Business interruption claims look to be a significant portion of insured losses that Superstorm Sandy inflicted on the East Coast last week and may lead to numerous coverage disputes.
Early estimates of business interruption losses as a result of Sandy were approximately 30% of insured losses, which catastrophe modeling firms estimated at $7 billion to $20 billion late last week.
Industry experts compared the proportion of Sandy's potential business interruption losses to previous catastrophes, including last year's earthquake and tsunami in Japan and flooding in Thailand.
Brian C. Schneider, senior director of insurance at Fitch Ratings Inc. in Chicago, said business interruption losses accounted for a significant portion of the combined $50 billion of insured losses in Japan and Thailand.
Business interruption losses after the Sept. 11, 2001, terrorist attacks were about one-third of the $40 billion in insured losses, he said.
“I wouldn't be surprised if it was something similar, about one-third of losses, in this case,” Mr. Schneider said.
While loss estimates were incomplete last week, John Dempsey, managing partner of Wilton, Conn.-based Dempsey Partners L.L.C., estimated Sandy's business interruption losses at about 30% of total insured losses.
“Overall, if it's a $50 billion event, it may be, say, $15 billion to $20 billion in” business interruption, he said.
Sandy's devastation disrupted business operations in the densely populated Northeast and affected industries including retail, corporate offices, transportation, manufacturing and energy concerns (see story, page 27), experts said.
Given the storm's wide geographic impact and lengthy service disruptions, such as power, phone and subway closures in New York, business interruption claims will be a significant issue, said Howard Mills, chief adviser at Deloitte L.L.P.'s insurance industry group in New York and former superintendent of the New York State Insurance Department.
“I think that there will be significant business interruption claims and there will be a lot of valid claims as a result of the mandated evacuations and orders,” Mr. Mills said.
Business interruption policies typically cover mandated evacuations, known as civil authority orders, which often involve loss of ingress or egress coverage, or access, to an insured property, experts say.
As was the case during Sandy, many municipalities ordered businesses along the Northeast and Mid-Atlantic to close or evacuate, shut down roads and restricted access to public transportation.
Ingress/egress and civil authority clauses within a business interruption policy may cause complications for policyholders, Mr. Dempsey said.
“Those remain the issues from a measurement and recovery standpoint because those coverage parts have different terms and conditions,” he said.
For example, most policy clauses have a time limitation for ingress/egress and civil authority coverage. Thirty-day limitations are common. Beyond that 30 days, “you're on your own,” Mr. Dempsey said.
When exactly civil authority is triggered in a business interruption policy has not been entirely answered in the courts, said Marc E. Rosenthal, a partner at Proskauer Rose L.L.P. in Chicago, who represents policyholders and captive insurance companies.
“Hurricane Sandy brings business interruption coverage issues to the forefront that have not been fully dealt with before,” Mr. Rosenthal said. He said whether business interruption coverage responds to a loss of profit under civil authority or preservation-of-property clauses when a business shuts down before a storm hits remains to be seen.
Linda D. Kornfeld, a partner at Jenner & Block L.L.P. in Los Angeles who represents policyholders, advises buyers to carefully examine their business interruption policy language to best position coverage claims.
“There have been clear access issues in the Manhattan area to say the least, and certainly in other areas as well,” Ms. Kornfeld said, noting that whether property damage is needed for civil authority coverage to trigger may become a major legal question.
“In that instance, the (New York subway) tunnels have been flooded, there has been damage to property that ultimately has caused the order of civil authority and the inability for these businesses to run that are sitting in Manhattan,” Ms. Kornfeld said.
“Depending upon the policy language at issue, ingress/egress coverage may provide coverage opportunities in circumstances where the civil authority coverage does not apply because of geographic limitations in the coverage, which again makes the critical point — read the policy language and applicable law carefully, and frame your coverage claim in a manner that best advances your coverage position,” she said.
Tom Teixeira, London-based senior risk adviser at Willis Group Holdings P.L.C., said the potential size of business interruption losses may indicate a disconnect between risk management and business continuity strategies, as well as a slow takeup rate.
“I'm not seeing a lot of evidence that the lessons learned from the disasters last year are being taken onboard,” he said.
While traditional nonproperty damage business interruption coverage costs were expensive when first introduced into the market, between 5% to 8% rate on line, “we're now seeing rates fall down to between 1.5% to 3.5%” rate on line, Mr. Teixeira said, with limits between $50 million and $100 million.
“When we start getting a better understanding of the business interruption numbers from the disaster on the East Coast, it's going to be a catalyst around getting this particular market to move and getting people to buy this type of protection,” he said.
As many goods and products are manufactured and transported through New York and other nearby cities, contingent business interruption claims related to Hurricane Sandy also may be significant and fairly complicated, especially as coverage is predicated on causation, experts say.
“There will be a question of what was the cause of the loss, was it wind or flood?” Mr. Dempsey said.