Common Property Insurance Claim Issues Following a Disaster
Nearly every major disaster serves as a reminder of the importance of reviewing a property insurance policy and understanding the scope of coverage before a loss happens. An insurance policy is a contract, a promise to pay. The clearer your understanding of what that policy says, the better off you will be in the event of a claim.
For example, consider that after a hurricane or other coastal storm, many businesses face the unpleasant surprise that, despite having windstorm coverage, they weren't covered for storm surge. And yet, storm surge is often responsible for much of the damage. Disputes over the exact cause of damage may wind up in court, but even a victory there will not make up for the time and energy diverted from recovery.
The ultimate test of an insurance policy is how it responds to a claim. Following are some claim issues that have been raised following natural disasters. It’s not an all-inclusive list, and each example has been the subject of extensive debate in insurance and legal circles.
What is and isn’t covered? How is it calculated? Business interruption (BI) is one of the most misunderstood coverages on an “all-risk” property form, and one that often brings difficulty in settling a claim. Following an event, many of the difficulties arise around what is not covered in a business interruption policy.
It’s important to note that a BI policy does not replace revenues: It replaces the profits lost and the continuing expenses that a property would have generated if it were operational. For example, a continuing expense could be taxes on a property. A non-continuing expense could be heat, light, or power. Another issue that may cause misunderstanding is the indemnity period. The complexities of BI are a good example of why it is important to have a thorough understanding of your policy before a loss occurs.
Following many losses, one complex issue involves deductible applications, including by occurrence and by location, and for separate deductibles for property damage and time element losses. A catastrophic event like a hurricane may have many potential deductibles to consider, which may be in the form of straight dollar deductibles or a percentage of value deductibles.
Some coverage may involve a waiting period. Insureds need to know if there is a definition of an occurrence in the policy and whether that deductible is per location and is applicable to all buildings.
Many disasters involve extensive service interruptions, raising the question: What is the scope of coverage for such losses? A service interruption must be caused by a peril insured against or a peril not otherwise excluded. It generally deals with the service supplier, such as a utility.
In the event of a service interruption loss, some insurers are likely to argue that if there is no trigger — for example, property damage — then there is not an accidental event. They could take a hard line and say a voluntary interruption is not a covered service interruption. And as in any coverage, it’s important to understand the specifics of an individual policy. For example, are there distance limitations? What property of the service provider is covered? Are overhead transmission and distribution lines included?
Civil Authority, Ingress/Egress
These two extensions of coverage come into play in almost every instance in which a government entity shuts down an area, and prohibits access to a facility, whether due to flooding, windstorm, earthquake damage, or some other peril:
- Civil and military authority, which has led to some debate over the years, as officials exercise more caution ahead of and following a storm. For example, following Hurricane Irene, Superstorm Sandy, and Hurricane Matthew politicians told people to stay home. So the debate becomes: Can this be considered a civil military authority claim under a policy?
- Ingress/egress, which involves access to or the ability to leave a property. This typically arises post-flood when an area is surrounded by floodwaters, and the roads are not serviceable. Wording is very important. For example, has the access to or egress from your property been “prevented” or “impaired”? It is critical to understand the exact terms and definitions within a specific policy.
Named Windstorm or Flood
Clarity is critical in any definition. Following such storms as Hurricane Katrina and Superstorm Sandy there were many substantial disputes that involved the definition of windstorm versus flood. One thing that an insured should review is whether the named windstorm definition includes “storm surge,” which is basically wind-driven water. Does the flood definition exclude storm surge? Over the years, the use of named-storm or windstorms with storm surge clauses have become more common, and coverage limits and how deductibles are applied have changed dramatically.
Loss Management Plans
At its core, loss management is about keeping an insured funded. When recovering from a major catastrophe, all parties need to work as allies. The insurers need to understand the insured's financial and operational goals, and vice versa. When looking at loss management plans and communication protocols, there should be agreement between parties as to the roles, responsibilities, and deliverables, as well as who has the authority to make decisions.
During major disasters, decisions have to be made in areas such as reinstatement, replacement, and mitigation. Often, there aren’t enough people involved at a mid-management level to make those decisions. That can slow down the process, and at times lead to confrontation around such issues as reconstruction alternatives, use of alternative suppliers, time elements exposures, funding protocols, partial payments, and the like. Planning helps ensure that the empowered personnel are involved, including adjusters, forensic accountants, building consultants, risk managers, financial executives, and public relations.
One of the most difficult claims areas following a major disaster involves the extensive geographic area that may be affected, as from an earthquake. Businesses that may not have suffered significant damage themselves can still see their revenue plummet if a wide swath around them is damaged, thus driving away their customer base. A number of issues go into deciding such a claim. As in most areas, work done with brokers and insurers ahead of time can prove beneficial following a loss.
On a related note, in particular for retail and hospitality companies, insurers will want to look at potential makeup. This analysis can take two forms. First is potential makeup of sales after operations are resumed based on possible pent-up demand. The second involves insureds with multiple locations, where customers may drive to a more distant store and potentially offset lost sales at a damaged location.
The recovery period following a major disaster is one of high stress for companies and their employees. People may be working to put their own lives back together while they are asked to help the business get up and running. Time is generally of the essence, and insurance plays a vital role in speeding recovery.
Just as having crisis management plans in place is a vital measure, it’s important to understand ahead of time how your insurance policy will respond. One way to do so is to conduct a drill, running through a scenario with your insurer and other key stakeholders to understand what coverage would be triggered by a loss, the various definitions that would come into play, what information would need to be collected before and after the event, and more. The information gathered can lead to improvements that may be critical to recovering promptly from a disaster.