If BP's "Deepwater Horizon" oil rig explosion and spill has taught us nothing else, it has at least drawn attention to three facts that will permeate insurance claims for the balance of the 21st century: The first is that indirect loss can be more expensive than direct loss. The second is that our infrastructure — be it a bridge, a pipeline, or an oil rig — is wearing out and will break. The third is that we need options to fossil fuels.
Having just finished writing a detailed course and new chapter about indirect loss — now called "business income," which was formerly called "business interruption," just as they renamed employee dishonesty "employee theft; they being the Insurance Services Office, Inc. — I became aware that indirect loss is far more complex and costly than direct loss. It also carries serious ramifications for a larger number of people. The reason that the ISO changed the name of the coverage, I suspect, is that some entities cannot "interrupt" business. Could yours? The coverages are sold with or without extra expense coverage that helps a business or other insured entity continue operations while direct loss is being fixed.
One would anticipate that the closest most adjusters come to handling an indirect loss is by assigning a rental car for an insured or a claimant while a damaged automobile is in the shop for repairs. Another scenario might involve paying a few motel and restaurant bills while a wind- or fire-damaged home is being restored. Commercial risk adjusters may become involved in the calculation of net income loss and operating expenses when an insured business suffers a covered peril, but for hurricane wave wash effects or river overflow victims who do have flood insurance, indirect loss is uninsurable. In fact, most indirect loss is uninsurable.
Therein lies the heart of the problem: The law and insurance deal (barring a few exceptions) with direct loss or damage at actual cash value, which is often far less than what it will really cost to replace what was damaged or lost. Suppose a computer hacker broke into your online financial accounts and helped himself to your money. Through credit card coverage in your homeowners' form, your loss is covered up to $500. That won't exactly go a long way toward the time and expense of getting new credit cards or bank records, and dealing with the stuff the hacker stole.
Indirect loss because of computer hacking is rarely covered by insurance for much beyond a basic amount, and many commercial insureds don't even bother to report how much they have lost directly, or what the indirect costs may be. Consider those businesses that have had their customer account numbers stolen, perhaps along with customer credit card numbers, social security numbers, and other data that may cost those customers zillions of dollars. Sure, it's all loss, but it is indirect loss and thus is rarely insurable.
Go Fish
As we learned from the BP oil spill, when the fishermen couldn't fish, shrimpers couldn't shrimp, and crabbers couldn't crab — well, they "crabbed," but it was about the income they were losing from not catching crabs — BP was forced to pony up $20 billion for their losses. They hired a few to skim oil, but deducted those earnings from the fishermen's lost income claims. Furthermore, those fishermen had to prove they had the big losses they were claiming. A few, undoubtedly, had been in a "cash and carry" business, where real income was not documentable with income tax records. They could probably prove the loan payments on their boats and homes, and show some cash deposits in a bank account, but Kenneth Feinberg, the settlement czar, would demand documents as evidence. What about those motels and restaurants and casinos that claimed millions in lost business? Proximity to the spill was one key factor. For instance, claimants in Ft. Lauderdale had far less a chance of collecting than did claimants in Ft. Walton Beach.
Now another question remains, "Is it safe to eat Gulf fish?" I just bought some shrimp, but my grocer tells me it came from Thailand, not New Orleans. Americans lose again, more indirect loss. Speaking of fish, a tiny item in the news explained that tons of lost fish nets are clogging the sea floor in the fishing zones — catching fish, but trapping them and preventing them from either reproducing or being commercially harvested. So the direct loss to a fishing boat of its nets (not an inexpensive loss) creates further long-term indirect loss that will affect all of us in the loss of a primary source of food in the future.
London Bridge Is Falling Down
Well, actually London Bridge is out in the deserts of Arizona right now (and is not going anywhere), but the original bridge of the ditty was made of wood, lined with shops, and burned down in the Great Fire of London in 1666. That's where the fire started, in a bakery built on the bridge.
However, as reported in a History Channel Modern Marvels documentary about rust and corrosion, the state of America's bridges and infrastructure is horrible. In fact, it is getting worse daily. We spent $750 billion on the Iraq War (and may yet spend another $750 billion maintaining the status quo). It will take at least $750 billion to just maintain our bridges, highways, sewers, and water systems in the next decade. Urban rail systems (not the freight lines) for commuters and urban dwellers are falling apart, corroding, and sinking. This past August, a switching system that was almost 100 years old burned out on the Long Island Railroad, stranding hundreds of thousands of commuters for almost a week until it could be replaced. Think of all the lost income that delay cost, all indirect. The relay circuits for the New York subway system were designed in 1904. When they burn out, they are virtually unfixable.
The Federal Aviation Administration (FAA) radar system is so overwhelmed that a major crash between airliners is inevitable. Major cities, including St. Louis and Anchorage, still have water and sewer lines made of wood, some dating back 150 years or more. Wooden pipes may sound odd. At least they are better than lead water pipes. Imagine the cost of replacing all those crumbling and rotting systems.
When the I-35W bridge in Minneapolis, Minn. collapsed Aug. 1, 2007, the costs, both direct and indirect, were horrendous. Claims had published my "Bridge Disasters – Collapse and Chaos" article in the March 2006, issue, and the producer for Nancy Grace's CNN show tried to reach me to come on the air as some sort of expert based on a couple of bridge-related articles I'd written over the years, including one in the CPCU Journal. Thank goodness I was out of town and missed that interrogation call by Nancy Grace. Yet, according to the History Channel's documentary, more than 50 percent of the bridges in one New England state are in such poor condition that they are virtually unsafe.
The Minneapolis disaster was not the first. As described in that Claims article about bridges, on June 28, 1983, the I-95 bridge over the Mianus River near Greenwich, Conn., collapsed from the weight of a truck. In 1987 part of the New York State Thruway also collapsed in a flood. A new highway bridge collapsed near Chicago, Ill. while it was still under construction. As an adjuster, if you have not yet handled a claim involving damage from a bridge collapse, then just you wait. You will.
What About Dams?
Does anyone give a damn about dams? Well, probably not; that is, until they burst and flood everything downstream, as one did recently in Iowa. According to Michael M. Grynbaum in the August 29, 2010 issue of New York Times the average American dam, whether made of earth or concrete, is at least 50 years old.
"Despite their monumental size, the dams can be weakened by foraging gophers and squirrels, whose holes undermine the foundations," he wrote. "Or even by simple operator error. A major gate at Folsom Dam in California burst in 1995 after the wrong lubricant was used on its gears."
Dams and levees are everywhere. It was the levee that failed and flooded New Orleans in Katrina five years ago last August.
Atomic energy plants built in the 1970s are nearing their expected lifespan. What happens when they wear out? Will there be more events similar in nature to the Three Mile Island accident? Also important, will we even hear about it? During all of the hullabaloo about BP's oil spill, an escape of benzene gases from a BP refinery in Texas City, TX took only back-page reporting. Although BP said it was nothing, hundreds of local residents were sickened by the carcinogenic gas.
Infrastructure Is Everywhere
It is not just city subways, elevated transit, commuter railroads, water and sewer systems, and bridges and dams that are at risk. Everywhere we look, there is corroding infrastructure. Our highways need rebuilding. I can recall the bits and pieces of the Interstate Highway System being built back in the 1950s. Even then one could go from New York City, NY to Chicago, Ill. without seeing a traffic light, on state-financed turnpikes. Today the interstates are old and overcrowded. The last time I made a trip on I-75; going either north or south, it was bumper-to-bumper trucks either going 85 miles per hour or dead zero. There isn't enough time or money to fix the potholes.
Americans may not realize it, but much of the nation's transport is by water. Ships and barges depend on the rivers and canals and their locks to move everything from coal to garbage. Many of the locks, such as those on the Monongahela River described by Grynbaum, are over a hundred years old. They leak, and maintenance is over $2 million a year, financed by state and local, not federal, taxes. And that is just one lock on one river.
Consider the electrical grid. We have not heard much about it since the demise of Enron, but it is still out there, barely adequate for a growing nation. When will new electric generating plants come on line? Where will they be built? Will they operate on coal, gas, or nuclear fuel? Well, certainly not very soon, if it's in my back yard. The NIMBY lobby is perhaps the most active lobby in the United States. and that, too, is a drag on the infrastructure. Fix it at night. Fix it with federal money. Fix it with local contractors. Fix it now before it breaks. Just don't fix it if it will inconvenience me. But if we don't fix it, whatever "it" is, it will break and cause direct loss. It will cost even more in indirect loss. We will all pay for it, either through taxes or insurance premiums, and we'll all blame each other. Next month, we'll take another look at this mess and see if there are any dim lights at the end of that crumbling tunnel.
Ken Brownlee, CPCU, is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claim-adjusting textbooks.
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