Even If Your Business Is Not In Katrina's Wake, Your Business May Have An Insurance Claim

September 2005

Library Sections:

If your business has key suppliers or customers in the Gulf Coast area, your business could be significantly affected. This is true even though your own business property may not have sustained physical damage. This frequently occurs because of (i) strategic supplier and customer relationships, (ii) outsourcing agreements, and (iii) just-in-time inventory systems.

In the case of a complex and long-lasting loss, such as caused by Hurricane Katrina, a business can not quantify its full loss immediately. Nevertheless, your policy contains claim time limits, which may be as little as 30 days. For this reason, it is imperative that the policy be reviewed immediately, and a claim submitted within the required limitation. For Katrina-based claims, it will be necessary to file one or more "preliminary" or "partial" proofs of loss as more information becomes available. Extensions are readily granted for major losses, but such extensions should be formally requested and granted.

Here are some of the claims that your business may have:

Contingent Business Interruption

Contingent business interruption usually requires that additional insurance has been purchased. Check your policy to see whether you have this coverage.

Contingent business interruption covers losses caused when key suppliers or customers experience a disaster that also affects your business. Contingent insurance occurs when the physically-damaged property is NOT owned, operated or controlled by the insured. The contingent property may be specifically named, or the coverage may blanket all suppliers and customers.

The type and cause of physical damage must be the same as insured under the controlling policy. The actual coverage will depend upon your policy language, which can vary considerably. An example of policy language is:

"This policy covers against a loss of earnings and necessary extra expense resulting from necessary interruption of business of the insured caused by damage to or destruction of real or personal property, by the perils insured against under this policy, of any supplier of goods or services which results in the inability of such supplier to supply an insured location."

Most small and middle market businesses will have the form policy issued by the Insurance Services Office (ISO). The ISO "Business Income from Dependent Properties - Broad Form" provides:

"We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the "period of restoration". The suspension must be caused by direct physical loss or damage to "dependent property" at premises described in the Schedule caused by or resulting from a Covered Cause of Loss …"

"Period of Restoration" with respect to "dependent property" means the period of time that:
a) Begins 72 hours after the time of direct physical loss or damage caused by or resulting from any Covered Cause of Loss at the premises of the "dependent property", and

b) Ends on the date when the property at the premises of the "dependent property" should be repaired, rebuilt or replaced with reasonable speed and similar quality."

"Dependent property" should be listed within the policy. If the "dependent property" causing your loss is not scheduled, then the coverage is limited to what is included in the "Additional Coverages", as follows:

"Miscellaneous locations - We will pay for the actual loss of Business Income you sustain due to direct physical loss or damage at the premises of a "dependent property" not listed in the Schedule caused by or resulting from any Covered Cause of Loss. But we will not pay more than .03% of the Limit of Insurance for each day's suspension of "operations" due to loss arising from any one location."

As with regular business interruption insurance, contingent business interruption losses require documentation and analysis to fully compensate for your business loss. See our Article on Business Interruption Best Practices for recommendations.

Denial of Access by a Civil Authority

This is normally a component of business interruption insurance coverage. It provides coverage if business operations are suspended as a result of an order of a civil authority (such as an evacuation order) following a loss of the type that is insured for your property. These clauses vary greatly between policies. For example, policy restrictions may require:

More limited coverage time periods than exists in the rest of the policy
That the policy holder's property be damaged
That physical damage occur within a specified distance from the insured premises

Ingress/Egress Restrictions

These claims are predicated on the closure of roads, airports, bridges, tunnels, or other means of transportation. This coverage is similar to the civil authority coverage described above, but does not require that the problem be caused by a civil authority.

Based on the policy wording and related court decisions, these claims must be based on a complete denial of access, rather than just more limited access than would otherwise be available.

Special Considerations re: Katrina

Hurricane Katrina may be the most costly natural catastrophe in U.S. history. Katrina caused significant damage to industrial (mainly oil, refinery, and chemical facilities), commercial (mainly hospitality), and agricultural facilities.

Because of the costly losses, it is likely that insurers will use every opportunity to limit losses and deny coverage. Legal counsel involvement is necessary to ensure that (i) all purchased coverage's are appropriately used in your claim, and (ii) state law requirements regarding how carriers are to conduct themselves have been met. Here are some of the expected challenges:

Flood vs. Wind Damage - Most "all risk" policies cover damage caused by wind and wind-driven rain, but do not cover floods. Insurers will likely claim that the damages were caused by non-covered flooding. Since all of the additional coverage's described above must relate to damage that is in your policy, the carrier may claim that these additional coverage's do not apply.
Lengthy Recovery Period - Because it will take so long to clean-up the New Orleans area, the full amount of business losses will be more difficult to calculate. Expect insurance companies to require extensive documentation and long negotiations.
Overlapping Coverage with Different Limits - Policies may provide coverage under the multiple provisions described above. However, each of these usually have different dollar and time coverage limits. For example, civil authority coverage usually contains a time limitation that will be shorter than what is actually required in New Orleans. Be careful that your insurance company does not minimize payment by classifying coverage under the most severe restriction(s).

Fulcrum Inquiry is a claims consulting firm. We have expertise in claims preparation, retrieval of electronic accounting records, forensic auditing, and litigation consulting.