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As Hurricane Matthew barreled toward Florida, property damage and lost business income projections were at Superstorm Sandy proportions. As the storm progressed, its trajectory and strength diminished and so too did the expected damage. While the damage projections were reduced from $15 billion before the storm to somewhere between $3 billion and $8 billion but still calculating, the losses suffered are clearly still substantial.
Southeastern homes, businesses, highways, agricultural fields, and other property experienced physical damage. Businesses that were not damaged lost, and are continuing to lose, profits because they had no power for days, and road closures and other transportation interruptions prevented customer and supplier access. And, the storm-related losses are in their nascent stage of calculation.
Thus, just as with Sandy and other storms both before and since, insurance will be a critical resource in responding to Matthew and its aftermath. Below are issues businesses should consider to increase the likelihood of a successful insurance recovery.
Much can be learned from coverage disputes that ensued after Hurricane Katrina, Superstorm Sandy and other storm events. Top of the list is the question of causation—did business losses result from “flood,” “wind,” “storm surge,” “wind-driven rain,” a “named storm” or something else? Some property policies exclude flood losses altogether. Others may include a narrow sublimit and/or high deductible for flood damage, but not for other causes of water-related damage such as wind or storm surge.
In addition, many policies that restrict flood coverage include a policy definition of the term that may expand or narrow applicable coverage. At the outset of the insurance claim, it is critical to understand the cause of water-related damage to determine the scope of available coverage.
Policy language and the facts should be scrutinized to determine how best to present the insurance claim to protect the policyholder’s coverage. For example, much of the recent press regarding Hurricane Matthew has focused on the flooding in North and South Carolina. And when speaking with insurance adjusters, it may be easy to use the term “flood” as shorthand for the nature of the damage suffered (water damage).
However, the policy at issue may, by way of example, exclude or significantly restrict coverage for flood but not for damages resulting from a named storm (such as Matthew).
Or if damaged property is close to the coast and the water damage stemmed from storm surge, that fact also could have significant coverage implications. In these scenarios, the policyholder will benefit from understanding at the outset the facts that best support coverage, and communications with insurers should pursue the claim consistent with those facts.
Scope of coverage
For many businesses, Matthew-related losses will extend beyond the expense of repairing physical damage to buildings and will also include lost profits, amounts spent to clean up facilities and remove debris, and expenses incurred to mitigate losses and continue business operations. Multiple issues should be considered in deciding the scope of coverage for such losses.
For example, property policies frequently cover lost profits when business facilities are not physically damaged but nevertheless operate below capacity, or not at all, because customers, shipments and/ or employees cannot reach a facility due to damaged highways; customers or suppliers in the area suffered damage and are operating at diminished capacity; or power outages prevent normal operations. In such circumstances, policyholders should review, for example, their ingress/egress, civil authority, contingent business interruption and service interruption coverages to determine available coverage.
In addition, flood damage typically does not include just water damage, but also can result in expenses to remove mold, dirt and possible contaminants from buildings and equipment. Such cleanup expenses can be costly but, depending upon the scope of a businesses’ debris removal coverage, may be entirely covered. Moreover, depending upon applicable policy language, coverage sublimits can be stacked. For example, some policies cover cleanup expenditures under a separate debris removal sublimit even if the debris resulted from flood, which may have its own coverage limit.
Many property policies also cover amounts spent before the storm to mitigate damage. Amounts spent to sandbag property, safeguard documents and equipment, and procure alternative operating facilities during the storm all may be covered as prestorm mitigation expenditures, which in some instances may have a separate coverage sublimit.
Again, a careful review of policy language and the facts will assist policyholders in determining how best to pursue and maximize an insurance recovery.
Document, document, document
While policyholders are reviewing their policy language and the facts of their loss to determine potentially available avenues to coverage, they also should immediately document their claim. As soon as possible, a team should be dedicated to keeping records of all expenses incurred as a result of the storm, including those incurred to address property damage, pre- and poststorm mitigation efforts, increased expenses and reduced profits.
If possible, historical financial data and prestorm budgets or projections should be preserved to help later evaluate the financial impact on profits.
In addition, once the potentially available coverages are determined, losses and expenditures should be allocated to coverage “buckets” to assist in determining total insured losses and the impact on policy deductibles and sublimits. If reasonably possible, advance insurer approval of loss evaluation approaches and necessary expenditures should be obtained and, if not, and again to the extent is it reasonably possible to do so, careful records should be maintained regarding expenditures made and reasons for the expenditures to reduce potential future insurer disputes. Careful documentation of a claim as expenses are incurred and damage is evaluated can be helpful to a smooth insurance recovery.
While a policyholder is evaluating coverage and the nature and extent of damages with the assistance of its broker, accountants and other retained consultants, it should consider methods to protect internal evaluations, including drafts of reports and other documents related to the loss.
Involving internal or external counsel in the process at the outset can allow for a fulsome evaluation in a privileged setting.
Property policies typically include procedural provisions that many insurers will argue provide a complete defense to coverage if not strictly followed. For example, these policies often include time frames within which notice of a claim, a signed and sworn proof of loss, and litigation should be provided or filed. Moreover, some policies often contain provisions regarding insurer “consent” to certain expenditures in response to a claim. Where reasonable to do so, and depending upon the applicable facts, policyholders should consider seeking the insurer’s written agreement to modify applicable policy conditions, as necessary.
Choice of law
If an insurance policy does not contain a choice of law provision, more than one state’s law may apply to an insurance claim.
The law of different states may have different consequences on whether coverage applies. Policyholders thus should consider and evaluate choice of law issues from the outset, and pursue their claim in a manner that best protects their ability to rely upon favorable law.
Linda D. Kornfeld is a partner with the insurance recovery and litigation practice at Kasowitz Benson Torres & Friedman L.L.P. and managing partner of the firm’s Los Angeles office. She can be contacted at firstname.lastname@example.org.