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.

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