The November 2017 issue of CFO Magazine includes an article authored by Shaun Crosner regarding insurance coverage for hurricane losses. In the article, Shaun provides tips designed to help companies maximize their insurance coverage for property damage and financial losses suffered as a result of Hurricanes Harvey, Irma, and Maria. An expanded version of Shaun’s article is below.
Five Tips for CFOs and Risk Managers to Maximize Insurance Coverage for Hurricane Losses
By Shaun Crosner
According to some preliminary estimates, Hurricanes Harvey, Irma, and Maria caused more than $100,000,000,000 in damage to buildings, equipment, stock and other property. And, as many financial and risk management executives are experiencing, the impact of these natural disasters is not limited to companies with operations in Texas, Florida, and Puerto Rico. Indeed, companies throughout the country—including many with no physical presence in the impacted regions—are feeling the financial impact of these hurricanes, with initial estimates suggesting United States companies are likely to suffer tens of billions of dollars in aggregate lost profits.
As thousands of companies prepare to pursue insurance coverage for their property damage and business income losses, many CFOs and Risk Managers have been tasked with preparing and submitting first-party property insurance claims. Below are tips for those individuals to keep in mind in the coming weeks and months.
Tip #1: Review your policy carefully to ensure a complete understanding of the coverage provided.
Commercial property policies typically insure against “all risks” of physical loss or damage to real property, except to the extent an exclusion or other limitation applies. This means that companies often are entitled to broad coverage for hurricane-related loss or damage to structures, machinery, stock, and other property.
Property policies also typically provide coverage for “business interruption” or “lost profits” attributable to damage to or at the insured’s facility. However, such damage is not always a prerequisite to coverage.
Indeed, even in the absence of direct damage to or at an insured’s facility, many policies also cover lost profits attributable to the insured’s inability to access its facility—either because access is physically prevented by damage to surrounding roads or access points, or because a civil or military authority is prohibiting access to the location. Furthermore, property policies frequently cover the insured’s lost profits resulting from damage suffered by the insured’s suppliers (who might be unable to supply raw materials or components) and customers (who might be unable to accept products or services being sold by the insured). This coverage, often referred to as “contingent business interruption” coverage, may be available to insureds even if they have no physical presence in the states impacted by Harvey, Irma, and Maria.
Because the precise terms of property insurance policies can vary widely, CFOs and Risk Managers should carefully review their policies to ensure that they do not overlook any of the coverage available for their hurricane-related losses.
Tip #2: Strive to comply with all deadlines and other policy conditions.
Most property policies contain various procedural conditions purporting to impose deadlines and other conditions with which the insured must comply in order to obtain coverage for property damage or business income losses. For instance, policies typically include conditions governing the timeframe in which the insured must (1) notify the insurer of a loss or other insured event and (2) submit a sworn proof of loss attesting to the scope and nature of the insured’s loss.
Because insurers might rely on an insured’s purported failure to comply with policy conditions to dispute coverage, CFOs and Risk Managers should make every effort to comply with all deadlines and other procedural conditions in their policies. However, an insured’s failure to do so will not necessarily result in a loss of coverage. Indeed, in many jurisdictions, an insured’s failure to strictly comply with a policy condition will not be a bar to coverage unless the insurer can demonstrate it was actually and substantially prejudiced by the insured’s supposed breach.
Tip #3: Consider whether it is necessary to perform a wind/flood allocation.
First-party property policies often treat “wind” losses differently than “flood” losses. For instance, some property policies provide broad coverage for “wind” losses but purport to limit or exclude coverage for certain “flood” losses. In other cases, property insurance policies purport to impose different deductibles—that is, one for “wind” and another (typically larger) one for “flood”—that must be satisfied before the insurer begins to pay for the insured’s damage and losses.
These provisions can significantly impact an insured’s total recovery for hurricane losses—which can include damage from both “wind” and “flood,” depending on how those terms are defined in the insured’s policy. Accordingly, insureds must consider whether it is necessary to perform a wind/flood allocation to determine how much of their total damage and loss is attributable to “wind” and how much is attributable to “flood.” Frequently, wind/flood allocations are performed by experts and consultants retained by the insured. These experts and consultants may employ a variety of techniques—including modeling, review of photographs, and on-site inspections—to determine the cause of the insured’s damage and/or financial losses.
Not surprisingly, wind/flood allocations can become more complicated with the passage of time. Therefore, early in the process, CFOs and Risk Managers should carefully review their policies and consider whether it may be necessary or advantageous to perform a wind/flood allocation and attempt to segregate their “wind” and “flood” losses.
Tip #4: Do not assume your insurer’s coverage positions are valid.
In the context of hurricane claims, insurers often attempt to impose deductibles and rely on policy sublimits and exclusions that, if applicable, would substantially reduce the insured’s recovery. Such positions are not always well-founded. Indeed, the application of deductibles, sublimits, and policy exclusions invariably turns on a nuanced analysis of the facts and the specific policy language at issue. Therefore, insureds should not blindly accept adverse coverage positions from their insurers.
In that regard, under the laws of most jurisdictions, ambiguities in insurance policies generally must be resolved against the insurer and in favor of coverage. As a result, if an insurer seeks to rely on a coverage limitation, the insurer generally must establish that its interpretation of the provision is the only reasonable one. If the insured offers a contrary interpretation that is reasonable and affords broader coverage, the insured’s interpretation ordinarily will govern.
Tip #5: Be mindful of the deadline to file suit against your insurer.
CFOs and Risk Managers also should be aware of timing-related limitations concerning the right to initiate litigation against an insurer, should they deem such action to be necessary. In some instances, the timeframe in which the insured can file suit is dictated by the express terms of the property insurance policy (commonly, such provisions call for suit to be filed within 12 or 24 months of the insured’s loss). In other cases, statute or regulation will provide the relevant limitations period.
Either way, insureds should be mindful of the timeframe in which they must initiate litigation against their insurers. By preserving the ability to file suit if necessary, insureds will put themselves in position to maximize their insurance recoveries and obtain the full benefits of coverage provided by their property insurance policies.