Commercial Property Insurance Should Help Those Affected by Winter Storms

Last week, Texas, Oklahoma, and Louisiana, among other states, were hit with a massive winter storm. Many commercial insureds and homeowners alike now face significant losses due to water damage from pipe bursts and sprinkler systems going awry, uncontained fires, food spoilage due to power outages, and business income loss from property damage and/or utility interruptions. Fortunately, most all-risk property insurance policies are designed to address these winter storm-related losses.  But policyholders must be vigilant to maximize their insurance recoveries.

This Client Alert addresses common coverages that may be triggered by winter storm losses, tips for preparing your insurance claim, and exclusions and conditions to watch out for. 

Losses Generally Covered by Commercial “All-Risk” Property Insurance

• Physical Loss or Damage to Insured Property: There is generally coverage for the cost to repair, replace or rebuild insured property that suffers loss, damage or destruction. Covered premises are usually listed on the policy’s declarations page, scheduled in the policy, or otherwise defined and may include not only buildings, but also equipment and business personal property such as furniture, machinery and stock.
• Business Interruption Coverage: Business interruption coverage is designed to cover lost income and profits resulting from the total (or often partial) suspension of operations due to covered property damage. This coverage also applies to operating expenses that must be paid even if the business is not operational, including ordinary payroll. Often, this coverage does not apply until the expiration of a “waiting period” designated in the policy—usually 48 to 72 hours after the property damage occurs.
• Expenses Incurred in Attempting to Mitigate or Stop the Damage: Property policies typically cover expenses incurred by policyholders to prevent or minimize loss (sometimes referred to as “protection of property”) or, where some loss has already occurred, to mitigate additional loss. In fact, many policies require the policyholder to safeguard the property and prevent further damage.
• Extra Expense Coverage: Repairing or replacing damaged property is not the only expense item when property is damaged. Often the cost of operating the business also increases as a result of a storm or its aftermath. Extra expense coverage is intended to indemnify the policyholder for above normal expenses incurred to operate the business as a result of the insured event. This may include costs of generators, costs to temporarily operate at a different location, fans to dry out property, and the like.
• Debris Removal: Generally, commercial property policies provide coverage for the costs incurred in the removal of debris from covered property damaged by an insured peril such as a weather event. The maximum policy benefit for this coverage is usually expressed as a percentage of the total loss.
• Civil Authority: Many policies also cover lost business income as a result of governmental directives preventing or restricting access to the insured property. Depending on the policy language, these losses may be recoverable even if the company’s own property has not been damaged.
• Ingress/Egress Coverage: Similar to Civil Authority coverage, many policies also cover losses when ingress to or egress from a covered property is prevented or hindered as a result of property damage. For example, if roads leading to the insured property are closed because of flooding, ice, downed trees, power lines or other property damage, thereby preventing access to the insured business, this coverage will likely apply.
• Service and Utility Interruptions: Losses and expenses caused by power, water and other service and utility outages can also have a significant impact on business operations. Resulting losses may be covered under commercial property insurance policies. For example, loss from damage to a transformer on the main line is generally subject to higher limits than loss from damage to your individual power line that connects to the overhead line.
• Contingent Business Interruption Coverage, Supply Chain Coverage, and “Leader Property” Coverage: Generally, these coverages extend coverage to business income loss due to damage to or destruction of property on which your business relies – such as damage to suppliers or distributors, customers, or properties that attract businesses to your insured business. In other words, the physical damage is not sustained by the insured. Rather, that damage is sustained by some entity with whom the insured has a business relationship and upon whom the insured relied prior to the loss event for a key aspect of the insured’s business.
• Spoilage Coverage: Commercial property policies generally contain endorsements that provide coverage for loss of perishable stock at the insured property. Perishable stock, for example, can include food at a restaurant, grocery store or bakery that spoils due to lack of refrigeration during or after a storm.
• Extended Period of Indemnity: Under the typical commercial property policy, the period of indemnity ends when the policyholder repairs damaged property or could have repaired the property had the policyholder acted reasonably. However, many commercial property insurance policies provide for an extended period of indemnity that extends the period during which you are entitled to indemnity under your insurance policy beyond the time it takes you to restore your damaged property after a storm. This coverage will help ensure that your business is made whole for losses as you ramp up marketing or sales efforts again following a storm.
• Professional Fees/Claim Preparation Fees: This coverage applies to cover costs incurred by the policyholder to prepare and certify a covered loss. While this coverage should apply to forensic accounting fees and other professional fees, this coverage often contains express exclusions for public adjuster fees.

Post-Loss Claim Tips

Following the storm, ensure your business takes all steps necessary to maximize recovery.

1. Provide Prompt Notice

This requirement cannot be overemphasized.  Failure to timely notify the insurer of a loss can result in a bar to coverage.  Property insurance policies require prompt notice of the loss. Untimely notice will result in the insurer asserting various defenses to coverage. Further, providing prompt notice is critical to ensuring that your claim is adjusted promptly, particularly given the massive number of claims expected to be filed as a result of this winter storm. Insurer workforces are always stretched thin following major catastrophes. For example, Texans filed approximately 670,000 property insurance claims following Hurricane Harvey in 2018.  Current estimates are that this February’s winter storm will easily eclipse that number.

Your notice of loss should contain a basic description of the loss, including where, when and how the loss occurred, as well as your contact information. Your broker or agent can assist you in reporting the loss. After successfully reporting the loss, the insurance company will assign an adjuster to handle your claim.

2. Data Collection

To ensure you adequately capture losses post-storm, your team should set up a general ledger to capture all storm-related costs, expenses, and time – including costs incurred to mitigate pre- and post-storm losses. You should designate one person for submission of all storm-related invoices, quotes, and other contracts, and to be the spokesperson with respect to your insurance claim.

To the extent you have multiple locations, we recommend creating a shared file to document physical damage, any applicable civil authority orders, dates and times that services like water or electricity were down and when those services were restored, supply chain disruptions, times of closing pre-storm and opening post-storm, and descriptions of mitigation efforts and extra expenses – such as purchasing a generator or renting other property to run your business while repairs are made. Collecting these facts in real time will help you later when you present your claim to the insurer.

3. Begin Preparing a Proof of Loss

Your policy is likely to require submission of a sworn proof of loss and may require that it be provided within a designated time period after the loss or within a designated time period after request from the insurer. Be aware of and note these deadlines now, so that you can request an extension of any deadlines, in writing, following the loss, if needed.

In addition to any specific requirements set forth in your policy, you should use photographs, receipts, videos, and any other available records to substantiate your claim. Thus, it is critical that you begin creating an inventory of damaged property – including business personal property – and take photos and videos of the damage. You should provide this evidence promptly to your insurer and give them an opportunity to inspect the property before repairs are made, if possible. If you must promptly begin repairs, make sure you provide written notice of this to your insurer and ensure that they have no objection to your beginning those repairs.

4. Keep Records of the Claims Process

Create a log of all documents to and from your insurer as well as a log of your phone calls or other communications with the insurer or insurance adjuster. Texas, like many states, has enacted insurance or unfair trade practices statutes.  Insurance companies violate the Texas Unfair Claims Practices Act when they, among other things:

• Knowingly misrepresent material facts or policy provisions related to coverage;
• Fail to attempt in good faith to promptly, fairly and equitably settle a claim where the insurer’s liability has become reasonably clear;
• Refuse to pay a claim without conducting a reasonable investigation;
• Fail to conduct an investigation in a reasonable amount of time;
• Fail to provide a reasonable explanation for a denial of the claim;
• Attempt to enforce a full and final release of a claim when only a partial payment has been made;
• Offer substantially less than the amount due on the claim; or
• Compel the insured to file a lawsuit to recover the correct amount for a claim by offering less than what the policyholder obtained in the original suit.

Ensure that you keep a log of insurer communications, so that you have this timeline ready in the event you end up in litigation over your claim.

5. Create a Memo of Lessons Learned

Finally, as you work through this claim, create a memo of lessons learned and work with your company’s key stakeholders to create a disaster or incident response plan for the future.

In the future, ensure that you have a team in place before a loss in order to minimize recovery time and avoid the frenzied competition for scarcely available expertise after the loss. This team should include forensic accountants and trusted contractors and engineers to provide estimates of repair costs and ensure that proposed repairs comply with any applicable building code. Further, ensure that you regularly review your policies after renewal or policy inception and that you incorporate policy conditions into any disaster or incident response plans. For example, some policies may exclude losses due to pipe ruptures if the property is vacant for an extended period of time or where the policyholder did not make reasonable efforts to keep the premises warm or keep pipes insulated.  Thus, coverage denials on these grounds can be avoided if your relevant team members are apprised of these conditions and work to meet them before the loss occurs. You should also be in regular communication with your broker and coverage counsel concerning preparations prior to a loss and mitigation efforts following the loss.

Understand the Insurer’s Coverage Position and Prepare to Push Back on Denials or Delays Where Appropriate

Specific policy terms and applicable law govern the existence and extent of your coverage. In addition, policies often include endorsements or exclusions that may expand or limit coverage. These may include sublimits on certain losses that limit the total available insurance for a particular type of damage (such as flood or service interruption) or exclusions that bar all coverage for damages caused by certain risks, like earth movement and others.

Fortunately for policyholders, it is the insurer’s burden to prove that an exclusion applies. Courts interpret exclusions narrowly and, where found to be ambiguous, courts will interpret the exclusion in favor of coverage for the policyholder.

Further, even if your policy contains exclusions for certain, coverage may nonetheless be available for loss or damage caused by a covered loss. In Texas, if excluded and covered events combine to cause a loss, and the two causes cannot be separated, concurrent causation exists and the exclusion applies so as to negate all coverage for the loss. JAW The Pointe, L.L.C. v. Lexington Ins. Co., 460 S.W.3d 597, 608 (Tex. 2015) (citing Utica Nat’l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 204 (Tex. 2004)).  However, the Supreme Court of Texas has noted that if a covered cause of loss and an excluded cause of loss “each independently cause the loss, separate and independent causation exists, and the insurer must provide coverage despite the exclusion” so long as the policy lacks anti-concurrent cause language. Id. (internal quotation marks omitted). Indeed, “[u]nder the doctrine of concurrent causes, when covered and non-covered perils combine to create a loss, the insured is entitled to recover that portion of the damage caused solely by the covered peril.” Tex. Windstorm Ins. Ass’n v. Dickinson Indep. Sch. Dist., 561 S.W.3d 263, 273 (Tex. App. 2018).

Individual and corporate policyholders are best served by a careful analysis of the terms of their policies and the controlling law governing their insurer’s obligations, as well as precise documentation and presentation of their claim. From our extensive experience resolving insurance disputes arising out of significant weather events, such as Hurricanes Michael, Irma, Maria, Harvey, Katrina, Wilma, Charley, Rita, Ike, Andrew, and others, the Hunton Andrews Kurth insurance coverage team knows that the claims process can be difficult to navigate. Retaining experienced coverage counsel to help you analyze your policies is critical to understanding your rights, knowing the insurance company’s obligations, and finding the smoothest pathway to getting your business back on track after a storm by maximizing your insurance recovery.