The homeowners policy provides coverage to insureds when a civil authority has prohibited use of the "residence premises" due to direct damage to neighboring premises by a peril insured against, and coverage is provided for no more than two weeks. Coverage is also provided when a loss makes the "residence premises" not fit to live in as a result of a covered loss under additional living expense coverage. Coverage is for the shortest time required to repair or replace the damage, or if the insured permanently relocates elsewhere. What does this mean to those insureds who left their premises because of evacuation requirements by the authorities because of predicted but not yet happened damage, and for the inability to return home due to the widespread loss of utilities?

The HO 00 03 excludes power failure if the failure of power or other utility service takes place off the "residence premises." An exception exists for a power failure that results in a loss from a peril insured against on the "residence premises"; the policy covers that loss. For example, if the power failure starts a fire, that fire is covered.

If an insured evacuated because of orders of civil authority before any damage occurred, and there is no damage to the "residence premises" but the insured still cannot return to his property because power is out, is there coverage under additional living expenses?

For additional living expenses coverage to apply, there must be a loss covered under Section I that makes the premises not fit to live in. Wind from the hurricane caused widespread power outages; wind is a covered cause of loss. Lack of air conditioning and power when the temperature is in the high 80s and 90s could be seen as making the premises uninhabitable; therefore there could be coverage for additional living expenses.

Determining coverage is much easier if the insured's premises received damage from the storm as well. If the insured's property is damaged making the premises unfit to live in, then additional living expense coverage applies as outlined.

When the property has been damaged, one of the insured's duties after a loss is to protect the property from further damage. If repairs are needed, the insured needs to make reasonable repairs to protect the property – what this entails is often temporary repairs, such as a tarp over a hole in the roof or moving furniture out of standing water, until the claim can be filed and the damage can be assessed. The Commercial Property policy lists the same duties.

Business Income

Another factor is that of business income; many businesses close as well, and employers and employees alike often have to evacuate to avoid the storm. Business income coverage, if purchased, will cover the lost income if the business was damaged by a covered cause of loss, or if physical damage away from the business caused the business to have to close, such as downed trees causing road closure, or due to acts of civil authority if the area was closed off and patrons could not come to the business. There is of course a seventy-two hour waiting period before such coverage takes effect.

The damage directly affecting the business must be due to a covered cause of loss for business income coverage to apply. Typically, wind damage from the hurricane is a covered cause of loss. However, if the damage was due to a flood, then there would need to be flood coverage added to the policy for the business income coverage to apply to the business damaged by flood. Most small businesses are covered by a Businessowners policy, which includes business income within the form. However, both the BOP and the commercial property causes of loss forms contain a utility services exclusion that precludes coverage for loss or damage caused by utility failure to the premises if it involves equipment used to supply service to the business from the utility or other source that is away from the business. Therefore, a problem could arise if, for example, the business lost power but was otherwise undamaged by the hurricane, but the hurricane knocked out transmission lines that were not on the insured's premises. However, if the windstorm caused damage to a transformer on the insured's premises, then the exclusion would not apply and coverage would be available. It is noted that coverage may be purchased for off-premises power failure; if a business purchased that endorsement, coverage could be available if a hurricane tore down lines away from the insured premises, causing it to shut down, even though there is no direct damage to the insured site.

If covered, the business income coverage would include the insured's normal operating expenses that continue even while the business is shut down, which would include such things as utility charges for the period of the shutdown, leased operating expenses, and salaries of the employees.

In order for the civil authority coverage to be triggered, the insured must actually incur a loss of business income because the civil authority prohibited access to the described (insured) premises. The coverage grant requires there be direct physical loss of or damage to property away from the insured premises as the result of a covered cause of loss.

The forced evacuation of certain areas and the closing of highways and bridges that lay in the path of a hurricane—which already had damaged property elsewhere—would appear to meet this requirement for coverage. Again, windstorm must be a covered cause of loss on the business's policy, and the business must sustain a loss of business income because it was shut down by the evacuation order.

Another coverage provision included in the businessowners policy is that of up to $5,000 for damage to insured businesses that lose business income because one of their "dependent properties" is damaged by a covered cause of loss. A dependent property is one that delivers materials to the insured, accepts the insured's products or services, manufactures products under contract for the insured, or attracts customers to the insured's business.

For example, a restaurant may be in a shopping center that is anchored by a large, prestigious department store. Shoppers might generate the bulk of the restaurant's business. The occurrence triggering business income coverage for the restaurant would have to occur at the department store in order for coverage to emanate from the dependent properties provision. Again, there is a requirement for physical damage at one of these properties that arises from a covered cause of loss.

While flooding caused by hurricanes could lead to business interruption losses, flood is not a covered cause of loss on most policies. Although flood insurance may be available to commercial property insureds through the National Flood Insurance Program, the NFIP coverage does not include a provision for business interruption losses. So, if a business is affected solely by flood waters and not by actual windstorm, business income insurance may not be available.

Extra Expense

In line with business income, extra expense is another valuable coverage in hurricane situations. For example, if generators are purchased to keep operations running, it is a covered extra expense, as is the gas needed to run the generators—even including an insured's gas and car expenses needed to possibly go to another state to obtain the gas. As long as the expense reduces the amount of time the business is nonoperational, or is an expense that will keep the business running, it is a covered extra expense.

If employees are injured by a hurricane-related incident while in the course of employment, such as while boarding up windows and doors or preventing looters from coming into the business, there should be workers compensation coverage available to cover these types of injuries.

Summary

These are some of the coverage issues beyond property damage that arise when a storm moves through an area. Additional living expenses, actions of civil authority, business income, and extra expense are all important coverages to understand, especially during hurricane season.

Related articles: 

Hurricane and Flood Articles

Disaster Compendium Part I – Hurricanes and Tornadoes

Hurricane Categories 1-5