In the aftermath of Sandy, many businesses have realized just how sensitive supply chains can be to unforeseen events, says Joseph Galanti, managing director with Alvarez & Marsal Global Forensic and Dispute Services, particularly those businesses with complex supply chains as they suffered contingent losses due to damaged suppliers without having adequate alternate suppliers.

While Superstorm Sandy wreaked havoc on countless homeowners, more than two-thirds of private-sector insurance payments for Sandy related losses will go to businesses. Although many companies have policies in place, they were inadequately prepared for contingent losses and the amount of time required to address those losses.

The storm has proven to be a somber wake-up call, as they struggle to resume normal operations. There are numerous lessons to be learned from Sandy, and businesses that take a proactive look at losses resulting from natural disasters or other circumstances are more likely to succeed in preventing them during the next major event.

The effect of the storm has highlighted several additional coverages businesses require — but lacked — to more fully recover, including flood damage, contingent business interruption (covering losses attributable to damaged suppliers or customers), extended period of indemnity (covering business interruption losses beyond the damage repair date) and greater sublimits on existing coverage. Improving contingency planning to ensure adequate cash on hand or lines of credit sufficient to continuing operations during cash shortfalls attributable to the storm should also be a top priority.

In the aftermath of the storm, many businesses have realized just how sensitive supply chains can be to unforeseen events, particularly those businesses with complex supply chains as they suffered contingent losses due to damaged suppliers without having adequate alternate suppliers.

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Other businesses, such as retail stores with numerous locations in the wide geographic swath of destruction, suffered such extensive property damage that they will require significant time and resources to restore their locations to pre-loss conditions. In fact, even after repairs are made, some policyholders continue to suffer losses, because their sales have not yet reached levels that would have been achieved had the damage not occurred.

Such losses may be covered under a special endorsement for business interruption called “extended period of indemnity” coverage, which affords coverage beyond when repairs are completed through some defined period. Without such an endorsement, coverage would cease when repairs are completed, regardless of whether the business returned to its pre-loss condition. Similarly, businesses such as telecom providers, which may have planned to roll out new services, have been forced to shelve those plans so that existing services can first be repaired and restored.

What we can expect going forward:

• There likely will be significant disputes surrounding causation. The matching of the many potential coverage triggers — wind, flood, fire, service interruption, ingress/egress, civil authority, contingent business interruption — to specific losses may be challenging. Even if all such perils are covered under an insured's policy, there may be sublimits, idle periods or exclusions that might make it beneficial to categorize losses in one bucket versus another.

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• Quantum and coverage disputes are likely months or even years off, as claims usually follow the typical adjustment process until an impasse is met by the policyholder and carrier. Quantum issues often involve business interruption calculations because financial estimates of what would have occurred in the absence of the peril may differ between the policyholder and carrier. For example, a carrier may take the position that a policyholder's lost business income estimates are overstated because they do not reflect decreased economic activity attributable to the loss, but not caused by the policyholder's damaged property. The policyholder would likely disagree with such a carrier position.

• Coverage issues often involve causation and specific policy language regarding what losses are covered versus excluded. Experienced coverage counsel should be sought on complex claims to help obtain an appropriate recovery.

• The ability to obtain timely cash advances from carriers will continue to be important, both to complete repairs and to provide working capital for continued operations. Many businesses operating in the most damaged areas already will have revenue shortfalls from decreased economic activity to contend with; this will only exacerbate the cash flow issues faced by businesses with significant damage, some of which may have already been struggling from the recession. Those businesses that fail to secure adequate advances may run out of cash to fund operations and cease to exist.

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• Large, complex claims tend to languish, as the level of effort to move them along is significant and employees often get busy with regular duties and can lose interest. Many policies provide coverage for claim preparation fees, which typically makes the decision to bring in outside forensic accountants to assist a much easier one. Management can then focus on getting the company back in business, rather than becoming absorbed in assembling the particulars of their claim. Many claims often can take more than a year to settle, and having outside assistance can keep the claim process moving.

• Industry knowledge and experience can be of paramount importance to policyholders working with forensic accountants on their claim team in identifying potential areas of recovery, as well as supporting lost business income calculations which are often challenged by carriers. Industry knowledge also can help build credibility with the carriers and their adjusters and accountants, which can in turn accelerate the claim process. Thus, deep industry knowledge cannot only help policyholders from a quantum perspective by ensuring no money is left on the table, but also by advancing the claim process through well-supported business interruption calculations.

• Errors and omission claims likely will increase, as many insureds either thought they had secured coverage for particular types of losses such as flood, or were advised against such coverage by their brokers or advisers. Before Sandy, many policyholders and brokers felt the risk of a major Atlantic hurricane causing widespread damage was minimal so they did not purchase sufficient coverage.

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Policyholders may nonetheless seek recovery for uninsured losses via negligence claims against their brokers' errors and omissions professional liability policies. Correspondence, meeting notes and other documentation contemporaneous with the underwriting process is often important in errors and omissions claims to demonstrate what risks policyholders intended their broker to cover under their insurance program, as well as what advice their broker provided to them.

In summary, while many businesses still are early on in the claims process, they should spend some time now to reflect on potential factors that can derail timely and amicable settlements with their carriers. Correctly anticipating issues that could thwart the claims process or inhibit recovery can smooth the process and help ensure an appropriate recovery is achieved. For those whose claims are not progressing well, now is the time to take action and get back on track learning Sandy's lessons, but also putting it behind them as expeditiously as possible so they can get back to running their businesses.

Joseph Galanti is a managing director with Alvarez & Marsal Global Forensic and Dispute Services in Atlanta. He can be reached at jgalanti@alvarezandmarsal.com and at 404-720-5233.