Monday, September 18, 2017

No. 235: Harvey and Irma—Often Neglected Business Insurance Implications of a Superstorm

Blogger's note: The late Eugene R. Anderson, a longtime close friend of mine, founded what is now Anderson Kill PC, a policyholders' law firm. In No. 146 (posted February 25, 2016), I wrote a memorial tribute to Gene. I also dedicated the October 2010 issue of The Insurance Forum to him shortly after he died in July 2010 at age 82.

Finley Harckham is an attorney in the Insurance Recovery Group at Anderson Kill. On August 30 Harckham issued a memorandum in the wake of Superstorm Harvey about the implications of contingent business interruption insurance. The title is "In Harvey's aftermath, contingent business interruption insurance claims should have broad reach." The subtitle is "Businesses nationwide that rely on plastics or chemicals may have claims for supply chain disruption." The contents of the memorandum are also relevant to Superstorm Irma. Here I show the memorandum, with light editing and with the firm's permission.

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Beyond the toll in human suffering that Superstorm Harvey is exacting this week, severe impact on the U.S. and even the global economy may emerge in the coming weeks and months. The Houston Ship Channel passes not only many of the nation's largest refineries but also major chemical manufacturing plants. As Grist (a nonprofit publication) noted last year, the Channel is "a crucial transportation route for crude oil and other key products, such as plastics and pesticides." A shutdown could disrupt supply chains nationwide and globally, affecting factories in a wide range of industries.

Businesses suffering from Harvey-induced supply chain disruptions throughout the U.S., and with global operations, should look to their property insurance policies for contingent business interruption coverage, triggered when policyholders do not themselves suffer physical damage but still lose revenue after a property loss sidelines a major supplier or customer base. Contingent BI is a standard provision in many property insurance policies, though many businesses are not aware of it.

In the affected areas of Texas, businesses will need to assess not only physical damage to their property but also income losses stemming from flooded and blocked roads and bridges, interrupted shipping and air transport, evacuations, and closures by civil authority. In the aftermath of a storm, physical damage to property stares a business owner in the face. For the future health of the business, though, it is vital to think beyond the cost and challenges of physical repair and begin right away to tally losses of business income and expenses incurred to mitigate that loss. Here are the relevant coverages to consider in a storm's aftermath.

Business interruption or BI insurance covers businesses for losses stemming from unavoidable interruptions in their daily operations. BI coverage may be triggered by circumstances including a forced shutdown, a downturn in business due to damage to premises, or a substantial impairment in access to a business's plant or premises.

Contingent business interruption coverage is triggered when policyholders lose revenue after a property loss sidelines a major supplier or customer base. For example, businesses that rely upon specialty chemicals from the affected area may have to pay more for supplies, and companies which sell into the area, such as consumer products manufacturers, will suffer lost sales. While the business itself need not be physically damaged, it does need to have coverage for the type of damage that affected its suppliers, business partners, or customers. For example, a business must have flood coverage to file a contingent business interruption claim for losses triggered when a supplier is incapacitated by flood.

Evacuation by order of civil authority coverage is triggered when authorities close off access to a damaged area. Relatedly, ingress/egress coverage insures lost profits due to difficulties in accessing the insured premises due to the storm. Here too, damage to the insured's property is not required to trigger coverage—though typically, the losses must result from property damage of a type covered by the insurance policy.

Extra expense coverage applies to additional costs incurred by the policyholder as a result of damage to its property, and to costs incurred to mitigate economic losses.

Too many businesses do not think about insurance unless their premises are damaged or, if they do, they fail to calculate the full range of loss. Some may not even be aware of their civil authority, ingress/egress, and business interruption coverage, let alone contingent business interruption coverage for those far from the damage site.

Many commercial property insurance policies provide different sublimits for losses caused by "flood," "storm surge," and "named storms." How the policy defines these key terms can be critical in determining the amount recoverable for the policyholder's loss. For most businesses in the Houston area, Harvey wrought its worst under the aegis of "tropical storm" rather than "hurricane,"—and that could affect coverage terms in some policies. Check your policy's definition of "flood," "storm surge," and "named storm," and hold your insurance company to the terms of the contract.

In the aftermath of a major storm, damage caused by wind or wind-driven rain and damage caused by storm surge—flood—can be difficult or impossible to distinguish. For policyholders lacking flood coverage, insurance companies often invoke "anticoncurrent causation clauses" to deny any coverage at all if flooding occurred. Many state courts, however, have held that if the "efficient proximate cause" of damage is covered—that is, the dominant cause—then the claim is covered. While most damage in the Houston area was flood-induced, several billions of dollars worth of damage incurred in the storm's early hurricane phase may be attributable to other causes. Denials based on anticoncurrent causation provisions should in many cases be contested. They should in any case be carefully scrutinized and analyzed in light of case law in the state in question.