After the Big Chill
1/5/2018Securing and maximizing insurance coverage for losses caused by winter weather early in 2018
Following a powerful winter storm that has left snow from Florida to Maine in the first week of 2018, a “polar vortex” is expected to bring record-low temperatures to the eastern U.S. Temperatures well below freezing are in the forecast for New England and the mid-Atlantic region. The potential exists for large-scale physical and economic damage to businesses and other entities, many of which will look to insurance policies for coverage. What follows is an overview of the types of damage that insureds may incur and the steps they ought to take in order to secure the fullest available coverage.
Freezing as Property Damage
Some property damage may be the direct result of freezing, such as the expansion and contraction of pipes as they are frozen and inexorably thaw, or the damage may be to product (personal property) conveyed in pipes, such as jet fuel that becomes unusable as it changes physical state due to cold temperatures. Insurers may question whether freezing itself is property damage. Freezing is an insured peril, and the consequent property damage caused by the expansion and contraction or other change of physical properties is covered property damage under all-risk policies. See, e.g., Cavalier Group v. Strescon Industries Inc., 782 F. Supp. 946, 956 (D. Del. 1992) (holding that freeze/thaw effect which exacerbated defects to balconies was not specifically excluded, and therefore was covered under an all-risk policy); Harbor House Condominium Ass’n. v. Massachusetts Bay Ins. Co., 703 F. Supp. 1313, 1317 (N.D. Ill 1988) (coverage for repair costs under an “all risk” insurance policy extends to a loss caused by a fortuitous freeze event; but since the insured could only show that freeze damage occurred to a small portion of pipes within a heating system, it could only recover for that specific location).
Under standard policy wording, damage to product, supplies, and other materials also triggers coverage. Fuel, chemicals, water and other “Personal Property” damaged (even temporarily) by the freeze may give rise to coverage for both direct physical loss (and/or loss of use) with respect to the frozen property, and resulting business income loss if the business is affected by such freezing damage.
Business Interruption Deductibles/Waiting Periods and Contingent Business Interruption
Business interruption policies are similar in substance, but they can vary greatly in coverage terms. Many policies include, in addition to monetary deductibles, “waiting periods” that limit coverage to the loss occurring after a waiting period—typically presented as a number of hours, e.g., 72 hours. Sometimes deductibles are also expressed in terms of days, hours, or even production equivalents, and although insurers and adjusters like to treat them as the same, they are sometimes very different. For example, if a loss continues for 10 days, and is subject to a 24-hour waiting period, there is coverage only for the nine days after the first 24 hours, typically eliminating the largest day of loss. Some policies even define the days as either business days or calendar days. If the loss is subject to a 24-hour deductible, the insured is entitled to deduct an amount representing 1/10 of the loss, which is typically less. This simple calculation could have a major impact on claims relating to the recent weather events.
Another point of tension may be proving and measuring contingent business interruption (CBI) losses. Policyholders with CBI coverage, whose own businesses suffered losses as a result of interruption to a customer or supplier’s business, may be entitled to their resulting loss of gross earnings or gross revenue and contingent extra expense losses. There are, however, challenges in presenting such claims. First, the CBI location must have suffered a loss that is covered under the policyholder’s policy. Second, the policyholder must prove that the CBI location’s losses impacted the policyholder’s business. This proof is often difficult as the insured has little or no control over, or access to, the facts and circumstances of the supplier/customer’s property damage and the reasons behind consumer behavior.
Critical to presentation of any BI claim involving this freeze will be whether the insured has put the right team of specialists in place, including forensic accountants, coverage attorneys and other consultants who specialize in assessing, quantifying and maximizing the extent of coverage. These professionals interact with management to help document the loss, including both financial and physical damages, and, when properly retained by counsel, may be subject to the attorney-client privilege so that their communications and advice are protected.
Other Potential Coverages
Depending upon an insured’s particular circumstances, a number of coverage extensions may provide a basis for recovering some or all of the loss caused by the storm and freezing weather. For example, Loss of Ingress/Egress coverage typically indemnifies an insured when access to the insured’s property is impaired as a result of road closures, flood, ice and snow, although proof of physical obstruction is usually required. Under this coverage, an insured may recover if access to its property is restricted due to physical damage such as impassable roads, and/or property damage within a certain perimeter of the insured’s premises. Similarly, Civil Authority coverage may apply where a governmental order impairing access to the insured’s premises was issued, typically as a result of physical damage of the type insured by the policy. These are often additional coverages, so a careful review of the policy is necessary before the claim is submitted.
What Insured Parties Should Do
1. Obtain and Evaluate Policies
As a first step to recouping the losses, it is critical to obtain, review and evaluate all potentially applicable insurance policies for coverage. Understanding your rights and obligations requires a thorough review of all policies to determine what coverages may apply. Property insurance policies are more likely to cover damages sustained as a result of the weather events. Liability policies generally will cover claims brought by third parties as a result of the weather, such as slip and fall accidents.
2. Place All Insurers on Notice
In order to preserve all rights under your insurance policies, it is critically important to notify each insurer (including excess insurers) of potential losses as soon as possible. Any instructions for providing notice to the insurer should be carefully followed. Brokers generally notify the insurance carrier on the policyholder’s behalf, but it is important to verify that the notice is accurate, in written form, and is actually sent to the correct parties in such a manner that the recipient has actual knowledge of the communication. Even if you have not yet identified all of your losses, or determined conclusively that a policy might respond, make sure to notify all insurers that may provide coverage, including excess participants on your property program. If you use your broker to provide notice, be sure to get confirmation of delivery and acknowledgement of receipt. Late notices can prejudice your ability to secure coverage in many states.
3. Document Your Losses
Next, properly documenting the loss or damage to property is crucial. This includes not only property that was damaged as a result of the weather, but also any property rendered damaged or unusable in the following days, such as inventory that was frozen/thawed, or exposed to water as a result of burst pipes. Contamination, spoilage or latent moisture infiltration are among other sources of loss which must be considered when standing water and sediment is released due to a burst pipe. It is important to document all damage and premises/locations with photographic evidence and, in some cases, give the insurer a right to inspect before discarding or replacing any damaged items. Keep a log of all actions taken. Save all repair receipts and other records of additional expenses made necessary by weather-related damage. Aside from taking steps to mitigate losses and prevent further damage to insured property, insureds should consult with coverage counsel before taking any action or agreeing to be interviewed by adjusters regarding the destruction of insured property, as the insurer may have rights to that property under the policy’s salvage provisions.
4. Consider Engaging Experts
It is wise to engage professional claim consultants, such as forensic accountants, particularly where there are business interruption losses. Their professional fees and other mitigation expenses are sometimes covered under property policies, subject to sub-limits. Usually, fees of attorneys and public adjusters are not covered. It is also advisable to engage an experienced insurance coverage lawyer, not just when you need an advocate, but to help you protect the privileged nature of your communications, and also to assist in avoiding many common problems inherent in presenting your insurance claim submissions. Counsel may work in the background, without revealing their involvement to insurers. Insurers routinely do the same. A prudent business owner who has to answer to shareholders is wise to have a policyholder team with equivalent expertise. Cooperate with the insurance company adjuster, but don't forget that he or she works for your insurer, not for you. If you need an advocate, hire your own.
5. Follow the Policy to Preserve the Claim
After initially notifying the insurer of the loss, most property policies require a sworn proof of loss, itemizing the damages. Sometimes, policies require proofs of loss to be submitted within a certain number of days or months after the loss. Although insurers are usually amenable to an extension of time to do so, any such extension should be confirmed in writing. In addition to notice and proof of loss, insureds must also preserve and protect property from further losses, including taking any and all steps necessary to mitigate (or minimize) additional damage, including business interruption. Because such steps are required to be taken, mitigation expenses are covered under property insurance policies. For example, if a building is flooded, most policies require the insured to take necessary steps to dry out flooded areas and, accordingly, provide reimbursement of such mitigation expenses, subject to certain sub-limits.
6. Assess All Potential Coverages
With respect to weather-related damages, “first-party” policies such as commercial property policies are the most likely to provide coverage for an insured’s own losses. As set forth above, in addition to providing coverage for physical damage to an insured’s property, many commercial property policies also include coverage for losses due to the interruption of the insured’s normal business activity as a result of damage to utilities, customers, suppliers, infrastructure and other critical, or dependent, properties. These extended coverages may apply, even if the insured’s own property was not physically damaged. This may be critical to businesses whose supply and customer chains were disrupted as a result of supply issues, closure of roads, grounding of flights, and other transportation-dependent issues. A thorough review of the policy’s coverage and application to one’s knowledge of the policyholder’s business process is critical to determining whether, and the extent to which, coverages may apply.