With recent severe weather events in Texas and other states causing significant property damage and business disruptions, companies should consider how their insurance coverage, including business interruption and supply chain coverage, can help mitigate losses.
Historic extreme cold weather, snow, and icy conditions have caused tremendous damage and suffering, impacting countless businesses across the South and Southwest this month. Every sector and business in these regions have been affected by freezing conditions, which left millions without power and water and caused extensive property damage and severe interruption to normal business activities.
Pursuing insurance claims can be a crucial first step in recovery. In fact, the Insurance Council of Texas, a trade association that represents insurance carriers, announced that “the arctic blast that hit Texas in February of 2021 could be the largest insurance claims event in the state’s history.” However, maximizing insurance assets following extreme weather events can be a complicated process with significant hurdles and hidden challenges. Lessons learned from prior natural disasters, such as hurricanes and wildfires, and the more recent COVID-19 pandemic serve as strong reminders of the importance of protecting your insurance assets by taking the following immediate steps.
The first step is to evaluate all potentially applicable insurance policies for coverage.
Property Damage Coverage. First-party commercial property policies typically provide coverage for physical loss or damage to business premises and other property owned or leased by the policyholder.
Business Interruption Coverage. Also contained in first-party commercial property policies, business interruption coverage reimburses the policyholder for profits that the policyholder would have earned but for the interruption to its business. Property policies typically cover loss of business income from physical loss or damage occurring through the period of rebuilding, repairing, or replacing damaged property. If physical loss or damage from severe winter weather forces your business to shut down facilities and causes losses, then business interruption coverage may respond.
Contingent Business Interruption Coverage. Contingent business interruption insurance, also known as supply chain coverage, provides insurance for losses resulting from disruptions to a business’s suppliers or customers. Such insurance generally covers losses stemming from disruptions from specific suppliers scheduled in the insured’s policy. Supply chain insurance also usually requires that the supplier suffer the type of property damage that would be covered with respect to the business’s own property.
Service Interruption Coverage. Service interruption insurance covers property damage and business income losses caused by the interruption of utility services to covered premises. The scope of service interruption insurance can vary significantly with respect to the specific utilities covered, including water, communications, and power supply, and typically requires physical damage to the property of the insured’s utility company.
Document any potential physical loss or damage. Property loss includes not only property that was damaged but also any property rendered unusable. There may also be an obligation to preserve and protect the property from further losses, including mitigating damage. Document all necessary steps taken to mitigate losses and to restore damaged property.
In addition, business interruption coverages reimburse insureds for lost income during the time that the business was interrupted. These coverages therefore require careful valuing and documenting of the losses. Be prepared to maintain detailed records documenting how the business was interrupted by the extreme weather event. The duration of business interruption coverages may depend on when normal operations could have been restored with due diligence.
Provide notice to all insurance companies from which you might seek coverage, and follow all policy terms, procedural requirements, and deadlines to preserve your rights. Notice requirements in policies variously use the terms “prompt,” “immediate,” and “as soon as practicable.” Keep in mind that there is no such thing as too much notice—and such notice needs to be in writing—so erring on the side of more notice rather than less is recommended.
In addition, some policies require that notice be made within a set amount of time after the loss. Typically, such policies will require that a sworn proof of loss be submitted within 60 to 90 days absent written agreement by the insurer. Other policies only state that a sworn proof of loss must be submitted within a set number of days after the insurer requests such proof of loss. Therefore, while it is important for a policyholder to promptly provide notice of its losses to its carriers, it is equally important for the policyholder to accurately and timely document those losses with an initial sworn proof of loss, which requires an accurate legal framing of the claim as well as documentation concerning the existence and amount of losses. And given the extraordinary hardships businesses are confronting, companies should be prepared to seek an extension for submitting any initial proofs of losses with the carrier, if necessary.
The Morgan Lewis insurance recovery team is committed to service, especially in this time of need. If your business is suffering losses from severe weather events, Morgan Lewis can review your coverages to determine if the losses may trigger coverage in one or more of your policies, including the lines of coverage described above. Notices and other communications with insurers must be framed accurately and drafted in a manner that will not inadvertently and incorrectly obstruct your ability to maximize access to potentially responsive coverage.
We can also provide advice on risk management, loss prevention issues, and proactive measures to minimize future losses, including counseling to take advantage of any available insurance coverages. Thus, coverage counsel, in addition to brokers, should be consulted in connection with policy reviews and communications with carriers.
Scott T. Schutte
Katherine A. Vaky
Jeffrey S. Raskin