The unprecedented confluence of weather conditions that caused Hurricane Sandy to ravage the Eastern Seaboard has devastated communities and businesses. While the human cost of the disaster is still being tallied, businesses have already begun the task of restoring operations. The next step is to ensure the continuity of businesses essential to the welfare of those affected.
In addition to the destruction of premises and inventory on the ground, companies in the storm-damaged areas—and elsewhere—must cope with supply-chain disruptions, the interruption of other essential services, and sometimes the loss of important markets, as well.
Insurance may help mitigate such losses. But to secure the coverage for which they have paid, businesses must act immediately to itemize and document broad categories of losses, and meet contractual deadlines.
The Importance of Acting Quickly
Commercial all risks insurance commonly covers damage to property and inventory and loss of profits due to business interruption. It may also cover supply-chain disruptions, loss of markets, and even liabilities arising from inabilities to meet commercial obligations. To secure the benefits of coverage, however, it is critical to take immediate action:
- Identify all available insurance and comply immediately with notice and proof of loss obligations. Commercial insurance typically requires the policyholder to notify the insurer of a loss "as soon as practicable." Thereafter, the policyholder must file a detailed, sworn "proof of loss," often within 60 days after the loss. It is essential to begin the process of documenting and quantifying such losses at once, ideally with the help of experienced coverage counsel and forensic accountants. Failure to meet these deadlines can result in a loss of coverage or lead to disputes with insurers that, at a minimum, will complicate insurance recovery efforts.
- Document and quantify all elements of actual and potential loss. You may have insurance for categories of loss you have not even considered. Insurable losses include destruction or damage to real property, equipment, inventory, furniture, data and records; losses from interruptions of business due to lost productive capacity, interruptions of labor, loss of access to facilities, loss of utility services, and civil authority directives ranging from the closure of premises to evacuation orders; interruptions in supply chain; and loss of markets. Even companies outside the storm-damaged areas that are dependent on suppliers or markets in the affected areas may be entitled to coverage.
Types of Insurance That May Respond
Just as it is critical to capture each element of the loss, it is important for you to identify every potential source of insurance to cover it. Your coverage may not be limited to first-party property insurance.
Losses of business property and inventory. At its most basic level, commercial insurance provides coverage for the lost value of property and inventory. Damage to buildings, facilities, manufacturing equipment, computer systems and data may all come within the scope of first-party property coverage and should be carefully indexed. The value of salvage must also be taken into account.
Direct and contingent business interruption. Often more valuable than insurance for damaged property, commercial property insurance also may include a so-called "time-element" provision for lost profits due to business interruption. This coverage is triggered when, in addition to suffering direct property damage, a policyholder's ability to produce goods and services is interrupted or impaired.
Importantly, to gain the benefit of such coverage, you must first establish that you have suffered direct physical loss to property or, in some cases, that your business has been required to shut down under orders issued by civil authorities. It is important to consult your policy to understand the scope and limits of such coverage.
In addition to direct business interruption coverage, many policies also provide "contingent business interruption" coverage for specific supply-chain or market impairments. Such insurance extends coverage even when you have not suffered direct physical loss or damage to property, but have suffered interruptions in supply or services or loss of markets for your products or services due to property damage suffered by your suppliers or customers. Such coverage may even extend to your indirect suppliers—so you will need to consider all the links in your supply chain.
Loss mitigation, prevention and documentation expenses. Many commercial policies contain provisions for salvage, loss mitigation, and coverage of "extra expenses" incurred to limit or mitigate business interruption losses. Business interruption coverage may require you to take unusual steps to expedite restoration, or incur special expenses to account for losses. Such costs may fall within the express coverage of the policy, or coverage may be mandated or inferred by applicable law. In addition, some policies include so-called "sue-and-labor" clauses providing coverage for expenses necessary to prevent further losses, including business interruption.
Coverage for Loss of Services. Some policies—but not all—specifically cover the loss of utility services, including power, gas, water, and sewerage. This is perhaps the most widespread cause of business interruption in the wake of a storm. Policyholders should review their policies immediately to determine whether they have this coverage.
Other Types of Insurance. Some policyholders may have purchased specialized coverage for supply-chain interruptions or trade disruption. Like contingent business interruption insurance, such policies do not necessarily require direct physical loss to trigger coverage. Such coverage will be relevant to companies in and out of the affected areas that have suffered indirect disruptions because of the storm.
Policyholders may also look to general, excess and umbrella liability policies, and directors and officers liability insurance, to cover liability claims from third parties arising from failures to supply goods or services or meet other contractual obligations, or to take necessary precautions to secure supply chains or personnel safety. Such policies often will fund the costs of providing a legal defense in addition to any liability that is ultimately assessed by court decision or settlement.
Finally, policyholders should not overlook the possibility of coverage as an "additional insured" under policies issued to contractors, joint venture partners and others. The extent of such coverage will vary based on the nature of the relationship and the specific terms of the relevant policies.