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Superstorm Sandy has left a storm of insurance claims in its wake, and many businesses are finding that their claims are being denied. Robin L. Cohen and William E. Denver of law firm Kasowitz Benson Torres & Friedman L.L.P. discuss what policyholders can do to protect their rights to coverage.
The effects of Superstorm Sandy are still being felt throughout the New York area. Hundreds of properties have been damaged and thousands of people have been displaced.
Many businesses suffered significant damage to property and/or loss of business. The governors of various states have estimated the storm caused more than $80 billion in damage. Now many of the businesses trying to recover from the storm are facing yet another difficult reality: Their insurance carriers have denied their claims.
Certain insurers will likely and aggressively seek to deny coverage. News reports indicate that many businesses in Manhattan have had their claims denied because they were allegedly caused by flood. These denials purportedly were not based on direct contact with floodwaters but were instead asserted because other, off-property locations were flooded. There is also a pending class action alleging that insurers are wrongfully trying to classify the ground floor of buildings as a “basement” in order to exclude or limit flood coverage.
As insurance companies issue denials and reservations of rights, policyholders should make sure that their rights to coverage are being respected. Below are a number of issues to consider moving forward.
Policyholders need to conduct a comprehensive review to identify any coverage that may have been triggered, including first-party property, business interruption, flood, commercial general liability, directors and officers, errors and omissions/professional liability and cyber security.
Policyholders also may be covered as “additional insureds” under policies issued to third parties.
Commercial property policies frequently cover many circumstances and are subject to coverage sublimits. For example, coverage may apply if the business is harmed because:
• Access to property is limited (“ingress/egress”);
• A civil authority prevents access to property (“civil authority”);
• Power or other services are not available (“service interruption”);
• Customers or suppliers suffered damage or are not operating at full capacity (“contingent business interruption”);
• Costs to remove damaged property (“debris removal”); and/or
• Costs to mitigate further property damage (“extra expense”).
Insurers may try to shoehorn claims into categories with lower sublimits. Accordingly, it is vital to review each coverage determination to ensure all costs and deductibles have been properly categorized.
Insurers with flood exclusions may ignore evidence that some portion of the damage was due to wind or other covered causes of loss when disclaiming or limiting coverage. It is important to remember that insurers bear the burden of proving any exclusion. Therefore, if an exclusion, including flood, cannot be proven and there is physical damage, then the policyholder should obtain coverage.
Insurers may argue that if there are two “concurrent” causes of loss, one that is covered and another that is not, then the policy will not respond. However, courts have been skeptical about efforts to broadly interpret such provisions to defeat the reasonable expectations of the policyholder, and consumer groups have requested that they not be enforced.
There also may be exceptions to the listed exclusions. For example, while many policies exclude flood damage, they also contain an exception that adds back in coverage for damage caused by an explosion, even if the explosion itself was caused by flood.
Policyholders should document all costs, including for debris removal or temporary relocation costs, and take photographs and video of the property. Damaged property should be preserved, and the insurer should have a reasonable opportunity to inspect it before removal. All available accounting records should be gathered, and a public adjuster and/or forensic accountant may assist in this process, particularly for business interruption claims.
Some policies contain deadlines for providing notice or proof of loss or for filing a lawsuit. Be aware of these deadlines or any statutory/regulatory changes to these requirements. Many contractual deadlines may be moved with the consent of both parties, so it may make sense to request that the carrier agree to enter into a tolling agreement to postpone applicable deadlines.
A policyholder faced with a denial of coverage should consider retaining coverage counsel. Experienced counsel may help a policyholder understand the various insurance policy terms, evaluate how each is likely to be interpreted under various state laws, and ensure that a claim is being presented in its best light.
Policyholders should keep in mind that, depending on the applicable state law, communications with their insurance broker may not be protected. However, if consultants are retained through counsel, those communications may be protected and privileged. Coverage counsel can help successfully navigate through these types of situations.
Robin L. Cohen and William E. Denver are partners in the New York office of Kasowitz Benson Torres & Friedman L.L.P. Ms. Cohen can be reached at email@example.com and Mr. Denver at firstname.lastname@example.org.