A catastrophic loss, such as a hurricane strike, can force any company out of business, even if it is insured. Although a business does not suffer any direct physical damage to its facilities, fickle natural disaster events can disrupt a company’s entire supply chain, with ripple effects for vendors, suppliers, customers and second-tier providers of services or goods.
With scorching August temperatures and the Atlantic hurricane season ramping up to full speed, the next months could, unfortunately, once again visit doom on vulnerable coastal areas, disrupting water or power services, causing evacuation and curfew orders, limiting travel, or halting operations either partially or fully. Securing insurance proceeds and FEMA assistance is crucial to business disaster recovery implementation.
1. What caused my loss?
A ubiquitous issue that arises with respect to natural disasters is how the peril is characterized – is it a hurricane, a “named storm,” a windstorm, a flood, or something else under your insurance policy? And what occasioned the particular damage at issue in the insurance claim – wind, wind-driven rain, storm surge, or flood?
How the mechanism of loss is characterized has critical implications for insurance recovery. Policies commonly provide different amounts of available limits (and sub-limits) for different types of losses (e.g., State Farm Florida Ins. Co. v. Moody, considering policy that limited coverage for damage caused by “hurricane” but that did not limit coverage for damage caused by “tornado”). And in some cases, policies may not provide coverage at all for losses that occurred as a result of certain causes (e.g., In re Katrina Canal Breaches Litig., considering whether damage to property was caused by flood or by the negligent design and construction of levees; flood being an excluded peril under the policy, while negligent construction was covered). For example, a commercial property insurance policy may provide coverage for damage caused by wind or a named storm but exclude coverage for damage caused by flood (e.g., Bradley v. Allstate Ins. Co.). Complicating this analysis, policies often contain overlapping ill-defined concepts of “flood” vs. “named storm.” One may question whether a storm surge resulting from a named storm is treated as part of the named storm or as a flood.
The net effect is that the scope and amount of coverage can vary dramatically depending on how the cause of loss is characterized up front to the carrier at the proof of loss stage – a critical juncture that is rarely straightforward and that usually benefits from thoughtful legal analysis. To hold carriers to their promises of disaster recovery, policyholders need to have a thorough understanding of the coverage provided under their policies, the relevant case law, and the mechanism or mechanisms that caused their loss. Properly determining the peril at the time of claim submission can allow a policyholder to achieve the benefit of its bargain with its carrier.
2. What if there is no physical damage to my property?
Assuming no physical damage to your insured premises, how does a business function without electricity, telephone, email or water service? Utility service interruption coverage (if purchased) indemnifies, for example, against loss due to lack of incoming electricity affected by damage from a covered cause (fire or named storm) to property away from the insured’s premises — usually the utility generating station. This type of insurance is commonly referred to as “off-premises power coverage.” Service interruption coverage is not standard, or even common but a policy could be endorsed to cover any of the following:
- Water services – pumping stations and water mains.
- Communications services – property used to supply telephone, radio, microwave or television services. Includes communication transmission lines, coaxial cables and microwave relays.
- Power services – electricity, gas and steam, utility generating plants, switching stations, substations, transformers, and transmission lines. Typically the policyholder must elect either to include or exclude overhead transmission lines.
The value of goods, including raw goods under refrigeration, is often challenged by the carrier when presented for coverage. The issue is further complicated in large scale operations by several commonly found exclusions that limit the inherent risks associated with perishables, including mechanical defect, failure to maintain systems and consequential losses.
3. What if my loss resulted from both covered and non-covered events?
Given that property policies may provide coverage only for certain causes of loss, or may provide different amounts of coverage depending on the cause of loss (e.g., named storm vs. flood), a debatable issue often involves the extent to which a loss is covered when it is caused concurrently or sequentially by both covered and non-covered perils.
Some courts apply an “efficient proximate cause” test, under which a dominant cause is determined and coverage hinges upon whether that cause is covered, or alternatively whether the covered cause set the chain of events in motion. Other courts apply one of two “concurrent cause” analyses: (1) Some courts have ruled that when two causes combine to produce an indivisible loss, there is coverage as long as one of the causes was a covered peril under the policy, and (2) other courts have ruled that the policyholder bears the burden of differentiating damage attributable to covered and non-covered causes, and if the policyholder cannot meet that burden there is no coverage.
This analysis turns on the policy language as well. Insurers have sought to eliminate coverage in instances involving concurrent causes by incorporating “anti-concurrent causation” language in their policies that purports to bar coverage when an uncovered cause is involved in any way, whether directly or indirectly. For example, the policy may state: “We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” Some courts have enforced these anti-concurrent cause provisions while others have held that they are unenforceable, predominantly on public policy grounds. Where and how this language appears in the policy is also important and factors into how a court will view it. If the language is buried deep in a definition or an exclusion, for example, the situation might be distinguishable from existing case law.
For this reason it is important to review your endorsements at the time coverage is bound as well as analyze the policy exclusions that may be applicable to any loss to determine whether they are subject to anti-concurrent causation language.
4. How is storm surge different than wind?
After a catastrophic weather event in coastal areas, insurers and insureds frequently litigate whether property damage was caused by wind, on the one hand, or storm surge, on the other. Such litigation arises because property policies often cover damage caused by wind, while excluding coverage for damage caused by flood.
Courts considering such claims tend to characterize the peril of wind and the peril of storm surge separately. Courts have noted that storm surge is “little more than a synonym for a ‘tidal wave’ or wind-driven flood” and have held that damage from storm surge falls squarely within the bounds of flood exclusions, even where the flood exclusions do not expressly include the term “storm surge.” See, e.g., Leonard v. Nationwide Mut. Ins. Co.; Tuepker v. State Farm Fire & Cas. Co.; or Bilbe v. Belsom (“We have repeatedly held that the term ‘flood’ includes storm surges.”). By contrast, property policies generally cover damage caused solely by wind (i.e., wind that doesn’t interact with water). See e.g., Leonard; Tuepker v. State Farm Fire & Cas. Co.; or State Farm Florida Ins. Co. v. Moody (determining that insureds were not entitled to recover because hurricane spawned the tornado that caused the damage and hurricane sublimit applied).
Recovery may rise or fall based on whether the property damage at issue resulted from wind alone (for example, a structure was blown over by wind) or whether the damage resulted from storm surge (i.e., flooding caused by wind). Insureds who buy a master property policy are wise to keep the distinction between wind and storm surge—and the impact of such distinction—top of mind when considering coverage issues post-hurricane. Legal analysis of the wording of any coverage grants or exclusions and choosing a peril wisely must become part of the recovery planning implementation strategy businesses rely on to maximize the insurance claim.