Harvey Coverage Questions Loom for Businesses

By Denise Johnson | September 8, 2017

Harvey’s lengthy stay over Texas and Louisiana, first as a hurricane and then as a tropical storm, will result in considerable losses for businesses located in both states.

According to Finley Harckham, a shareholder in the Insurance Recovery Group at Anderson Kill P.C., “In the affected areas of Texas, businesses will need to assess not only physical damage to their property but also income losses stemming from flooded and blocked roads and bridges, interrupted shipping and air transport, evacuations, and closures by civil authority.”

Charles Martin, national claim practice leader and chief claim officer for Marsh, described the perils likely to result from Hurricane Harvey in a recent Risk in Context blog. He explained that one involves “wind, windblown debris, and rainfall entering buildings through damage caused by wind and windblown debris.” Another peril could result from “wind-driven water above the predicted tide, also known as storm surge” or “as a result of accumulating surface water or bodies of water overflowing their banks.”

Harckham defined different types of business interruption coverage that may be applicable after Harvey:

Business interruption – Covers businesses for losses stemming from unavoidable interruptions in their daily operations. BI coverage may be triggered by circumstances including a forced shut-down, a downturn in business due to damage to premises or a substantial impairment in access to a business’s plant or premises.

Contingent business interruption – Triggered when policyholders lose revenue after a property loss sidelines a major supplier or customer base. While the business itself doesn’t have to sustain physical damage, it does need to have coverage for the type of damage that affected its suppliers, business partners or customers. For example, a business must have flood coverage to file a contingent business interruption claim for losses triggered when a supplier is incapacitated by flood.

Evacuation by order of civil authority – Triggered when authorities close off access to a damaged area. Relatedly, ingress/egress coverage insures lost profits due to difficulties in accessing the insured premises due to the storm. Damage to the insured’s property is not required to trigger coverage; though typically, the losses must result from property damage of a type covered by the insurance policy.

Extra Expense – Coverage applies to additional costs incurred by the policyholder as a result of damage to its property, and to costs incurred to mitigate economic losses.

“Anybody who has direct physical damage to their plants will also likely have business interruption losses,” said Jill Dalton, managing director of Aon Global Risk Consulting.

Bob Fisher, managing partner of the Atlanta office of the global law firm Clyde & Co., said Harvey raises many coverage issues regarding occurrence limits, application of flooding sublimits and deductibles and business interruption claims where there was no physical damage.

Coverage for business interruption isn’t automatically included on most policies, but can be added through an endorsement. The coverage is available as part of other policies like commercial property insurance, business owners’ policy or a commercial package policy, according to the Insurance Information Institute (I.I.I.)

The I.I.I. noted that most business interruption claims will have a separate deductible, apart from the deductible applicable to damage to covered property. Business interruption claims typically include a 24, 48 or 72 hour waiting period.

Coverages differ widely on what constitutes flood damage, according to Harckham.

Policies may have different definitions of “flood” and some policies provide coverage for “named storms”. There will likely be considerable analysis on whether coverage applies to a roof collapse claim where water ponding resulted from heavy rains, he added.

According to Fisher, though similarities exist between Harvey and Katrina, each storm intensified rapidly before landfall and each affected major metropolitan areas; the differences between each storm are more significant, he said. With Harvey, the duration of the event, the extensive rainfall and the amount of flooding will drive a number of policy-related issues.

Fisher, who has 35 years litigation experience in first party property commercial claims, said occurrence limit issues will likely be examined and may lead to property insurers facing claims for multiple limits. He said the analysis will drill down to the language of the definitions, the number of events, the overall limits and sublimits.

The decision by officials to open dams to release excess water may result in a determination of a second occurrence, said Harckham.

He explained that many commercial property insurance policies provide different sublimits for losses caused by “flood”, “storm surge” and “named storms.” How the policy defines these key terms can be critical in determining the amount recoverable for the policyholder’s loss, he said.

“For most businesses in the Houston area, Harvey wrought its worst under the aegis of ‘tropical storm’ rather than ‘hurricane’ – and that could affect coverage terms in some policies,” Harckham said.

Other forms of business interruption losses will include ingress/egress claims, claims related to orders of civil authority like mandatory evacuation orders. In addition, there will be contingent business interruption claims for damages a supplier or manufacturer incurs that affects the insured’s business.

“Too many businesses do not think about insurance unless their premises are damaged – or if they do, they fail to calculate the full range of loss,” Harckham said. “Some may not even be aware of their civil authority, ingress/egress and business interruption coverage, let alone contingent business interruption coverage for those far from the damage site.”

There’s potential losses from service interruption and loss of access that will affect a businesses’ ability to operate,” said Dalton.

Several conditions must be met to trigger coverage, Martin wrote. “There may be time and distance requirements for waiting periods and periods of indemnity or distance limitations for losses caused by damage away from an insured location.”

In light of past claims and court issues related to Katrina claims, Fisher said courts handling cases related to Harvey will still look to determine what caused the flooding – wind, storm surge or rain – in applying coverage limits, sublimits and deductibles. He noted that since Katrina, case law has developed that didn’t exist prior to the 2005 storm.

Harckham added that anti-concurrent clauses will be an issue in states other than Texas, where courts have upheld the language in property insurance policies.

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