Nature has done a number on the U.S. this year. With two months remaining, 2011 already set the record for the most FEMA-declared disasters since the agency began keeping track in 1953. Between Midwestern and southern tornadoes, Texas fires, and northeastern blizzards and hurricanes, no corner of the country has escaped without being affected in some way. Domestic weather losses have exceeded $35 billion, according to the National Oceanic Atmospheric Association, and the damage doesn’t stop stateside. With a tsunami in Japan and flooding in Australia, the rest of the globe has been hit hard as well. This has been the costliest year on record, with economic losses in the first six months alone topping $265 billion, according to Munich Re.
In handling these crises, businesses must act quickly to contact their insurance brokers, evaluate potential coverage, and file claims. Delays in identifying insurance create unnecessary problems and can even foreclose coverage. Failure to pursue available insurance can even create liability to shareholders and others.
To protect themselves, affected companies should first review their policies to determine what coverage may or may not be triggered. This also represents an opportunity to consider what additional coverage should be purchased moving forward to protect against loss from future disasters.
Coverage That Can Apply to Natural Disasters
When reviewing insurance files, companies may find a variety of potentially applicable policies.
Commercial property insurance is the first line of defense in dealing with natural disasters. Most companies carry this insurance, which generally covers assets lost or damaged as a result of various perils. Insureds should pay close attention to what particular perils their policies actually cover: policies typically cover wind and fire damage, but might exclude other causes such as flood or earthquake. Policies also may cover man-made damage. Of course, companies and their brokers should consult the actual policy language in evaluating coverage issues.
In the wake of natural disasters, business interruption (BI) coverage also can be critical. This type of policy is intended to compensate a policyholder for lost income and ordinary business expenses as long as its business premises suffered damage.
Even if a business avoids catastrophe, though, its customers or suppliers may not be so lucky. In certain situations, contingent business interruption (CBI) coverage protects earnings following physical damage to the property of those customers or suppliers. Most policies require that the damage to the property be the same as would be covered for the insured’s own property.
Other lesser-known types of coverage may also aid in recovery.
Extra Expense: Covers necessary expenses (over and above normal operating expenses) incurred because of physical damage.
Ingress/Egress: Covers loss sustained when customers, suppliers or workers cannot get to an insured property. Typically, these provisions do not require actual physical damage to the property.
Civil Authority: Covers income lost when the authorities prohibit access to a business due to physical damage elsewhere. Typically, coverage begins 72 hours after the authority imposes restrictions and can last up to three weeks.
Utility Services: Covers business interruption losses caused by a loss of power or communication services.
Interruption of Computer Operations: Covers income lost when a covered peril interrupts critical computer functioning.
Making a Claim
When disaster strikes, a business must immediately take steps to preserve coverage. Under almost any policy, a company should:
- Give prompt notice to the insurer. For each policy that could even potentially apply, businesses should send a letter to the insurance company, demanding coverage under “all potentially applicable policies.”
- Attempt to protect the property from further loss or damage (if possible).
- Provide the insurer with a written proof of loss as described in the policy. Usually, businesses have 60 to 90 days to submit this claim. If a company needs an extension, it should request one and obtain the insurer’s permission in writing.
- Allow the insurance adjuster to inspect the property and otherwise cooperate with the insurer.
- Keep a record of any and all expenses (including receipts, if possible).
- Resume business activities as soon as possible.
Businesses also should immediately document all damage by taking as many photographs as possible. Authorities may require disposal of certain items so companies should take care to document those items before they are no longer available.
Companies must also be mindful that every policy includes its own conditions. Businesses should closely examine policies and consult with their brokers and coverage counsel to determine the various requirements.
Preparing for What’s Next
For businesses not affected by 2011’s catastrophes, now is the time to assess coverage and make any necessary changes. Companies should confirm that their levels of coverage accurately reflect the value of the covered property. They should also consider the types of coverage carried. For instance, if a company does not carry business interruption coverage, it may want to discuss that option with its broker.
In these tough times, businesses need every break they can get. Carrying and taking advantage of the appropriate insurance coverage puts companies in the best position to recover from unexpected challenges as quickly as possible while taking measures to mitigate physical damages and other loss before the storm.