As companies large and small grapple with losses in Sandy’s aftermath, a number of critical — and costly — business questions have emerged. Darlene Alt and Robert DiUbaldo, two experienced insurance attorneys from international law firm Edwards Wildman Palmer LLP, provided Insurance Journal with answers to these commonly asked questions.
Insurance Journal: What does Contingent Business Interruptions coverage encompass? For example, will businesses in the Northeast – and beyond – be reimbursed for supply chain disruptions due to closed roads, shuttered hotels due to dangling cranes, and retailers and coffeehouses lacking electricity?
Contingent business interruption (CBI) insurance covers lost income to an insured business when an insured’s supplier’s property is physically damaged, thereby disrupting the flow of goods or services to insureds. Because direct physical damage caused by a covered loss is essential for CBI coverage, those businesses shut down by Sandy due to a lack of power, closed roads or evacuation orders may not be able to show the physical damage to suppliers necessary to trigger CBI coverage.
However, other types of insurance may cover business losses in the wake of Sandy. For example, a policy may include Utility Interruption Coverage, which covers income lost due to a lack of incoming electricity even though there is no direct physical damage to the insured’s property. Civil Authority Coverage may also be available to hotels and retailers for losses suffered when access to their businesses was prohibited.
Similarly, businesses may find that their policies include Lack of Ingress/Egress Coverage, which generally covers losses sustained when entry to or exit from an insured’s property is denied because of closed roads or other storm-related destruction. These coverages generally apply, however, only if the loss was caused by a non-excluded peril.
Businesses therefore should review their policies carefully to determine the scope of coverage and whether their loss is caused by a covered peril. With many business and property policies containing flood and water exclusions, causation questions are likely to be a focal point of claims to come.
The ‘hours clause’ in insurance circles kicks into effect from the moment damage occurs. Did commercial entities suffer damage from the wind or was it the water surge that emanated from the wind, high tide and high water levels?
In insurance and reinsurance contracts that provide indemnity coverage on an “any one loss occurrence” basis, an “hours clause” typically limits the duration of a covered loss to a fixed number of hours, which may vary depending upon the type of peril giving rise to the losses. For example, a policy or reinsurance treaty may provide for a “loss occurrence” period of 72 hours in respect of a hurricane or windstorm.
Any covered losses that occur within the requisite period can be aggregated as a single “Loss Occurrence,” thus requiring the insured/reinsured to only pay a single deductible/retention before accessing the limits of a given policy or reinsurance agreement. An “hours clause” may also provide the party seeking indemnification with the right to decide when the time limit begins to run, with the only limitation being that the party cannot deem the period as having started to run before the time of its first identifiable loss.
As most insurance policies and reinsurance agreements require the insured or reinsured to pay a deductible or retention on a per occurrence basis, an insured or reinsured will likely want to aggregate as many of its covered losses as possible within the requisite hours limit, in order to avoid having to pay multiple deductibles/retentions.
Because Sandy’s trail of destruction in the Caribbean and United States may exceed the hours limit contained in insurance policies or reinsurance agreements, an insured/reinsured that suffers losses in multiple locations will need to determine how best to present their losses to insurers or reinsurers.
The reports thus far indicate that commercial insureds suffered damage from a variety of factors, including wind, water damage, and storm surge. Insurers and reinsurers will need to review the terms and conditions of their respective contracts to determine the scope of coverage provided, and whether the cause of a particular loss is covered.
Was Sandy a bad storm or was it a hurricane when it hit? The definition matters to insurers and the insured.
Many property policies have provisions such as a “hurricane deductible” that turns on the status of a storm when it first hits land in a state. However, the status of Sandy was not the same when it hit landfall in different states, and some states’ regulations and some policies may not refer to “hurricane” but rather to whether there was a named storm or whether sustained winds were at a certain miles per hour or other criteria. Several states’ insurance departments and governors have addressed the issue.
In New Jersey, the Governor issued an Executive order stating that as the National Weather Services (NWS) categorized Sandy as a post-tropical storm prior to landfall in New Jersey, it shall be a violation of New Jersey law “for any insurer to apply a mandatory or optional hurricane deductible to the payment of claims for property damage attributable to Sandy.”
In Connecticut, the Insurance Department issued a notice, based on new regulatory guidelines issued post-Irene, stating that as the NWS had not issued a Hurricane Warning for the state of Connecticut, among other factors, companies may not impose a hurricane deductible on Connecticut claims.
In New York, the Governor announced on October 31 that the New York State Department of Financial Services has informed the insurance industry that hurricane deductibles should not be triggered “because Sandy did not have sustained hurricane-force winds when it made land in New York,” and that the Department will be monitoring how insurers handled claims.
However, not all states will have the same positions, as the weather service reportedly classified Sandy as a hurricane when it hit landfall in other states such as North Carolina. Thus, the full effect of the status of Sandy at different locations and the effect of varying policy definitions, and whether the issue will become a focal point of dispute, is still to be determined.
Reinsurers v. Insurers – who will really be shouldering the costs of this storm?
The insurers that provide coverage to the property owners and businesses that suffered losses due to Sandy most likely purchased reinsurance that will indemnify them for portions of their Sandy-related claims payments. Reinsurance is indemnity-based and is usually only triggered after direct insurers make payments to their insureds.
Therefore, unlike the direct insurance issues that are currently receiving the attention of regulators and the media, the reinsurance issues will likely not be ripe for awhile.
Reinsurers are generally obligated to follow the fortunes of their reinsureds (also known as “cedents”), meaning that reinsurers will indemnify their cedents for payments made (a) in good faith after a reasonable investigation, (b) on claims subject to the underlying insurance policy, and (c) to the extent they are also encompassed within the terms, conditions and limits of the reinsurance contracts.
It remains unclear, however, how reinsurers will respond to payments made by their cedents on claims that arguably do not fall within the scope of the direct insurance policies, such as those made in response to political pressure or regulatory edict that are not consistent with policy terms. There may also be issues related to the interpretation and application of aggregation clauses and hours clauses.
Since most reinsurance agreements contain arbitration clauses requiring confidential arbitration in the event of disputes regarding the scope of the reinsurance, we may not see court decisions regarding the reinsurance issues. The issues, however, will be interesting for those in the industry to monitor as both reinsurers and cedents may seek to revise language in their reinsurance agreements going forward in the event of unfavorable determinations by arbitration panels.
Darlene Alt is a partner in the Insurance and Reinsurance Department at law firm Edwards Wildman. She represents insurers in coverage actions, class actions and complex commercial litigation. Alt can be reached at firstname.lastname@example.org.
Robert DiUbaldo is an associate in Edwards Wildman’s Insurance and Reinsurance Department. His practice areas include insurance, reinsurance and commercial litigation and arbitration. DiUbaldo can be reached at email@example.com.