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Hurricane Losses and Insurance: Businesses Well Away from the Gulf Coast May Also Be Covered

By James W. Reuter

We all sympathize with the victims of Hurricanes Katrina and Rita, the horrors they endured and catastrophic losses they suffered. On a personal level, we can help in many ways, and many of us have and will continue to do so.

We should also be concerned about affected businesses—including those that may not have suffered actual physical damage to property—and the rights they may have to insurance coverage. Clearly, many businesses have suffered physical damage to their property and have insured losses. However, many other businesses will also suffer serious consequences though they have not sustained any physical damage to property. For example, some businesses have key suppliers or customers in the affected Gulf Coast region. Others will suffer damages because of failure of power or other utilities including telecommunications. Further, some will be damaged as a result of orders by government authorities. Businesses that have suffered damage from such causes may also be covered by insurance.

You should consider whether your business has losses due to the Gulf Coast disasters even if your business has not suffered physical damage to property.

Here is a short list of some of the insurance issues affecting businesses, including both those that have suffered physical damage and those that have not.

• Flood versus hurricane damage. Private insurers ordinarily exclude flood and mold damage. Consequently it is to the benefit of insurers to try to categorize damage as flood rather than wind/hurricane. Indeed, some insurers are already referring to the disaster as the “Great New Orleans Flood.” There will be plenty of room for disputes, for example, where wind damage caused the property to suffer flood damage or greater flood damage. Moreover, in Louisiana and Mississippi, any covered cause that materially contributes to the damage may be sufficient to invoke coverage even where the damage was also caused by an excluded peril (e.g., flood). It is expected that thousands of lawsuits will be filed over causation issues alone. Some businesses may have flood insurance through the national program. However, many did not buy this form of insurance and those who did are often faced with low limits and policies that do not provide replacement cost coverage or business interruption coverage. Even multi-peril or “all risk” policies often have especially low limits and high deductibles for wind/hurricane damage.
  
  
• “Total Loss” and building upgrades. Both Louisiana and Mississippi have “valued policy” laws. This means that if any covered wind/hurricane damage has occurred and the property has suffered a total loss, even to some extent from uncovered causes (e.g., flood), the insurer must pay the full policy limits. Undoubtedly, this principle will also be tested again in the courts. Other damage issues will develop over whether policyholders are entitled to the cost of re-building in order to comply with new, upgraded building codes.
  
  
• Business interruption losses. While business interruption policies generally are not triggered until there has been physical damage to property, if you have purchased business interruption extensions of coverage , there may still be coverage for losses. This can be true even if there has not been direct physical damage to property or if the damage was caused by an excluded occurrence (e.g., flood). As suggested above, this may include loss of key suppliers or customers from the affected Gulf Coast region, damage because of failure of power or other utilities including telecommunications and loss as a result of orders by government authorities, among other things. Business interruption (sometimes called business income and extra expense) policies frequently present many issues about fair calculation of damages, if not liability. Just about any business that has suffered a partial (even for a very short time) or complete loss of business income, extra expenses or limited ingress or egress to property should seek legal advice from an experienced insurance coverage attorney.
  
  
• Bankruptcy. Losses, both insured and uninsured, will likely force many businesses into bankruptcy. Sometimes, insurance companies do not pay valid claims and as a result a business may be forced into bankruptcy. Whether in bankruptcy or not, insurance companies can be forced to pay legitimate claims and sometime also be required to pay “bad faith” damages when they fail to pay valid claims.
  
  
• Class actions. Businesses may be better off opting out of any class action settlements. This option should be considered where a business might be able to net more by private action. This may be the case more frequently than you might expect.
  
  
• What an insured business should do. In order to preserve its insurance rights, a business should do at least the following:
  
  
  • Promptly notify all insurers potentially providing coverage even if all the facts or losses are not yet known;
  • Provide a sworn proof of loss statement to all insurers within the time provided in the policy, usually 60 or 90 days after the loss;
  • Preserve evidence by taking photographs, keeping damaged material and retaining and keeping records (including electronic records) of the business and losses suffered;
  • Locate insurance policies;
  • Locate employees with important knowledge;
  • Inventory losses;
  • Cooperate with insurers as required by the policies;
  • Monitor what federal and state agencies and law makers are requiring and act accordingly, particularly with respect to filing claims with government agencies;
  • Calendar any time stated in the policies by when a lawsuit must be commenced; and
  • Hire qualified insurance coverage counsel.

Finally, if you were one of those fortunate businesses that did not suffer losses, these highly destructive hurricanes should motivate you to review your insurance coverage to be certain that your business has the right forms of insurance and in sufficient amounts so that you are better able to weather devastating losses whether or not your business sustains physical damage.

ABOUT THE AUTHOR

James Reuter is chair of the Insurance Coverage group as well as a member of Lindquist & Vennum's Commercial Litigation groups. He can be reached at 612-371-3519; or e-mail jreuter@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
October 2005