Business Losses From Sandy Expected to Grow

According to the latest estimates, Superstorm Sandy could cost insurers up to $20 billion in insured losses and up to $50 billion in economic losses.

Tom Teixeira, a practice leader in Willis Global Solutions, said the numbers are not surprising.

“In fact, I expect the figure to be a lot bigger once all of the losses have been analyzed, including the business interruption losses,” said Teixeira.

That’s because many companies have failed to learn from past catastrophes. The National Association of Insurance Commissioners reported just 35 percent of small companies had business interruption insurance in 2007.

According to the National Federation of Independent Businesses (NFIB), 30 percent of small businesses that experienced a natural disaster in the past three years were closed 24 hours or longer and nearly 62 percent reported lost sales and customers as the primary negative result of the disaster.

“There is still not enough alignment between the procurement function and group risk. The silo mentality – driven by localized Profit & Loss (P&L) accounts – has created opposing objectives, such as procurement trying to significantly reduce inventory and group risk trying to reduce the level of business interruption should disasters occur,” Teixeira said.

“Once the full extent of the damage from Sandy is analyzed I have no doubt we will see large business interruption losses – not just as a result of property damage at supplier sites but as a result of power failure to suppliers leading to the stoppage or partial stoppage of production,” Teixeira said.

The Willis practice leader said that business interruption losses will be compounded by two key issues:

Mohammad Khan, an insurance partner with PricewaterhouseCoopers, also thinks business interruption losses will impact the total losses resulting from Sandy.

“Business interruption claims specifically, may play a significant part in regards to the overall losses. With Katrina, we saw interruptions claims making up approximately 20 percent of the overall insurance loss. Whether this is applicable to Sandy depends on the swiftness of recovery of the subway and other transports links which would be a good proxy for the recovery of New York in general,” said Khan.

New York City Mayor Michael Bloomberg has said small- and medium-sized businesses will be eligible for emergency loans of up to $10,000 – an amount business owners have said is not enough to recover from the disaster.

“It might buy a deep freezer,” said Laura Tribuno, co-owner of Edi and the Wolf, an Austrian-themed restaurant on Avenue C in the Manhattan neighborhood known as Alphabet City.

Damage from Sandy, which swept through the neighborhood with flooding and dangerous winds, more than wiped out the year’s profits, she estimated. The cost of replacing equipment and merchandise will be about $80,000, and it could be weeks before paying customers can return, she said

On the next block, Monica Pedreros, owner of a decades-old hardware store with her husband, said she fears her insurance does not cover flooding and that Bloomberg’s offer of an emergency loan falls far short of what they need.

Even with a property policy, there may be no coverage for a loss associated with Sandy.

“For business income coverage to apply, a suspension of operations must be caused by damage to property at the insured location by a covered cause of loss. In many policies, flood is not a covered cause of loss for business income coverage, even if the flooding happened because of windstorm, which is a covered cause of loss. This can, and often does, lead to coverage disputes but the flood exclusion is usually upheld if it goes to court,” said Arthur L. Flitner, senior director of knowledge resources for The Institutes.

Experts Weigh In

Colleen Vallen, who works in the Philadelphia office of Citrin Cooperman and specializes in forensic accounting, expects there will a number of business interruption claims arising from Sandy.

“I would expect there’s going to be a lot of claims from Sandy, given the size and the area it hit,” she said.

Insurers will scrutinize the losses, given the multiple causes of loss.

“I think because Sandy had multiple elements, again going back to you have wind, you have flooding, you have storm surge. I would expect that insurance companies will look closely at coverage and the cause of physical damage,” Vallen said.

According to Neal Cason, a partner at Matson Driscoll & Damico, a forensic accounting firm specializing in economic damage quantification assessments, adjusters in the midst of handling dozens of Sandy-related claims may forget that many insureds don’t understand the claims process until they experience a loss.

“Adjusters just need to be mindful that…their insureds are going through a major crisis here,” Cason said.

Adjusters need to explain, in detail, how the process will work.

“As an accountant, what we do is we go in and we want to measure the revenue losses and then deduct whatever costs are saved or abated because you are not operating and then what’s left over by default is profit and fixed costs,” Cason explained.

Many small businesses are in panic mode demanding payroll and rent; however, they don’t understand there are deductibles, waiting periods and physical damage requirements that affect how much they are owed under the policy, he said.

“What the goal is, is to put the insured back in the same position financially it would have been in if no loss occurred,” Cason said.

While some businesses may have appeared to have been lucky in avoiding physical damage, the loss of customers could close them for good. According to Cason, a change in market happened in New Orleans when the population was displaced after Hurricane Katrina.

“You’ve got to have physical damage before it triggers the policy,” he said.

Because many small businesses don’t keep good records, it will likely be easier to process claims made by large businesses.

“Like the casinos in Atlantic City, they’re going to have sophisticated records; they are going to have sophisticated risk management. The losses might be much, much higher but it’s going to be actually easier to measure then sometimes these mom and pop operations that do not have very good records,” said Cason.

Common Areas of Disagreement in Business Interruption Claims

According to Craig Roswell, a partner at the law firm of Niles Barton & Wilmer, the single largest area of disagreement in business interruption claims is the period of restoration.

It’s particularly relevant in commercial landlord tenant relationships because a building owner may not rebuild at all or may rebuild at a slower pace, Roswell said.

That’s why it’s important for adjusters to get a handle on the period of restoration as early as possible.

“The earlier you can act to establish a good evidentiary basis the better off you are,” Roswell added.

The Baltimore attorney also recommended adjusters focus on individual company policy language. Though Roswell had some clients who wrote endorsements covering flood loss, most policies don’t cover it.

Another area of disagreement in business interruption calculations relates to using historical lookbacks to project what income would have been earned during a particular period of time. Often, an insured will want to include the highest season in his or her calculations.

“Make sure you are looking at apple to apple snapshots,” Roswell said.

In addition, adjusters should consider how the rest of the area was impacted and whether offsets for other non-covered causes of loss may have contributed to a downturn in business. Roswell cited 9/11 as an example, indicating that after the terrorist act no one wanted to eat out contributing to the downturn in business for restaurants in New York City.

Roswell added that adjusters should carefully review geographical offset issues and competitive sets, where a business will calculate damages by looking at a competitive set of businesses.

If an insurer and insured disagree on business interruption calculations, some companies offer the option of an appraisal. The option varies by state and in some states, if an insurer chooses appraisal, it must pay 100 percent of the costs associated with it, Roswell said.

Ben Berkowitz, Jonathan Allen of Reuters contributed to this article