Maximizing Your Coverage after Hurricane Katrina
September 2005
Companies with operations affected by Hurricane
Katrina, even those based outside the Gulf Coast, must deal not only with the
human tragedy and disruption to people and business, but must also effectively
protect the availability of insurance by making a timely claim and complying
with all the conditions of coverage.
by Jay M.
Levin
Reed Smith
While senior operations managers focus on fixing the damage and rebuilding
the business, those in charge of the company’s insurance assets must make sure
that notice is given to insurers, that claims are properly documented, and that
there is appropriate follow-through. This article will discuss some of the key
areas which must be addressed in order to maximize an insurance recovery.
First Steps
The first and most important step in presenting a claim is to gather all
of the applicable policies and make sure they are current and complete. Particularly
for those policies with renewal dates in the last few months, care should be
taken to make sure that the policies have been issued and checked for accuracy.
All applicable policies should be reviewed to determine whether and when
notice and proofs of loss must be submitted, whether they require specific types
of documentation of a loss, whether they purport to restrict the policyholder’s
ability to effect repairs before approval by the insurer, and the scope of any
obligation to mitigate damages. Potential gaps or limitations in coverage should
be identified and analyzed so the claim presents the best possible case for
including the most damage as covered, as opposed to falling within exclusions,
exceptions, or limitations. This is particularly important where policies have
sublimits—such as mold or flood sublimits. Operations management should be made
aware of these issues so that consultants and contractors can be advised and
the issues can be addressed in repair estimates and techniques.
If there are any gray areas, counsel should be involved promptly so that
legal advice may be obtained on the best way to address them. While the policyholder
should take care not to turn counsel into an adjuster, which might waive attorney-client
privilege, complex insurance claims usually require legal advice. There is no
reason not to obtain that advice at an early date, so it can be used to help
formulate the claim presentation and in evaluating alternative means of approaching
repair and replacement.
All first-party property insurers should be given notice of loss as soon
as possible. Even a preliminary notice which identifies only the damaged facilities
and indicates that the extent of damages is unknown is better than no notice
and should be given as soon as possible. This will trigger the insurer’s obligation
to investigate and evaluate the loss. In addition, insurers already have CAT
teams in place and may be able to provide assistance in identifying contractors
to do emergency repairs and emergency cleanup. Notice should be given not only
to primary property insurers, but to excess property insurers. If separate policies
are maintained for builders risk, inland marine, or various types of property
floater coverage, and those coverages may be implicated in the loss, those insurers
should also be notified promptly and in accordance with the terms and conditions
of the policies.
In addition to notifying the insurers of the date of loss and loss location,
the notice should mention that emergency repairs will begin as soon as possible
and that the insurers should have their representatives at the property as quickly
as possible so that appropriate repairs are not delayed. Insurance company adjusters
and consultants may need access to the property, and their access should be
granted as quickly as possible.
The policy conditions describing the insured’s responsibilities in the event
of loss should be carefully noted and followed. Many policies require that a
proof of loss be filed within a certain number of days and that day should be
diaried. Policies frequently describe steps that an insured should take to protect
the property from further damage, segregate damaged property, retain certain
records, etc. Failure to comply with all policy requirements may jeopardize
coverage and will almost certainly delay payment of the claim.
Coverage Areas To Consider
In a hurricane and flooding situation such as experienced with Katrina, there
are many coverage areas to consider, including the following.
Property Damage and Flood Coverage
Property damage and flood coverage for actual physical loss and damage to
real and personal property will likely serve as a principal source of funds
to repair and replace plant and equipment. One of the key coverage issues which
should be examined as early as possible is the scope of flood coverage. Many
policies exclude flood and those that have flood coverage may have sublimits
or significantly larger deductibles. This is a case where differentiating between
wind storm damage, damage caused by rainwater entering buildings, and flood
damage may become a very key valuation issue, and how damage is characterized
could create a substantial swing in the amount of insured loss.
Debris Removal
One of the largest problems that may face businesses in the aftermath of
Katrina is getting rid of the damaged material that remains after the storm.
Most property insurance policies have a debris removal component that provides
some coverage for this expense. Some policies even provide this coverage in
excess of property damage limits.
Code Upgrade Coverage
Often, when buildings are damaged or destroyed, building codes require repair
or rebuilding to include elements that were not present in the original structure,
because they are required by current building codes. Policies should be carefully
reviewed to determine whether this coverage is included, since the additional
cost of complying with current codes can be very substantial.
Business Interruption Coverage
This coverage may provide compensation to you for the losses you suffer due
to hurricane-induced suspension or diminishment of your business. Depending
on the nature of the business interruption coverage you have, it may pay for
expenses that continue despite the fact that your business is idled due to damage.
This coverage may include paying the cost of continuing payroll during the period
of suspension. This last aspect can be particularly important to the employees
who have lost their homes and possessions in the hurricane.
Extra Expense Coverage
This coverage will pay the additional costs incurred to operate the business
in place or potentially at a different site when covered interruption of business
has taken place. Care must be taken in incurring these expenses, however, since
the coverage may limit reimbursement to the extent these extra expenses reduce
otherwise compensable business interruption.
Expediting Expense Coverage
If you have this coverage, the insurer will pay additional costs, such as
overtime or double shift costs, incurred in speeding repairs to the damaged
property. Again, care must be taken, because this coverage also may limit covered
expediting expense to the amount of compensable business interruption that is
saved by expediting.
Sue and Labor Coverage
This type of coverage, if in your policy, can pay costs that you incurred
before the loss in order to try to protect against damage to your property or
costs you incur after the storm in an effort to protect the property against
further damage. Expenditures that are intended to protect against otherwise
insured damage may be the only ones covered.
Contingent Business Interruption Coverage
Even if your own property has not been physically damaged, your suppliers
or customers may be badly affected by hurricane damage. Your suppliers may not
be able to provide you with critical needs. Even if you can obtain your supplies,
your customers may not be in business and purchasing from you due to suspension
of their business from the hurricane. Contingent business interruption insurance
can compensate you for the losses you incur due to hurricane-induced idling
of your suppliers’ and customers’ business, even though your own property is
physically unscathed and fully operational.
Interdependency Coverage
This coverage, if you have it, can provide indemnity for the loss of business
you have if one of your divisions or operating subsidiaries is idled due to
hurricane-induced suspension of business of another division or subsidiary.
Even though the unit that is dependent on the other may be undamaged, if it
depends on the idled one as a supplier or customer, this coverage may be applicable
to the losses incurred.
Mold
A key issue for future dispute will undoubtedly be mold. Most policies contain
either mold exclusions or mold sublimits. It will be very important to demonstrate
that the repairs for which recovery is sought from insurers were based on the
hurricane and other covered causes of loss, and that any additional expense
due solely to mold is nonexistent or minimal. Because New Orleans is hot and
humid in September, there is a very real likelihood of extensive mold, particularly
since access to the area is limited and repairs cannot be started promptly.
Insurers will be paying very careful attention to mold damage and may well seek
to limit payments on this basis.
Documenting the Damage
To the extent that repair work can commence before the insurance company
is present, an attempt should be made to reach the insurer’s claims representative
by phone or e-mail to advise of the impending repair. Temporary and emergency
repairs may be effected immediately without waiting for the insurer. As long
as the initial notice was timely and specified that emergency and temporary
repairs would begin, the insurer should not penalize the policyholder for acting
promptly to mitigate the loss. To the extent possible, damage should be videotaped
and photographed and the scope of any emergency or temporary repairs carefully
documented, along with the reasons why they needed to be done.
Planning Permanent Repairs
The most important thing for the risk manager is to work with senior operations
management in planning permanent repairs. All necessary consultants and contractors
should be retained as soon as possible and, to the extent possible, materials
needed for repairs and replacement equipment ordered. Careful documentation
of all steps should be retained and provided to the insurer on a regular basis.
The more information provided to the insurer, the faster and more likely the
insurer will respond to the notice of loss and begin to evaluate the claim.
Before signing the final contract for big-ticket items, it is wise to notify
and consult the insurer. The insurer may propose alternative means of repair
which might be faster or cheaper and may have sources of replacement equipment
that it can make it available faster and cheaper. Insurance companies have contacts
in many industries and there is no reason why a policyholder should not take
advantage of those resources, if available. However, be wary of insurer attempts
to require lower quality or used replacement materials or equipment or contractors
who are less qualified or overburdened. Although there is no policy requirement
allowing the insurer to dictate these issues, some insurers may try to limit
recovery if its recommendations are not followed. This can be addressed through
negotiation, appraisal, or, if necessary, litigation. If the insurer has no
suggestions when initially consulted, it is more difficult for the insurer to
raise objections later.
Documenting the Claim
Generally, carriers will pay legitimate, well-documented claims. If the advice
above is followed, the policyholder should have pictures and, possibly, videos,
documenting all damage. Contracts for repair work should spell out in detail
exactly what will be done. This will allow the insured and insurer to reach
agreement quickly on those repairs which are clearly covered and minimize the
areas of dispute. One line repair bills for repair of hurricane damage will
be contested by the insurer. Contracts and invoices supported with trade by
trade scope of work will be much easier to deal with and will lead to faster
payment. To the extent there is any question about the source of damage, contractors
and engineers should be able to explain exactly why the work needed to be done
as a result of the hurricane, the flood, or some other covered cause of loss
ensuing from the hurricane. Again, this will minimize areas of dispute and allow
the undisputed portion of the claim to be paid as quickly as possible.
Conclusion
Hurricane Katrina is one of the worst natural disasters to hit the United
States in the last century. The destruction, the disruption, and the toll on
people are virtually incalculable. This is precisely the type of event for which
insurance is purchased and prompt submission of claims and prompt payment by
insurers is needed so that people and businesses can get back on their feet
as quickly as possible. By following the simple principles set forth above,
claim disputes can be minimized, and payments should be forthcoming at the earliest
possible time from insurers. If insurers do not live up to their obligations,
following these principals should have placed the insured in a position to take
the insurer to task, whether through appraisal, some other form of alternative
dispute resolution, or litigation.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.