Preliminary estimates indicate that the weather phenomenon that the press has dubbed “Superstorm Sandy” will cause tens of billions of dollars in potentially insured losses. As reports concerning the nature and extent of the damage continue to develop, without doubt commercial property damage and business-interruption insurance will be critical to the effort to recover and rebuild. Our insurance work in connection with other disasters, including the Japanese earthquake and tsunami; Thai floods; Hurricanes Katrina, Lee, Irene and others; and 9/11 insurance claims, can help companies implement strategies now that increase their ability to maximize their insurance recoveries.
Identifying Triggered Coverages
Sandy-related physical damage should trigger both the property damage coverage and the businessinterruption coverage in a company’s standard property policy. However, standard commercial property insurance policies also may cover loss to businesses that are not themselves physically damaged, but nevertheless are operating below capacity, or not at all, because, for example, (1) customers, shipments, and/or employees cannot reach a facility due to the shutdown of public transportation, bridges or roads; (2) customers or suppliers in the area suffered damage and are operating at diminished capacity; or (3) power outages prevent normal operations. In each of these circumstances, multiple additional policy coverages may be triggered and should be pursued, such as “ingress/egress,” “civil authority,” “contingent business interruption,” and “service interruption” coverages. In addition, many standard commercial property insurance policies provide coverage for “extra expense” to avoid or mitigate property damage and “debris removal” and other clean-up expenses. Policyholders should consider all potentially available coverages in order to maximize insurance recovery, including whether coverages and “sublimits” can be stacked, such that, for example, in addition to a flood sublimit, the policyholder can recover its “cleanup” expenditures under a separate debris removal sublimit.
“Flood” v. “Wind” – or Something Else
Standard property policies may contain multiple “sublimits” and deductibles that arguably limit coverage based on the cause of loss. For example, a policy may include special sublimits or retentions for loss caused by “flood” or “named storm,” but provide broader coverage for “wind” losses. Thus, businesses should consider carefully the specific cause(s) of loss to increase their chances of an insurance recovery.
Choice of Law
The state’s law that applies to a claim can determine whether the policyholder recovers. Thus, a policyholder should consider “choice of law” issues at the outset. For example, applicable law may determine whether more than one policy sublimit, or deductible, applies; whether particular policy exclusions bar coverage; and other issues that could impact the extent of a business’ recovery. Policyholders should evaluate potentially applicable law and frame their claims to seek to ensure the most favorable application of that law. Additionally, during the life of the claim, the policyholder should consider whether disputed issues could result in litigation and whether to take proactive measures to avoid litigation or arbitration or to preserve a favorable forum.
Documenting the Loss
Policyholders should engage immediately to best position themselves for a maximum recovery. As soon as possible, a team should be created to evaluate the loss and directed to report to in-house counsel. The team should gather both historical data about company operations and documentary and other evidence of the loss, to establish property damage and lost-profit evaluations. All potentially available coverages and sublimits should be reviewed and expenditures and lost profits should be categorized into coverage “buckets” to help the policyholder assess the best approach for pursuing coverage. Advance insurer approval of loss evaluation approaches and necessary expenditures should be obtained, if possible, and, if not, careful records should be maintained regarding expenditures made and reasons therefore to reduce potential future insurer disputes.
The policyholder be able to evaluate its claim without concern that its insurer may access privileged attorney-client or work-product communications for its own use, against the policyholder, in a coverage dispute. Thus, in-house counsel should implement procedures that help protect privileged internal communications regarding the claim. Accountants and consultants retained to evaluate the claim should be hired through counsel, and retention agreements should be framed to protect privileged communications.
Communications With Insurers Regarding the Claim
Property and business-interruption claims often are complicated – and can take many months or more to value and resolve. Communications with the company’s insurer(s) can later end up as exhibits should coverage disputes ensue. Counsel should coordinate with a limited number of individuals designated to communicate with the insurer(s) to (1) ensure that the information provided is consistent, and (2) seek to reduce the risk that early communications, before the company has fully evaluated its claim, may later be used to support a coverage denial. Early insurer communications should be strictly factual, avoiding agreement regarding the number of “occurrences,” applicable sublimits or deductibles, or how (or whether) particular policy provisions or exclusions apply. Additionally, while communicating with its insurer about the claim, a policyholder should pay careful attention to whether disputed issues could result in litigation and whether to take proactive measures to protect its interests in the event that litigation or arbitration is inevitable.
Identify Conditions to Coverage
Policyholders should seek to comply with policy “conditions” to circumvent insurer arguments that coverage has been somehow forfeited. For example, policyholders should provide prompt notice of any potential loss. Most policies also may require “a signed and sworn proof of loss” providing specifically identified information, within a specified number of days “after the loss.” Policies often contain a “limitations” period specifying that coverage litigation be filed within a limited period of time, sometimes one year – or less. Policyholders should keep insurers reasonably informed of progress in documenting and valuing the claim – and, where necessary, should seek to obtain the insurer’s written agreement to modify applicable policy conditions before any limitations periods (for proof of loss or filing of suit) run.
The Period of Indemnity
A debated topic in many large business-interruption claims is the proper “period of indemnity” – the time period during which losses are measured and may be recovered. For example, a business with severely damaged facilities may decide that rebuilding in the same location is commercially impracticable.
The business might argue that it may relocate and recover lost profits from the date its facilities were damaged to the date that its business is back to “normal” at the new location. The insurer might argue for a shorter period. Policyholders should carefully scrutinize their policy language to ensure that they are not shortchanged regarding the length of their lost profits recovery.
As companies assess their losses resulting from Sandy, they should work proactively now to understand the nature, cause, and extent of their loss and all potentially applicable policy provisions, and strategically pursue their claims in order to maximize and increase the chances of a successful insurance recovery.