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Preparing for Business Interruption When a Natural Disaster Hits

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Hurricane Matthew is the latest major storm to hit the East Coast, with early estimates of property damage and lost business in the billions of dollars in North Carolina alone. In fact, according to officials with the North Carolina Department of Public Safety, the storm damaged about $1.5 billion in property, including homes, businesses and government buildings. This figure, however, doesn’t include other costs to the state’s economy, including losses that businesses suffered when forced to close and when consumers were not spending because they were forced to hunker down or evacuate.

Of course, the focus should always be on safety first and the wellbeing of employees and their families and making sure there risk management practices are in place to help mitigate the loss of life and property destruction and disruption. In managing property loss and interruption, businesses of all types – from real estate developers/owners to manufacturers and contractors – should be prepared as to how they will deal with damage and economic loss.

One of the first things that should be done is to ensure the insurance policies in place will respond in the event of a claim to help rebuild and cover losses, including business interruption resulting from damage to owned property as well as property of suppliers and customers. Some covered losses may have begun even before the hurricane hits, including costs associated with shutdowns in advance of the impending wind, rain and flooding. Notice to insurers and careful review of policies are important first steps in preserving rights to coverage.

Also, insureds should make sure that evidence of loss is organized and maintained to support a claim under any applicable coverage provisions and track the expenses incurred in preparing the claim (including legal costs). They should understand that adherence to any applicable notice and proof of loss provisions in the policies, including obtaining waivers or tolling agreements from insurers, is critical. There are several issues that may arise from claims made in connection with storm losses, including causation, trigger, notice, number of occurrences, limits, defenses and exclusions when analyzing a claim, so the better an insured understands what needs to be done, the smoother the claims process will go. 

Let’s take a look at some of the policies that would kick in after a storm and what to consider.

Property Damage:  If property is damaged as a result of a natural disaster, an insured should be aware that most first-party property policies cover much more than just physical damage to owned property. Many policies define property damage to include loss of use of your property that has not been physically damaged. The property covered often includes inventory as well as property leased, property within the policyholder’s care, custody or control, and property for which an insured is liable or in which an insurable interest exists. Many policies also include additional coverage for debris removal, demolition and increased cost of construction in the event of physical loss to covered property. Costs associated with expediting repairs are often also included. While such provisions vary significantly, “preservation of property” and “sue and labor” clauses often cover costs incurred to prevent or minimize actual or threatened loss.

Business Interruption: Lost profits are commonly covered under one or more provisions of most property policies with business interruption coverage. Business interruption typically comes into play to reimburse an insured for losses sustained due to the total or partial suspension of the policyholder’s operations during a period of interruption. For example, business interruption coverage would cover the profit lost while repairing the damaged property a manufacturing operation suffers as a result of storm or flood damage.

Business interruption losses often require valuation and calculation issues best analyzed soon after the loss or even as the loss progresses, rather than later or after the fact, when it may be difficult to obtain important supporting data. In addition, business interruption coverage may require the insured to expedite repairs, mitigate losses and/or track expenses. Many policies also provide coverage for “extra expense” associated with maintaining production while property is being repaired or for certain expenses incurred before physical damage to property. Covered extra expenses generally include such costs as rent, moving and hauling expenses, overtime, temporary labor, and even advertising.

Contingent Business Interruption/Dependent Business Interruption: If an insured’s suppliers or customers suffer loss or damage as a result of the disaster, the client may have a claim for contingent business interruption due to the inability to acquire or deliver materials or services. These provisions generally extend the business interruption coverage to include loss of gross earnings at the insured's premises as a result of a supplier’s or customer’s inability to deliver or receive goods or supplies due to damage to its property.

Utility Interruption: When utility services to an insured’s premises are interrupted, service interruption coverage may be available to cover damage to property and the loss of income or extra expense. Service interruption coverage generally requires damage to the property of a utility supplier used by the insured. It could apply to power outages, for example, where power lines downed by a storm or physical disruption to a transformer or generating station prevent a manufacturing plant from operating normally. This coverage is typically limited in duration and subject to waiting periods or deductibles.

It’s important that insureds are prepared in managing and mitigating risks posed by natural disasters. Adequate preparation facilitates the insurance claims process and ensures coverage will respond.  RPS provides insurance programs for different industry sectors, including manufacturing, real estate, construction, healthcare and others.

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