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Catastrophe insurance for midsize businesses takes planning

Flooding, power outages during Hurricane Irene found many unprepared

While small and midsize businesses in the Southeast and along the Gulf Coast generally know what their property insurance will cover when a hurricane heads their way, experts say many businesses in the Northeast were caught off guard last summer when Hurricane Irene stormed up the East Coast.

Perhaps the biggest surprise was the amount of water damage that occurred as far north as Vermont, where many businesses had no flood insurance, they note.

Losses from extended business interruptions after Irene also went largely uninsured because many small and midsize businesses either had time deductibles for service interruption or had limits on ingress/egress coverage under their business owners or commercial property policies, the experts say.

While small and midsize businesses can't prevent hurricanes and other catastrophic events, they can mitigate their exposure to such risks through comprehensive planning, said Victor J. Sordillo, vp and global technical services manager, loss control services, at Chubb & Son Inc. in Whitehouse Station, N.J. (see related story).

“Even some big clients had some, "Oops!' moments” following Hurricane Irene, said Duncan Ellis, New York-based U.S. property practice leader for brokerage Marsh Inc. “The issue we found was: Where was storm surge covered?” he said. “Was it covered under flood, which is almost always sublimited, or was it covered under wind, which is sublimited much fewer times?” In cases where it was covered under flood, businesses often found they had less coverage, he said.

“Most commercial policies are pretty stingy on coverage in flood zones, usually no more than $1 million” in coverage, said Al Tobin, New York-based managing principal in Aon Risk Solutions' property practice.


“Typically, insurers will attach (in) excess of (National Flood Insurance Program) coverage, whether purchased or not, for critical flood zones,” which include coastal areas and land along inland waterways, said Eric Nikodem, executive vp and property division executive at Lexington Insurance Co. in Boston. So “unless the client went out and bought the NFIP coverage, that becomes the deductible.”

Unfortunately, “NFIP doesn't provide a great deal of coverage, and it excludes business interruption,” Mr. Nikodem noted.

While most business owners property and commercial property policies cover civil and military authority disruptions, such as when the government orders a business to vacate or not enter a particular area, that coverage was limited in many cases because of policy waiting periods, Mr. Tobin said.

“When Hurricane Irene was coming, authorities shut New York City down for two days because of the pending storm. That triggered a clause in policies called "civil authority,'” he said. Many policies have civil authority waiting periods ranging from 24 to 72 hours. “So if you had a 48-hour waiting period, then you didn't have a loss,” he said.

For many small and midsize businesses in the Northeast, ingress/egress coverage was even more limited, Mr. Ellis said.

“These types of coverage, depending on how they are written, sometimes will require damage to your own property. Other times, it will require damage in the area that is the type insured by your policy,” Mr. Ellis said.

For example, if a business didn't have flood coverage, but it was not accessible because a neighboring business was flooded, the first business very likely wasn't covered for the lack of ingress/egress, he said.


Service interruption coverage also was limited for many small and midsize businesses left without power following Hurricane Irene. “There are often limitations as far as mileage around your property,” Mr. Ellis noted.

In some cases, flooding added to the power outages, with businesses in New Jersey, Vermont and upstate New York hit hard.

“Some of them were without power for two weeks,” said Dave Finnis, property practice leader for Willis North America Inc. in Atlanta. “For the most part, Irene affected the Northeast as a water event as opposed to a wind event.”

In many cases, coverage for such service interruptions was limited depending on whether the business owners policy contained a “time deductible” vs. a “waiting period,” Mr. Ellis said.

For example, if the policy contained a 24-hour waiting period for service interruption losses, coverage would apply to the first minute of power loss after that waiting period. However, if the policy has a 24-hour time deductible, coverage doesn't begin until the 25th hour of service interruption, he said.

While all of these policy nuances may seem like “old hat” to small and midsize businesses along the Gulf Coast or Southeast, businesses in the Northeast were not as familiar with them, said Mr. Finnis.

Fortunately, Hurricane Irene weakened by the time it hit the Northeast. Had it remained even a Category 3 storm, it would have had a devastating effect on businesses, according to a recent report by data analysis firm CoreLogic, which found New York City to be the U.S. metropolitan area at greatest risk from hurricane damage, both in the number of properties affected and the potential value of damage.


“It's been a long time since a hurricane hit the Northeast, so it's not on your mind every day,” Mr. Finnis said.

In the aftermath of Hurricane Irene, Alice V. Edwards, a partner in the Atlanta office of forensic accounting firm Dempsey Partners L.L.C., advises clients to “read carefully” the storm and flood coverage sections of their property insurance policies so “people are not blindsided.”

“The language in some of these policies can be a little difficult for the layman to understand. So if you see that you've got a percentage deductible...ask for an example with a deductible calculated showing how it would work,” she suggested.

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