Are You Covered for the Next Flood?

Although it is too early to make accurate predictions, Hurricane Harvey is expected to result in damages between $70 billion and $108 billion and Hurricane Irma may exceed $200 billion. Unfortunately, massive storms and their massive resulting price tags have become commonplace. Hurricane Katrina was estimated to result in $160 billion in damages followed by, among others, Superstorm Sandy ($70 billion), Hurricane Wilma ($24 billion) and Hurricane Rita ($23 billion). Like the victims of the storms before them, those impacted by Harvey and Irma are now evaluating the magnitude of their damages, their potential liabilities and the extent to which insurance will indemnify their losses.

First Party Property Coverage

Many individuals and businesses in the paths of Harvey and Irma only learned in the aftermath that their “standard” insurance programs purport to exclude damages caused by flood. The reality is that flood insurance on the private market has been generally unavailable for decades. That absence of a private market resulted in the creation of the National Flood Insurance Program (NFIP) by Congress in 1968. Insureds can purchase a flood policy directly from the NFIP or via insurers that are authorized to participate in the program and write policies in their own names (also known as “Write Your Own” insurers). Either way, insureds can only purchase a preprinted, nonnegotiable Standard Flood Insurance Policy. And, despite the majority of individuals and businesses that could but do not purchase a NFIP policy, the program (and, thus, the American taxpayers) are billions of dollars in debt as a result of loans from the U.S. Department of the Treasury to cover the damage claims that arose from storms well before Harvey and Irma came calling.

Insureds must be knowledgeable about the coverage they have and the coverage that may also be available. For example, property policies cover the structures scheduled in the policy as well as personal property and costs to prevent or mitigate a loss. Many property policies also provide “business interruption” coverage (to reimburse the insured for lost profits caused by an interruption) and “contingent business interruption” (to reimburse the insured for economic losses caused by a supplier’s inability to get goods to the insured due to damage to or destruction of its own property). The cause of a particular loss dictates whether that loss is covered. In the context of a hurricane, for example, the cause of loss could be the hurricane itself, storm surge, flooding, the breach of a levee, a governmental order or looting. A policy with a “flood exclusion” may still cover damage caused by, for example, the perils of wind or storm surge.

Third Party Liability Coverage

In addition to securing coverage for one’s own property and losses, insureds may also find themselves named as defendants in lawsuits seeking monetary damages alleging breaches of duties to protect persons or property. Comprehensive general liability (CGL) and directors and officers (D&O) coverage may mitigate those exposures and potential liabilities. Also known as “litigation insurance,” CGL policies typically impose on the insurer a “duty to defend” its insured. That obligation is based only on the allegations of the complaint as compared to the terms of the policy. Thus, an insurer is obligated to afford a full and complete defense of its insured in a lawsuit. This is so regardless of whether the allegations are later proven to be true or groundless, false or fraudulent.

D&O policies provide multiple types of coverage. “Side A” coverage indemnifies directors and officers for loss arising out of an allegedly “wrongful act” committed by individuals in their official capacities when the corporation does not or cannot indemnify individuals itself. “Side B” coverage indemnifies the company upon the company’s indemnification of a director or officer (also resulting from loss stemming from an allegedly wrongful act).

Other Specialty Coverages

Crisis management insurance provides companies the financial flexibility to respond appropriately to a public relations issue. These policies generally obligate the insurer to advance the costs associated with responding to an event, whether it be a natural or man-made disaster, or the contamination of foods, beverages or pharmaceutical products. This coverage is available to the insured regardless of fault. A crisis event is any occurrence that, in the good-faith opinion of the insured, will result in damages if crisis management services are not utilized, as well as where the insured anticipates significant adverse media coverage. Crisis management services are those performed by a crisis management firm, including advising the insured on how to minimize potential harm, and maintain or restore public confidence in the insured. The policy also covers medical and funeral expenses, psychological counseling, travel and temporary living expenses, expenses to secure the scene and any other expenses preapproved by the insurer.

In addition, event cancellation coverage insures against loss arising out of the cancellation, interruption or postponement of a covered event, so long as the source of the cancellation or postponement is covered under the insured’s policy. Coverage is potentially available for cancellations and postponements stemming from a wide variety of perils, including hurricanes, earthquakes, floods, fires, power failures, damage to the leased or rented venue and problems associated with public transportation or roads leading to the venue. It is worth noting, however, that event cancellation policies are generally nonstandard, meaning that terms and conditions vary widely from policy to policy. An insured must therefore carefully review its policy to determine the scope of coverage.

The forms of financial loss covered under an event cancellation policy will likewise depend on the particular terms of the policy. Some will cover the out-of-pocket costs incurred by the insured prior to the cancellation, interruption or postponement of the event. Coverage might also be available for contractual guarantees that the insured is obligated to pay. Lost profits and revenues may also be covered under these policies, provided of course that the insured can establish with reasonable certainty the amount of the loss. This could apply to, among other things, lost advertising or broadcasting revenue, lost ticket sales or amounts paid to reimburse individuals who had already purchased tickets. Finally, depending on the terms of the particular policy, it could cover the costs associated with rescheduling a postponed or interrupted event – for instance, the costs of organizing and marketing the event, or transferring equipment and supplies to a new location. An insured may also be able to recover the cost of renting or leasing a new venue.

Like all forms of insurance, cancellation policies will typically contain exclusions designed to limit coverage. Although some policies contain exclusions for weather-related cancellations and postponements, these are commonly absent from policies and can often be narrowed or eliminated through negotiation. Consequently, before purchasing an event cancellation policy, an insured should carefully examine the coverage provided and, if necessary, explore the possibility of negotiating for more favorable terms or purchasing supplemental coverages.

Navigating the Claim Process

Insureds should be familiar with the scope and breadth of their coverage before a potential claim arises. All policies impose a requirement that the insured provide the insurer with notice of a loss or claim. Some policies require receipt of notice within a certain number of days of an actual loss while others require notice of a potential claim or facts which may give rise to a claim. Failure to give timely and proper notice in accordance with the terms of the policy may result in a denial of an otherwise covered claim.

First party polices also typically require the insured to submit a detailed “proof of loss” within a specified time following the loss. This is the insured’s opportunity to document the claim, provide supporting and backup details, and adequately justify the amount claimed. Claims for lost profits will often necessitate the submission of historical financial data so insureds should have protocols in place to maintain and preserve not only copies of the policies themselves, but the financial data that might later be needed to support a claim.

Finally, insureds should avoid making assumptions about what is (or is not) covered. The scope of these coverages can vary widely so a careful review of the policies (with the assistance of coverage counsel) before providing notice of a claim will maximize the chances of that claim being honored and favorably adjusted.

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