of the damage or loss. Some policies impose a specific deadline for submission, which can be as short as 60 or 90 days post-loss. If the loss is catastrophic and the deadline unreasonable, the parties often agree to extend time limits.
- Suit Limitations Clause
Some policies attempt to limit the time within which a policyholder can sue the carrier for coverage. Two years is a common deadline, which is usually much shorter than the statute of limitations that would otherwise apply. Some courts have enforced these deadlines and others have not. This clause can be a trap for the unwary.
- Repair / Replace Time Limit
Where a policy provides coverage on a “replacement cost basis” (as opposed to “actual cash value,” which typically deducts for depreciation), it may limit the period during which the policyholder must repair or replace the damaged property. Two years post-loss is a typical time limit. Where the loss is catastrophic, especially when the event results in a depletion of resources, such as labor and materials to conduct repairs, the limitation period may prove unreasonable and the parties will need to negotiate an extension.
In the wake of these devastating tornadoes, policyholders should review their insurance policies and take immediate action to obtain advice regarding potential coverage for any physical property damage sustained as well as economic losses incurred as a result of the tornadoes. Policyholders facing property and/or time element losses should provide timely notice to their insurance carriers as a first step in preserving their rights to recover for their losses.