Time is running out for businesses to assess whether or not they may have a contingent business interruption claim from Superstorm Sandy.
Superstorm Sandy struck the Northeast United States more than a year ago, impacting thousands of businesses in densely populated areas including retail, corporate offices, transportation, manufacturing and energy plants. Some suffered severe damage and were unable to reopen for months, if at all. Other businesses continue to face enormous financial losses—even without suffering any physical damage—because of power outages, evacuations, halted public transportation, government shutdowns, or damage to facilities of key suppliers or customers.
While Swiss Re estimated that insured losses from the storm totalled $35 billion, to some degree, the actual losses have not been fully realized since many businesses are adversely affected not only as a result of the physical loss of their business property, but also because of the lasting impact of the disaster. Specifically, first-party commercial insurance covers damage to a business’s property and resulting business interruption (BI) loss, but most policies also contain protection against contingent business interruption (CBI)—losses caused by damage to others’ property.
To incur a BI or CBI loss, an insured business must suffer an actual loss of income. In the case of BI, the interruption must be due to physical loss or damage to its own property as a result of a covered cause of loss. A BI claim can also be triggered if the work location is not accessible due to a “civil authority” order telling people to stay out of an area.
CBI coverage provides additional protection for loss of income when the insured’s operations are disrupted by damage to another’s property. For instance, if a policyholder’s supplier can’t operate and customers are affected, even if the policyholder has suffered no direct physical damage, CBI coverage provides protection.
Sandy-related CBI claims also don’t have to arise in the northeastern part of the country. The insured business only needs to establish that it lost income as a result of physical damage to the property of a customer or key supplier—typically described in the insured’s policy as a “contributing,” “recipient,” “dependent,” “leader” or “attraction” property.
Unlike CBI claims, which can arise anywhere in the world, BI, civil authority and ingress/egress claims will be concentrated in the areas directly affected by Sandy. Businesses located in or near closed subway stations or in the seven-block area around the damaged construction crane that hung over midtown Manhattan are likely to make civil authority or ingress/egress claims under their commercial property insurance policies. Businesses in the path of the storm whose property was damaged are likely to make BI claims. CBI coverage is available not only to these businesses, but also to businesses with locations many miles from the storm center.
Contingent business interruption coverage has taken on much greater importance for businesses as more companies are now outsourcing portions of their manufacturing, logistics and services, and have increased reliance on outside suppliers. CBI covers the insured’s financial losses caused by damage occurring on the premises of a supplier or customer.
Companies dependent on New York-area businesses that provide goods and services or that are major customers, for example, may have incurred economic loss attributed to Sandy, even if they were not in the path of the storm and did not have any damage to their property. These affected companies may have claims for CBI coverage if their business operations were adversely impacted by damage to customers and suppliers.
Contingent business interruption coverage may give coverage where a business faces loss due to its suppliers’ inability to offer needed parts and resources, or its customers’ inability to take delivery of product because of the damage to their own business ventures. Other types of insurance that may respond include policies for trade disruption, event cancellation, and directors and officers. Given the interconnectedness of the economy, the insured seeking CBI benefits may be located anywhere in the world. This was evident when U.S. automobile and electronics manufacturers successfully sought CBI coverage when they were unable to obtain key components due to physical damage suffered by suppliers in the Japanese earthquake and tsunami.
Policy Time Limitations
Many first party policies contain time limitations that could impact insureds’ ability to recover. For example, standard commercial property conditions (1988 edition) indicate that companies suffering a contingent business interruption loss might be precluded from recovering from their insurers if suit is not brought within two years.
Some states have permitted even more restrictive bar dates with suit limitation clauses as short as one year. For example, in one Pennsylvania case, the court enforced a one-year suit limitation clause even though the insured was still communicating with the insurer about adjustment of the claim. Suit limitation clauses have also been enforced when the insured has not discovered the loss within the limitations period.
The impact on CBI coverage can be draconian, as the full impact of a disaster like Sandy on a business’s operations might not be immediately available. It may take time for the impact of the storm on a business’s customers or suppliers to become evident. For instance, a product manufacturer selling to retailers in a storm’s path may not feel the loss of those retailers for months after the storm. And by then they may not attribute it to the actual storm, but to other factors. CBI coverage is, however, an important asset that businesses should not ignore.
CBI Policy Review
It is now a little more than a year since Sandy, and businesses should review their policies to determine whether they have CBI coverage and whether it might be impacted by the time limitations clause. Even in jurisdictions enforcing a one-year limitation, there may be a basis for pursuing a CBI claim where the loss may not have occurred or been discovered until sometime after the storm. This coverage can play an important role in helping recover financial losses from this or other future disasters.
There may be other time-related defenses that impact a CBI claim as well. In many jurisdictions, for instance, a delay of notice to an insurer can preclude coverage. If an insurer can show that the insured delayed notifying them of a loss and failed to provide notice thereof, the insurer is likely to assert such a defense.
With the anniversary of Sandy, it is also critical that policyholders immediately assess whether they might have a CBI loss arising out of that disaster. Manufacturers with customers in the impacted areas need to examine their sales records to evaluate whether the storm reduced profits. All policyholders should, as quickly as possible, determine whether they sustained contingent business interruption, and if so, its extent and the scope of coverage for those losses. Insurers will seek detailed proof of the loss claimed under the policy and documented evidence of the expenses incurred by the policyholder in responding to that loss. As a result, policyholders will need to fully understand the scope of coverage afforded by their policies to maximize the potential for recovering all covered losses.
Ultimately, businesses want their claims adjusted promptly and accurately, and insurers will require complete information from insureds. To achieve this, businesses must make sure that appropriate financial models are in place, claimed losses are carefully documented and claims are carefully investigated to make sure they are covered by the policies in place.
When assessing loss of profits for a business, calculations must be accurate. A forensic accountant should be engaged at an early stage to work through the problem and analyze the expenses as they are being incurred. The claim needs to be presented to insurers in a manner that optimizes the available coverage and, for this reason, legal assistance is prudent as well.
Filing a CBI Claim
Before filing a claim under a policy’s CBI provision, bear in mind that preparing a CBI claim can be more complex than preparing a BI claim. This is because the policyholder must assemble documentation to show damage to a third party’s property rather than its own. Moreover, because of the complex business models used by many companies, CBI losses may occur at a variety of locations. It is therefore important to fully understand the links in the company’s supply chain to know when CBI coverage is triggered. Likewise, understanding what constitutes a covered peril under the CBI provision is key. Finally, understanding how property loss is measured is critical to preparing a claim.
Whenever a business faces unanticipated losses, it should immediately consider how its insurance will respond and have skilled coverage counsel—not just claim adjustors—assess their insurance policies. They can help develop a plan to determine and document losses that were or will be sustained because of the disaster.
Equally important is retaining an experienced financial expert knowledgeable in insurance claims to allow the insured to focus on running the business rather than spending time responding to data requests and developing an estimate of loss. This financial expert, often an accountant, can serve an integral role in properly gathering data and quantifying the claim. The expert can also assist the insured with the cash advance process and later negotiate a reasonable settlement recovery.
To appropriately evaluate potential economic loss attributed to Sandy or other disasters, analyzing the insured’s financial and operational data is necessary. This may include analysis of historical data for three to five years, assessment of current operations, and evaluation of projected business operations before and after the event. Understanding the business, its seasonality and trends, supplier and customer relationships, and the industry as a whole are essential to calculate actual losses sustained.
In reviewing the recent one-year anniversary of Sandy, businesses should look carefully at their historical operations and determine whether they have been adversely impacted by Sandy’s toll on their customers, suppliers, and other business partners. If so, now is the time to evaluate whether they may be able to recover all, or part of their losses under available contingent business interruption coverage.