For days, Hawaii’s Kīlauea Volcano has been erupting, sending lava pouring through the neighborhoods of the Puna district, about 35 miles south of Hilo – the largest city on Hawaii’s Big Island. Unfortunately, the worst may be yet to come. According to a recent Fox News report: “[O]fficials warn [Kīlauea] may soon blow its top with a massive steam eruption that would shoot boulders and ash miles into the sky.” And, now, “[b]ecause of the increase in ash emission and higher altitudes of ash,” the U.S. Geological Survey has “assigned an aviation color code RED to indicate … significant ash emission that is a hazard to aircraft.” There is also ongoing concern about the release of toxic gas from the volcano.
As a result, many businesses – from hotels to golf courses to airlines – may already have suffered or are at the risk of suffering property damage or other potentially catastrophic loss. Businesses near the volcano are, of course, at risk for physical damage, while even far-flung businesses could suffer losses due to some form of business interruption. First-party property insurance, however, may cover certain of these losses.
First-party property coverage
A policyholder seeking coverage for loss or damage from this or any other volcanic eruption should generally look initially at its “first-party” property insurance policies, which protect against damage to a policyholder’s own property and economic interests. Although such policies are typically known as “property” policies, they may also be called “fire,” “all-risk,” “multiperil,” or “inland marine” policies, or they may be part of a package policy, often called a “business owners” policy, that contains a number of commercial coverages.
Generally, first-party property policies provide coverage for physical damage to a policyholder’s own property arising from a covered peril. Such property policies also can provide coverage for lost profits resulting from damage to a policyholder’s property (i.e., “business interruption” coverage). Additionally, many property policies provide “contingent business interruption” coverage, which may cover lost profits resulting from physical damage to the property of a policyholder’s supplier or customer, or to a property on which a policyholder depends for its economic livelihood, even absent physical damage to a policyholder’s own property. “Extra expense,” “ingress/egress,” “order of civil authority,” “service interruption” and “supply chain” coverages may also be included in first-party property policies.
Property damage. First-party coverage is generally available for physical loss or damage to a policyholder’s buildings and/or other business property. The “insured property” is often defined broadly to include property owned or leased by a policyholder and may include property for which an insured is legally responsible.
Physical damage resulting from a volcanic blast, airborne shock waves, ash, dust, lava flow, fire or explosion should be covered under “all-risk” policies, which traditionally provide coverage for “all risks of direct physical loss or damage” to insured property, absent explicit exclusions for specific risks. See Association of Apartment Owners of Imperial Plaza v. Fireman’s Fund Ins. Co., 939 F. Supp. 2d 1059, 1070 (D. Haw. 2013) (“An ‘all risks’ policy creates a special type of coverage extending to risks not usually covered under other insurance, and recovery under an ‘all risk’ policy will be allowed for all fortuitous losses … unless the policy contains a specific provision expressly excluding the loss from coverage.”) (quotation omitted).
Insurance companies, however, may attempt to invoke certain policy exclusions in an effort to avoid providing coverage. For example, they may attempt to rely on a pollution exclusion or an earth-movement exclusion. At least one federal court applying Hawaii law, however, has applied the “efficient proximate cause” rule to find coverage for property damage “when two or more perils combine[d] in sequence to cause a loss and a covered peril [was] the predominant or efficient cause of the loss” and a non-covered peril was an additional cause of the loss. See id. at 1070 (emphasis in original). Accordingly, where a volcanic eruption causes an earthquake, which in turn physically damages an insured’s property, coverage may be available notwithstanding the presence of an earth-movement exclusion.
Business interruption. Business interruption coverage (also known as “business income” coverage) is designed to cover a policyholder’s loss of profits, and a policyholder’s unavoidable continuing expenses, during the period in which a policyholder’s business operations are necessarily impaired because of covered damage to property necessary to conduct operations. Unavoidable continuing expenses would typically include items such as certain payroll, mortgage and loan expenses.
Insurance companies may disagree with policyholders as to the proper quantification of business interruption losses and/or the proper time period for calculating the period of interruption. “Cessation” versus “impairment” can also be a key issue in dispute. For example, in Keetch v. Mutual of Enumclaw Insurance Co., 831 P.2d 784, 785 (Wash. Ct. App. 1992), the owners of a motel sought business interruption coverage for lost earnings following the eruption and release of volcanic ash from Mount St. Helens in 1980. The motel had been buried in six inches of ash, but nevertheless remained open for the few months it took to clean up the ash, during which time the number of motel guests decreased. The policy included a “loss of earnings endorsement,” which provided insurance “against loss of earnings resulting directly from necessary interruption of business caused by the perils insured against damaging or destroying … real or personal property … at the premises” (emphasis added). The insurer agreed the motel was physically damaged – and thus paid for cleanup and repair expenses – but denied coverage for business interruption loss. The trial court found that the policyholders were owed coverage for their “partial business interruption,” but the Court of Appeals of Washington reversed. According to the appellate court, “the purpose of business interruption insurance is to indemnify for loss due to inability to continue to use specified premises. Here, the [motel] did not suspend its business activity; its business was not interrupted as provided for in the loss of earnings endorsement.” As always, policy language can be key. Cf. Aztar Corp. v. U.S. Fire Ins. Co., 224 P.3d 960, 965-66 (Ariz. Ct. App. 2010) (interpreting policy language providing coverage for “interruption of business, whether total or partial” to include “loss from decreased patronage, so long as the decreased patronage is brought about by a covered peril”).
Extra expense. Extra expense coverage is intended to cover costs incurred by a policyholder in minimizing or avoiding its business interruption losses, such as the costs it incurs in relocating operations temporarily or providing temporary power. Coverage may also be available for costs incurred in excess of normal operating expenses that are necessary to continue operations, such as hiring security guards to prevent looting of property. There may also be coverage for “expediting expenses,” which are premiums, such as overtime, paid to vendors and suppliers for faster repairs to get back into operation.
Contingent business interruption. This coverage is designed to insure a policyholder for loss of business income caused by damage to property owned by others, like customers or suppliers. Accordingly, a company that relies on a business partner impacted by the eruption in Hawaii might be able to recover for losses incurred as a result of damage to that business partner’s property. Usually, the damage to the third party’s property must be of a kind that would have been covered had it happened to an insured’s own property, and that damage must prevent or impede an insured from continuing its business. For example, volcanic ash could ruin crops, such as pineapples, in Hawaii. Therefore, businesses that rely on Hawaiian crops may experience losses and, in turn, be entitled to contingent business interruption coverage.
Also, there may be coverage for interruption of an insured’s business caused by damage to an “attraction property,” which is a property, such as a lead tenant in a mall, that produces a flow of customers to the insured business. Some policies provide blanket coverage for this type of loss, but many policies require that the attraction properties be specifically identified on a policy schedule.
Contingent extra expense. As with extra expense coverage, contingent extra expense coverage is designed to cover increased costs incurred to minimize or avoid a contingent business interruption costs. For example, if a policyholder was forced to purchase materials from a company at greater cost than it would typically incur, it may have contingent extra expense coverage for those costs.
Ingress/egress. Some policies also provide ingress/egress coverage, which covers losses when access to property is made more difficult or prevented by property damage. Recent news reports indicate that major highways are or may soon be shut in Hawaii, which could, in turn, implicate this type of coverage.
Order of civil authority. A first-party property policy also may provide coverage for the loss of business caused by the inaccessibility of a property due to an order(s) of a civil authority. The classic example is an order prohibiting access to property due to a fire at a neighboring property. In Hawaii, if access to areas in the vicinity of the volcano is prevented by civil authorities due to damage in the area, there could be coverage for the associated economic disruption.
Evacuations have already been ordered for certain parts of the Big Island and more could be ordered. However, insurance companies may seek to deny coverage if an evacuation order is considered “advisory” or “voluntary,” as opposed to mandatory and also based on geographic proximity to the damage.
Service interruption. This coverage is designed to provide coverage for losses attributable to interruption of utility or telecommunications services to the insured property. So far, the Big Island seems to have escaped service interruption issues, but that could change quickly.
Supply chain. Supply chain insurance is an “all-risks” business interruption coverage that normally does not require property damage. Generally, it provides coverage for business interruption resulting from disruption or delay in the receipt of products, components or services from a named supplier. Supply chain insurance policy language varies widely, so close examination of policy language is necessary to determine whether coverage exists.