Companies dealing with facility closures and property damage — sometimes to multiple locations in the wake of Hurricane Sandy — can avoid headaches and even receive up-front cash from insurers if they are diligent now, claims experts advise.
“If you put a good package together that is credible and supported by documentation, carriers will help you out with advance payment,” says John Dempsey, a managing partner at Dempsey Partners, a forensic accounting firm in New York.
Who should be the point person in assembling a company’s claims and making the case for coverage? “I think the risk manager should be at the center of the process. They are the insurance buyers who will maintain relationships — or [later drop] carriers that are not performing well after a claim,” he says.
For their part, CFOs have an interest in the risk managers making fast progress with insurers, according to Dempsey, who notes that if a company has a large business-interruption loss, earnings can be affected. “Timely recovery of insurance proceeds can help mitigate the reported earnings impact,” he says. “It’s possible to establish a process in the claims system, so that underwriters and adjusters know the client’s goal is to collect money [quickly] in order to preserve reported earnings.”
Because such an agreement must be made early in the claims-handling process, it’s essential to “think insurance” immediately, as failure to provide timely notice can invalidate coverage, he cautions. To maximize recovery efforts, Dempsey, whose clients include casinos in storm-devastated Atlantic City, New Jersey, advises businesses to assemble a recovery team with expertise in coverage and loss quantification. “They need to document any losses thoroughly and resist the unwarranted denial of their claims by their insurers,” he says.
Since insurers and adjusters may be stretched thin because of the magnitude of the damage caused by Sandy, he suggests, corporate insurance buyers should strive to collect as much money up front as possible. “If you’re collecting cash, that means the claim is progressing,” he says. “Seek advance payments on losses to the full extent the carriers will permit.”
Daniel Gerber, co-chair of the law firm Goldberg Segalla’s Global Insurance Services Group, which has U.S. offices in New York, Pennsylvania, New Jersey, and Connecticut — all states hit hard by the storm — says that from an insurance claims standpoint, Sandy is likely to be “astronomical.”
From the perspective of determining the size of payments a company is entitled to from an insurer, the cause of the loss will be a threshold question. That’s because many property-insurance policies exclude losses resulting from storm-surge flooding, with only flood-insurance policies typically covering losses resulting from flood. “As a result, knowing the type of applicable coverage and the exact cause of loss will be critical in Sandy claims,” says Gerber.
In the path of Sandy, he notes, fires have burned out of control and first responders have been unable to get to them as a result of flooding. “Fire is generally covered, but may not be if [damage is exacerbated] by flooding,” he says. “Again, causation will be an issue.”
Gerber also points out that most policies that exclude storm-surge flood coverage provide limited coverage for flooding caused by a sewer or drain back-up. A determination is required as to whether a loss resulted from initial flooding or debris in a drain.
Sandy will no doubt cause significant business-interruption losses, he says. Most policies require that in order for a claim of business interruption to be made, a business must also suffer a “physical loss.” In other words, says Gerber, “it is not sufficient that roads are closed and employees cannot get to work. If the business property also does not sustain some type of physical damage, then a business-interruption claim may not exist.” Some specific policies are not contingent upon a physical loss, however, he adds.
With the actual calculation of business interruption, a key issue is in determining appropriate restoration periods: the period until a business is again able to commence normal operations, Gerber says. Generally, coverage is only afforded for loss up to the point of restoration of normal business.
Here, several factors are usually weighed, including the market conditions and trends both before and after a loss. Further, the “savings” a business must credit to its claim because it is not paying costs of operation during the restoration period must be calculated, he says.
Another issue sure to come into play, Gerber adds, will be hurricane deductibles, since many policies have a deductible that must be applied to any loss arising out of a hurricane. These policies often apply a time period to the deductible: in other words, any damage caused by a storm designated as a hurricane within 24 hours of the storm’s landfall.
“Last year, this did not become an issue with Irene, as it had been downgraded to a tropical depression by the time it reached land,” he says. “This clearly is not the case with Sandy, and insurers may seek to impose deductibles.”
After Irene, he says, insurers faced pressure from many regulators to issue a statement that they would not enforce deductibles, and most insurers issued such a statement. This year, however, because of the extensive damage and the fact that Sandy remained a hurricane at landfall, similar statements are not likely.
What’s the silver lining for businesses in such claims disputes? Finley T. Harckham, shareholder in the insurance recovery group at law firm Anderson Kill & Olick, observes in an e-mail from the firm that business-interruption coverage may be triggered by such circumstances as a forced shutdown, a downturn in business due to the damage to premises, or a substantial impairment in access to a business’s plant or premises.
Harckham says businesses may have coverage for loss resulting from evacuation by order of civil authority, triggered when authorities close off access to a damaged area. Damage to the insured’s own property is not required to trigger coverage, though typically the order must result from property damage of a type covered by the insurance policy.
Dempsey also observes that companies “are permitted to shut down in advance of a disaster to preserve their property and have coverage for those costs.”
Dempsey saw such an extension at work in some insurance policies that paid off in connection with last year’s Midwest floods that affected casinos. “Some of those companies had a time-element coverage that started when they shut down their businesses to preserve their property — that gives them a couple of extra days of business-interruption coverage if they have that,” he says.
While standard policy forms may not cover the time element or business interruption, notes Dempsey, they most likely will cover any costs incurred to preserve property.