Hurricane season is upon us again, and so is the time to ensure that your business is properly insured to weather storms of any category. These helpful tips—some obvious; others not as much—can help to make all the difference when disaster strikes.

1. Know Your Coverages

a. Understand Exclusions, Deductibles and Sublimits

All businesses should be covered by commercial property insurance, but as with many things, when it comes to insurance, one size does not fit all, which leads to commercial property policies that vary widely from one policy to the next. These differences may be plainly apparent while others may be obscure, often resulting from subtle differences in wording.

Most commercial property insurance is written as “all-risk” insurance, meaning that the policy covers all risks of physical loss or damage to property unless a risk is specifically excluded. “All-risk” policy forms in coastal regions may expressly exclude damage caused by a “Named Storm”—a weather event named by the National Weather Service—as a cause of loss entirely, requiring businesses to obtain separate windstorm-specific policies meant to complement their commercial property insurance. “All-risk” policies can also contain other limitations on coverage for windstorm damage, even if not entirely excluded. For example, these policies may apply a sublimit to losses covered by windstorm damage or apply a high deductible to losses caused by a windstorm or Named Storm. Policyholders should review these provisions and consider whether separate windstorm specific coverage is needed on top of current property insurance. Policyholders should also note in their disaster recovery plans the notice information for all appropriate policies as damage could be caused by both wind and water, which would trigger notice obligations to a windstorm or Named Storm specific policy, a traditional commercial property insurance policy and potentially a separate flood insurance policy.

Property insurers often limit coverage for flood damage, including by applying flood sublimits or exclusions that apply to storm surge. Many policies also exclude certain types of water damage caused by rising water. Business located near a coastal line should be sure that they have adequate flood insurance in place, which may be in addition to the business’s commercial property insurance policy. 

Policyholders should also consider whether all relevant property is covered and identified on the appropriate schedule of insured locations. For example, are newly acquired locations and newly constructed buildings included? Does your policy require that they be “scheduled” or does the policy contain a provision that captures these “after-acquired” locations without the need to schedule? 

It also is important to understand which types of improvements are covered (and which may be excluded). Policyholders may be surprised to learn that signage, fencing, trees/landscaping and other expensive land improvements often are not covered unless specifically scheduled or endorsed to the policy. This is even the case for properties that are heavily dependent upon trees and landscaping, like golf courses.

b. Business Interruption and Extra Expense Coverage

Under most “all-risk” policies, of equal or even greater value than coverage afforded for physical loss or damage is the policy’s business interruption and extra expense coverage, which cover loss of business income and increased operating expenses necessitated by a physical loss event. These coverages, collectively known as “time element” coverages, are measured by the amount of time it takes to repair, replace or rebuild your damaged property. Imagine, for example, your physical assets sustain damage from flooding that costs $3 million to repair, but it takes 12 months to complete those repairs resulting in a gross earnings loss of $500,000 per month. Typical “all-risk” policies should cover that $6 million loss of gross earnings, but here, too, the devil is in the details.

Business Interruption coverage is designed to cover lost income and profits resulting from the suspension of operations due to covered property damage. This would also include operating expenses that must be paid, even if the business is not operational. Unlike dollar deductibles applicable to other coverages, time element coverages typically use a duration-based deductible called a waiting period. This means that the policy will begin to cover business income loss after the waiting period is over, typically 24 to 72 hours from the moment of the physical loss or damage. Businesses should carefully consider the applicable waiting period and whether a shorter waiting period is necessary. Policyholders should also ensure that the business interruption coverage does not require a total or complete suspension of business, which could have an adverse effect on efforts to mitigate the business interruption by resuming partial operations. Favorable time element coverages will apply even to a slowdown or reduction in business due to covered physical loss or damage.

Repairing or replacing damaged property is not the only expense item when property is damaged. Often, the cost of operating the business also goes up during the time when the business is affected by the storm or its aftermath. Extra expense coverage is intended to indemnify the business for expenses over-and-above normal operating costs that are incurred to operate the business after the storm. Examples may include the cost of a generator when electricity is lost, costs incurred to operate at a temporary location or costs associated with covering payroll while the business is shut down.

Policyholders that depend on other businesses, such as suppliers, key customers, logistics and transportation companies that allow your business to function, and nearby “leader” or “attraction” properties that draw customers to your business, also should ensure that they have adequate contingent business interruption coverage. Contingent business interruption (CBI) coverage insures against lost business income resulting from property damage sustained at the property of the business on which you rely to operate your business—such as those in your supply chain, local attraction properties or key suppliers or customers. Following Hurricanes Irma and Maria, many small businesses were shocked to learn that they had not purchased this vital coverage and, while their business may not have sustained damage and thus was able to operate, their supply chains were decimated and attraction properties like convention centers were closed for weeks or months, leading to substantial losses of income. Equally important is civil authority and ingress/egress coverage, which likewise apply to provide coverage for income loss sustained as a result of damage to other property which impacts the ability of your business to operate normally. All of these coverages should be purchased as part of a robust property insurance program.

2. Duty to Mitigate

All businesses have a contractual duty under their property policy to mitigate their losses. If your business sustains hurricane damage, it is important to take all reasonable steps to mitigate any further damage. This includes using building materials, tools and other techniques to reduce damage to the building, and its contents, after a hurricane hits. Likewise, a property policy requires that the insured take reasonable steps to continue its business as best it can while repairs to covered property are made. Documenting the efforts and expenses incurred to mitigate covered loss is critically important, as these records will be submitted as part of the formal claims process. Most property policies will pay for the cost of accountants and certain other professionals to assist the insured in collecting and documenting these expenses.

In addition, take sufficient photographs of the exterior and interior of the property and maintain current records of all inventory both pre- and post-storm. This is important to ensure this information can be provided promptly to the insurance company in the event of a loss and to avoid any dispute over what was damaged. Photographs and video should be taken of all damage prior to any mitigation, and the insurer should be invited to inspect the property as soon as possible to record damage and loss before changes are made to the structure.  

3. Ensuring the Right Team Is in Place Pre-Storm to Maximize Post-Storm Recovery

Your company’s disaster response and recovery plan should include a section on insurance. Having a proper team in place before the storm will help streamline your recovery and maximize your insurance claim. The team should include a point person designated to liaise with the insurer, broker and other recovery vendors. 

Having an up-to-date and accurate pre-loss inventory of insured assets and schedule of insured locations (including the statement of values you submitted to the insurer) will greatly assist you in the claim and assist your insurer in adjusting your loss. This is especially important where adjusters are unable to reach your property, such as was the case in the Caribbean immediately following Hurricanes Irma and Maria, or where your property is completely devastated.

Establishing a general ledger to capture all storm-related costs, expenses and time post-loss is also critical. A skilled forensic accountant can be invaluable in this regard. Knowing who you will call upon as coverage counsel also will help to ensure that critical steps are not missed and will keep your claim moving as efficiently as possible.

Maintain copies of all communications to and from your insurer, as well as a copy of all documents provided to the insurer and any consultants engaged by the insurer. Many states require insurers to communicate promptly, including issuing prompt coverage determinations and paying undisputed amounts as soon as reasonably possible.

Most insurers will require the insured to submit a signed, sworn proof of loss. Timing can vary, with some policies requiring submission within 60 to 90 days of the insurer’s request, while other policies tie the deadline only to the date of loss. The proof of loss should outline the total amount that is being claimed as a result of the hurricane, including all loss or damage to property and all time element loss. While commercial property insurers may agree to extend the proof of loss deadline in writing, note, however, that extensions are not permitted under flood insurance policies issued pursuant to the National Flood Insurance Program unless a blanket extension is issued at the federal level. These policies require the proof of loss to be submitted within 60 days of the loss, and a failure to do so could preclude your claim for coverage. 

Further, be sure to have any proof of loss reviewed by coverage counsel before signing and returning the proof to the insurer, as this document could be used by the insurer to limit or cut off further payments. Lastly, be ready to create a timeline of these communications post-storm and to keep that timeline up-to-date and ready in the event you end up in litigation over your claim.

4. Time Is of the Essence

Timely notice is critical. That means businesses should know their policy’s notice requirements before a loss occurs, and notice requirements should be clearly and readily accessible as part of any disaster recovery plan. Wording of the initial notice of loss is also important and could shape how the loss is investigated and ultimately adjusted by the insurer. Here, too, experienced coverage counsel should be utilized to ensure that any proof of loss is worded appropriately to secure undisputed amounts while protecting recovery of amounts that are still subject to adjustment or future accrual.
 

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The insurance attorneys at Hunton Andrews Kurth LLP have extensive weather-related coverage experience, having handled storm losses nationwide for decades. Hunton’s Hurricane Recovery Resource Center contains important advice and resources to help policyholders prepare for a hurricane and deal with the aftermath. The Hurricane Recovery Resource Center also includes pre- and post-storm checklists and blog posts on recent weather-related opinions.