With hurricane season upon us, many risk professionals are helping their organization prepare for this year’s storms and assessing their company’s protections for the future. As recent storm seasons have demonstrated, it is critical to ensure your business has adequate coverage and that you know what steps to take if your business suffers damage as a result of a hurricane. The following tips can help risk managers ensure their organization is ready to act quickly to both mitigate storm damage and maximize insurance recovery when filing claims.
1. Understand Applicable Coverage Terms and conditions
All businesses are likely covered by commercial property insurance, and risk professionals should be aware of the different coverages—and exclusions—contained in such policies. For example, policyholders must ensure they have the appropriate coverage in place for flood- and windstorm-related damages.
Commercial property forms in coastal regions may exclude windstorm (or “named storm”—a weather event named by the National Weather Service) as a cause of loss entirely, may limit coverage to a windstorm sublimit that is less than the policy’s overall limit, or may contain a high deductible. Risk professionals should review their current policies and determine whether there are limitations on coverage for windstorm damage and whether they need to purchase separate windstorm-specific coverage to complement their current commercial property insurance.
Property insurers often use similar methods to reduce coverage for flood damage, including sublimits or exclusions that apply to storm surge. Many policies also exclude certain types of water damage caused by rising water. Businesses located near a coastline should be sure that they have adequate flood insurance.
Policyholders should also consider whether all relevant property is indeed covered and identified on the appropriate schedule. For example, are recently added buildings and locations included? Further, check whether other land improvements are also covered. Many policyholders may be surprised to learn when reviewing their policy after a loss that signage, fencing, trees and landscaping, and other expensive land improvements may not be covered. Fortunately, these items can be covered through endorsements, at least subject to a sublimit.
After reviewing policies in detail, risk professionals should incorporate information on notice requirements into their disaster recovery plans. Be sure to do so for all appropriate policies that could be implicated, especially as damage could be caused by both wind and water, and only notifying the insurer on one policy could result in leaving money on the table when it comes to recovery.
2. Assess Business Interruption and Extra Expense Coverage
Physical damage is just one part of a hurricane loss. Interruption to a company’s day-to-day operations and income can pose an equal or even greater threat, and risk professionals should be sure that their organization has adequate coverage to address those situations.
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 in other policies, business interruption coverage usually includes a time deductible called a waiting period. This means that the policy will not cover loss immediately following the storm damage, but rather begins after the waiting period is over, typically 24 to 72 hours. In other words, your losses may only be covered if the interruption lasts more than three days. 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 full suspension of business so that the policyholder is not penalized for mitigation efforts to operate at least part of the business post-storm. Optimal coverage will apply to even a reduction in business or partial suspension of business due to covered physical loss or damage, rather than requiring a total cessation of business operations.
Repair or replacement costs are not the only expense when property is damaged. The cost of operating the business often also goes up during the time when the business is affected by a storm or its aftermath. Extra expense coverage is intended to indemnify the business for increased costs incurred to operate the business in the wake of the storm, such as 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 must also ensure they have contingent business interruption coverage in place prior to hurricane season, or at least “leader” or “attraction” property coverage. Contingent business interruption coverage is designed to cover lost business income resulting from property damage sustained at a customer, key supplier, distributor or other component of the supply chain. Attraction or leader property coverage covers lost business income sustained as a result of property damage to a property that attracts business to your property, such as a school, mall, theme park or office building. Equally important is civil authority and ingress/egress coverage, which likewise apply to income loss sustained as a result of damage to other property that impacts a company’s ability to operate normally. All of these coverages should be purchased as part of a robust property insurance program.
3. Mitigate the Damage
All businesses have a contractual duty under their property policy to mitigate their losses. If your business sustains damage in a hurricane, it is important to take all reasonable steps to mitigate any further damage once the storm has passed. This includes using building materials, tools and other techniques to reduce damage to the building and its contents. Likewise, property policies require that the insured take reasonable steps to continue its business as best as it can while repairs to covered property are made. Be sure to keep records of these expenses as they are likely covered under the policy and should be submitted as part of the formal claims process.
Take sufficient photographs of the exterior and interior of the property and maintain current records of all inventory both pre- and post-storm. This will help ensure relevant information can be provided promptly to the insurance company in the event of a loss and may help avoid disputes 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.
4. Assemble a Disaster Recovery and Response Team
Your company’s disaster response and recovery plan should include a section on insurance. You must ensure that you have the proper team in place before the storm to minimize down-time and maximize payout on your insurance claim. This includes designating a point person for the insurance claim who will serve as the lead liaison with the insurer, broker and other vendors.
Make sure that you have an up-to-date and accurate pre-loss inventory of insured assets and a schedule of insured locations (including the statement of values you submitted to the insurer) to help provide a roadmap for your insurer to adjust your covered loss. This will be particularly important if dangerous conditions on the ground prevent adjusters from being able to reach your property following a storm.
In addition, be sure to train your team to set up a general ledger to capture all storm-related costs, expenses and time post-loss. Select competent coverage counsel and forensic accountants in advance and include their information in your disaster response plan so that you can quickly reach out after the storm. This will help get your claim moving forward as quickly and efficiently as possible.
Finally, be sure to train your team to log all communications to and from your insurer, make copies of all documents provided to the insurer, and record details on any of the adjuster’s visits to the property. Many states require insurers to communicate promptly, including issuing prompt coverage determinations and paying undisputed amounts as soon as reasonably possible. 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.
5. Ensure Timely Submission of Notice
Providing proper and prompt notice is the most important thing an insured must do after a loss, so be sure to review your policy’s requirements thoroughly and include those requirements in your disaster response and recovery plan. Initial notice should be broad as it may take weeks or months to fully understand the scope of the loss, and there is no need to limit the claim prematurely.
Many policies will also require submission of a sworn proof of loss, typically within 60 to 90 days of the insurer’s request. A proof of loss should outline the amount that is being claimed as damage as a result of the hurricane. While commercial property insurers may often agree to extend this deadline, it is important to note that flood insurance policies issued under the National Flood Insurance Program require the proof of loss to be submitted within 60 days of the loss and this is a hard deadline. Failure to comply could preclude your claim from coverage.
Hurricane season poses critical threats to businesses large and small, but many of those threats can be neutralized with proper insurance coverage and prompt, accurate claim submissions. It is never too late to be better prepared for this year’s natural disasters, nor is it too early to prepare for the next disaster season. Risk professionals should act now to ensure you have the proper team in place, both internally and externally, so that you are best prepared to weather the storm and claims process whenever disaster strikes.