August 30, 2011 Losses from Hurricane Irene: Are You Covered? Practice Group: Insurance Coverage Hurricane Irene slammed into North Carolina early Saturday morning, August 27 th , after already causing extensive damage across the Caribbean, and then proceeded up the Atlantic seaboard, knocking out power and leaving widespread destruction of property and at least 24 fatalities in its wake. Days before Irene made landfall in the continental United States, the hurricane caused major disruptions as a result of unprecedented preparedness actions taken across the East Coast. In addition to declaring states of emergency, authorities ordered the mandatory evacuation of approximately 2.5 million people. Mass transit systems in the storm’s projected path suspended operations, including the New York Metropolitan Transit Authority, the nation's largest mass transit system, which shut down its entire system, including all subways, buses, and commuter rails, for the first time in history. Major airports, ports, bridges, tunnels and highways were closed. Airlines cancelled more than 10,000 flights. Non-emergency travel was banned. Businesses and entertainment venues closed. Numerous events were postponed or cancelled, including professional sporting events, headliner concerts and all of the weekend's Broadway shows. Although the full extent of damage and disruption of business has yet to be assessed in concrete dollar terms, early estimates in the U.S. alone are about $7 billion. 1 Insurance policies can play an important role in helping businesses and individuals recover from the hurricane, as much of the property damage and business interruption loss suffered in the wake of Irene is insured. Indeed, early estimates are that as much as $3 billion of losses in the U.S. may be covered by insurance. 2 Businesses often have insurance not only for property damage losses, but also for economic losses arising from business interruption, including interruption incurred as a result of actions of civil authorities (such as the evacuations, mass transit suspensions and airport closures) and for extra expenses incurred to minimize or avoid business interruption. Even if the hurricane did not damage their own property, many businesses will have sustained losses because of damage to the property of business partners (such as customers or suppliers), damage to infrastructure, actions of authorities, transit interruption, power outages, and/or disruption of various other forms of production and support systems. Businesses that have suffered losses related to the hurricane are advised to carefully assess and document those losses and to review all potentially applicable insurance policies to determine if such policies may afford coverage. A careful review of its insurance policies will be an important component of a company’s efforts to recover from Hurricane Irene. In addition, early identification, characterization and presentation of loss information in light of potentially applicable insurance coverage law can help maximize coverage and make a substantial difference in a policyholder’s ultimate recovery. 1 See Derek Hawkins , Insurers Brace for Claims Post-Irene , Law360, New York (Aug. 28, 2011). 2 See id .
Losses from Hurricane Irene: Are You Covered? Identifying Possible Coverage Most businesses have property insurance policies that cover damage to the policyholder’s property and also provide so called “time element” coverages—including “business interruption” and “extra expense” coverages—that insure against loss resulting from the inability to conduct business normally. Although the terms and conditions of property policies vary significantly, these policies frequently provide coverage for expense incurred in minimizing or preventing an insured loss and may even cover the policyholder for costs associated in establishing the extent of a loss. Some of the types of coverage afforded under property insurance policies include the following: Property Damage Coverages Covered Property The peril of “windstorm”—which encompasses hurricanes such as Irene—is typically a covered peril under property insurance policies, which generally cover “physical loss of or damage to” insured property. Insured property is often broadly defined by the policy or applicable law. By way of illustration, the standard-form Insurance Services Organization (ISO) “Standard Property Policy” form includes, among other property, the policyholder’s scheduled “building or structure,” “business personal property” such as “furniture and fixtures,” “machinery and equipment,” “stock” and leased property. 3 Policies also frequently provide coverage for unscheduled "newly acquired or constructed” property and the property of third parties that is in the policyholder’s “care, custody or control.” Preventing or Mitigating Insured Loss Most property policies contain a separate provision that reimburses a policyholder’s costs and expenses incurred in taking preventative measures to reduce or avoid an insured loss. Businesses may be able to recover under this separate grant of coverage for preventative expenses incurred such as the cost to board up windows, move equipment or otherwise secure property in advance of Irene. Debris Removal Most property policies cover expenses that the policyholder incurs to remove debris on the policyholder’s property following an insured event. By way of illustration, the ISO standard form states that the insurer “will pay [the policyholder’s] expense to remove debris of Covered Property caused by or resulting from a Covered Cause of Loss that occurs during the policy period.” 4 A business may have coverage under this separate coverage for expenses incurred to clean up its property after the hurricane. 3 CP 00 99 06 07 (2007). 4 Id . 2
Losses from Hurricane Irene: Are You Covered? “Time Element” Coverages, Including Business Interruption Business Interruption “Business Interruption” coverage generally reimburses the policyholder for its loss of earnings or revenue resulting from covered property damage. By way of example, the ISO “Business Income (and Extra Expense) Coverage Form” 5 covers the loss of net profit and operating expenses that the policyholder “sustain[s] due to the necessary ‘suspension’ of [the policyholder’s] ‘operations’ during the ‘period of restoration.’” 6 Importantly in a hurricane context, where impact is likely to be felt throughout the country, business interruption insurance may cover loss of business income at premises that are physically remote from the damaged property if such premises are operated in connection with the damaged property. Extra Expense “Extra Expense” coverage generally covers the policyholder for certain extra expenses incurred to minimize or avoid business interruption and in order to resume normal operations. For example, the ISO standard form covers, among other things, “Extra Expense” to “[a]void or minimize the ‘suspension’ of business and to continue operations at the described premises or at replacement premises or temporary locations ….” 7 The form defines “Extra Expense” as “necessary expenses” that the policyholder “would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.” 8 Contingent Business Interruption “Contingent Business Interruption” generally covers the policyholder with respect to losses, including lost earnings or revenue, as a result of damage, not to the policyholder’s own property, but to the property of a policyholder’s supplier, customer or some other business partner or entity, which damage renders that entity unable to conduct normal business operations. Again, this coverage is important in a hurricane context. A business may have coverage, for example, if it suffers lost profits because of lost production and sales due to the fact that a supplier’s manufacturing facility was damaged by Hurricane Irene. Actions of Civil Authority “Civil Authority” coverage may apply when a business suffers a loss of income and/or extra expenses arising from an “action” or “order” of a civil authority that prevents or impairs access to the premises of the business. Importantly, this type of coverage typically applies even in the absence of property damage to the policyholder’s property, although it may require damage to the property of others depending on the specific policy language. 5 CP 00 30 06 07 (2007). 6 Id . 7 Id . 8 Id . 3
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