Category Archives: Disaster Preparedness

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Key Insurance Considerations in a Record Hurricane Season

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The active 2020 hurricane season has produced so many named storms that scientists ran out of traditional names and have moved to the Greek alphabet for the first time since 2005. Most recently, Hurricane Sally struck the Gulf Coast, making landfall in Alabama with winds above 100 miles per hour, causing widespread destruction, and leaving hundreds of thousands of residents and businesses without power. Ensuring that your business’ insurance program is ready to deal with such perils will prove critical to maximizing insurance recovery for business interruption and property damage claims. Below are critical steps policyholders can take now to ensure that insurance available if and when it is needed.

Locate a Copy of Your Policy

Having your policy on hand prior to a loss will help start your claim as soon as possible, as it may be more difficult to contact your insurer or broker following a storm, when thousands of claims are taking place simultaneously. Your policy will also provide important information regarding how to get in touch with your insurer following a loss.

In addition to windstorm and flood coverage, commercial policyholders should ensure that they have the following specific coverages in place before a storm hits:

  • Physical Loss or Damage to Insured Property: This is the basic coverage afforded under almost all commercial property policies. Policies generally cover the cost to repair, replace or rebuild property that suffers physical loss or damage. Covered premises are usually listed or scheduled in the policy and may include not only buildings, but also equipment and business personal property such as furniture, machinery, and stock. Although typically a lesser concern, many policies do not include coverage or limit coverage for outdoor landscaping and paved surfaces like parking lots.
  • Debris Removal: This covers costs incurred when removing debris from covered property damaged by an insured peril such as a windstorm. The maximum policy benefit for this coverage is usually expressed as a percentage of the total loss.
  • Expenses Incurred to Mitigate Loss or Damage: Property policies often cover expenses incurred to prevent or minimize loss or, where some loss has already occurred, to mitigate additional loss. In fact, many policies say the policyholder must take steps to safeguard the property and prevent further damage. Failure to do so could jeopardize coverage.
  • Extra Expense Coverage: Extra expense coverage is intended to indemnify the policyholder for expenses that are above and beyond the business’s normal operating expense that are incurred to continue operating the business after damage has occurred. Examples may include the cost of a generator when electricity is lost, increased costs to secure new materials or replacement inventory or costs to operate at a temporary location.
  • Business Interruption Coverage: Business interruption coverage is designed to cover lost business income resulting from the total or partial suspension of operations due to covered property damage. Typically, this coverage does not apply until after a designated “waiting period”—usually defined in hours—which operates as a sort of “deductible.”
  • Orders of Civil Authority: Coverage may also be available when business income is lost as a result of government directives, issued because of property damage to other property, which prevent or restrict access to the insured property. These can include evacuation orders or curfews. These losses may be recoverable even if the company’s own property has not been damaged.
  • Ingress/Egress Coverage: Similarly, many policies cover losses when entry to or exit from a covered property is prevented or hindered by damage of the type insured under the policy, such as downed trees covering a road or a broken bridge. Importantly, the damage need not be to insured property so long as the damage prevents ingress to or egress from an insured location.
  • Service and Utility Interruptions: Some policies may also provide coverage for business interruption losses and extra expense caused by power, water, and telecom outages if those outages are the result of an insured event. This coverage is typically sublimited.
  • Contingent Business Interruption Coverage (CBI): Contingent business interruption insurance and contingent extra expense coverages provide reimbursement to the policyholder for lost income and extra expense resulting from property damage to a separate, non-insured property, often in the policyholder’s supply chain. The third party could be a supplier of critical materials or components; a transporter of goods, materials or resources; or a wholesaler, retailer, or customer who purchases or consumes the insured’s goods on a regular basis. Some policies may offer this coverage for “leader properties” or “attraction properties” within a specific mile radius of the insured property.
  • Extended Period of Indemnity: Policies may also provide for an extended period of indemnity, thus extending the time of covered business interruption losses from the time the property is repaired for several additional months. This coverage is designed to ensure coverage for any “ramp up” period the policyholder experiences to ensure coverage until business returns to normal.
  • Spoilage Coverage: Commercial property policies for food-service and hospitality industry insureds may also contain endorsements providing coverage for loss of perishable stock at the premises of the policyholder.
Have an Insurance Response Team in Place Before the Storm

Commercial policyholders should know who they are going to contact for emergency repairs and services. Having an emergency action plan in place, with cell phone contact numbers, will minimize downtime and maximize recovery efforts after the storm. Document or photograph your pre-loss inventory and other insured assets to provide to your insurer when adjusting your claim. They may not be able to reach your property immediately following the storm.

Following the storm, your team should set up a general ledger to capture all storm-related costs, expenses, and time, including costs incurred to mitigate storm losses. Designate a point person to liaise with the insurer’s adjuster and to submit storm-related invoices, quotes and contracts.  Document everything, including physical damage, evacuation orders, curfews, power outages, supply chain disruptions, and extra costs.

Present Your Claim As Soon As Practicable

Insurance companies require prompt notice of a loss. Once the claim is submitted, check your policy regarding the submission of a proof of loss, as is often required. These documents have deadlines, some of which are triggered without any request from the insurer. Request an extension if you need one to ensure timely submission. Use photographs, videos, or other documentation to substantiate your claim, and keep a log of all communications with your insurer and adjuster, including phone calls. An accurate timeline of communications will assist in any potential litigation regarding your claim.

In the event of a denial, delay, or recovery smaller than required to repair your business, experienced coverage counsel can help you analyze your policies, enforce your rights and hold your insurer to their contractual and statutory obligations.

Hurricane Laura Damage Could Total Billions

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Experts now project damage figures could be in the billions of dollars as a result of last week’s Hurricane Laura, the category 4 storm that hit several Caribbean nations as well as Louisiana and Texas in the United States.

Laura was the strongest hurricane to hit Louisiana since 1856, but the damage may end up costing less than previous storms because it did not hit heavily populated cities. In 2005, Hurricane Katrina caused $160 billion in damages, while 2017’s Hurricane Harvey cost $125 billion.

Karen Clarke & Company estimated on August 28 that the damage will total almost $9 billion in the United States, and $200 million in the Caribbean, where it hit Antigua, Cuba, the Dominican Republic and Hispaniola.

CoreLogic put the damage in Louisiana at $8 billion to $12 billion, and estimated that the damage in Texas would total less than $500 million. Moody’s Analytics also provided a preliminary damage estimate of between $4 billion and $7 billion.

According to Louisiana news site The Advocate, State Farm, which has around 278,000 policies in Louisiana, said it had received more than 7,000 claims as of last week. The National Flood Service said Friday that FEMA had received nearly 100 claims for damage caused by Laura.

On Thursday, Louisiana officials announced that over 230,000 residents still do not have power, and 175,000 have water outages. As of September 3, 21 Louisiana residents have died related to the storm, with the Louisiana Department of Health reporting that at least 8 deaths were from carbon monoxide poisoning related to improper generator use.

In a new report, Hurricane Season: More Than Just Wind and Water, the Insurance Information Institute said that losses from hurricanes have risen sharply over the past 16 years, growing quicker than inflation by almost 7%. Citing Aon director and meteorologist Dan Hartung, the III reported that “2017, 2018 and 2019 represent the largest back-to-back-to-back insured property loss years in U.S. history.”

The Institute blamed these rising costs on populations moving to more hurricane-prone areas like Florida and Texas, and building bigger, more expensive houses in those areas. When these houses—and the expensive property in them—are damaged, the insurance payouts are higher.

Additionally, hurricanes have brought significantly more water inland as climate change intensifies, the report noted. These factors have all caused more flooding and more insured property damage. The Institute said that rising hurricane losses, plus claims related to the COVID-19 pandemic, will likely translate into insurance rates increasing in the near future.

Hurricane Laura Leaves Destruction—and Pandemic-Related Recovery Challenges

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Hurricane Laura made landfall in the United States at 1 a.m. on Thursday, hitting Louisiana and Texas as a Category 4 storm with maximum sustained winds of 150 miles per hour and what National Hurricane Center officials called “unsurvivable” storm surge. In such ferocious wind, thousands of homes and businesses were damaged or completely destroyed, hundreds of thousands were left without power and, as of Thursday evening, at least four people had been killed.

While forecasters initially expected the storm to lose intensity before reaching land, it rapidly intensified this week, becoming one of only 10 hurricanes to make landfall in the continental U.S. with winds over 150 mph since modern recordkeeping began in 1851. After windspeeds nearly doubled on Wednesday, officials in Texas and Louisiana ordered several hundred thousand people in the storm’s path to evacuate, but many were either unable to leave or chose not to. Increasingly severe storms in the area in recent years may have left some feeling prepared or resigned to ride out the storm.

Others faced difficulties related to the pandemic. As Risk Management recently reported, many experts have expressed concern that the COVID-19 pandemic could significantly complicate hurricane season this year, increasing the risk to individuals and businesses and making disaster recovery more difficult. Ahead of Laura, NPR reported that emergency shelters had a hard time safely accommodating evacuees without overcrowding and had to direct many to hotels. Pandemic-related job losses may have ruled that option out for some. Mayor Nic Hunter of Lake Charles, which was particularly devastated in the storm, told NPR that he “suspects the coronavirus pandemic and economic hardship are leading many people to take pause.” The outlet also reported that experts are concerned that mass evacuations from the hurricane could lead to new outbreaks in the region.

Now, the recovery process will undoubtedly be impacted by the pandemic as well.

“The global health crisis is going to have a major impact on recovery from any major storm, including Hurricane Laura—the stress of natural disaster becomes more intense when it unfolds against the backdrop of a highly contagious viral outbreak,” John Dickson, president and CEO of flood insurance provider Aon Edge, told Risk Management in the wake of the storm on Thursday.

For example, he said, “If you think back to hurricanes like Katrina (which hit about 15 years ago almost to date) and create a mental image, you see the community banding together to respond in close physical proximity. Similar images emerged from last year’s prolonged flooding along the Missouri River. In those and other events, assembly lines formed to fill and deploy sandbags—a task impossible to do six feet apart.”

Dickson noted that technology increasingly used by insurers (also known as risktech) would be more important than ever in responding to natural disasters this year as emergency response must be balanced with safe social distancing practices.

“Smart phones and basic technology can help homeowners achieve the recommended preparation steps and stay safe during a storm,” he advised. “For example, taking pictures and videos with date and time stamps could minimize the need for on-site inspections and physical proximity to claims adjusters.”

For insurance professionals, he noted, “The insurance industry is thinking through very tactical steps to ensure policies and procedures are in place to protect those who are on the frontlines when a hurricane hits. Drone technology offers the opportunity to take photos remotely, and computer models help better quantify risk and manage work forces.”

For more insight and actionable guidance on risk management for hurricanes and other natural catastrophes, including disaster preparedness, recovery and insurance, check out the following pieces from Risk Management:

Before Disaster Strikes: How to Prepare for Natural Catastrophes
How does an organization ensure it is prepared to minimize losses and recover quickly following a natural disaster? Long before a disaster strikes and property damage occurs, the best response plans begin with careful negotiation and placement of well-defined property coverage. Read more

Key Considerations for Disaster Planning
Meticulous disaster response planning has never been more critical. When developing a plan, it is important to involve key stakeholders and review every step that your business, your network and your vendors must take if a natural catastrophe impedes operations. A strong plan should address these key questions. Read more

Weathering Hurricane Season During the Pandemic
Pandemic-related social distancing guidelines and supply shortages could make it harder for business owners to protect their properties should a storm happen, making it even more important to have an action plan in place. These key considerations can help businesses owners mitigate potential storm risks amid COVID-19. Read more

Understanding Post-Storm Business Interruption Coverage
Whether in the impacted area or beyond, businesses suffering from supply chain disruptions after hurricanes and other storms should look to their property insurance policies for contingent business interruption coverage. Read more

Natural Disaster Planning During COVID-19
As the COVID-19 pandemic continues, government authorities and disaster-response entities are over-extended and may not be able to provide assistance as readily this year. It is more important than ever that companies make backup plans and assess the potential impact of shortfalls in their disaster response protocols. Read more

The Human Element of Disaster Recovery
Crisis and disaster recovery plans offer a critical advantage when catastrophe strikes, helping mitigate the impact on facilities, information systems and equipment. Just as important, however, is considering how a disaster can affect the company’s workforce. Read more

Ensuring Insurance Recovery After a Hurricane Loss
These seven tips can help policyholders resolve disaster insurance claims in the wake of hurricanes and other natural catastrophes. Read more

Using Captives to Insure Against Black Swan Events

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Until recently, a global pandemic was, in most people’s minds, little more than a compelling plot to blockbuster films and apocalyptic science-fiction stories. A disease drastically changing the way of life and business operations for people across the globe and inciting wide-spread fear, quarantines and stay-at-home regulations was unthinkable for most beyond the “prepper” community. Now, though, after weeks of lives overturned, hindsight is 20/20 (pun intended). Many business owners and executive teams now agree the threat was obvious. A black swan.

As popularized by finance professor and Wall Street trader Nassim Nicholas Taleb in relation to financial markets, the term “black swan” refers to a rare or low-probability event that deviates from what is normally expected but poses critical threat. The 2008 financial crisis, the 2001 Fukushima nuclear disaster, the 9/11 terrorist attack and the dot-com crash of 2000 are all considered black swan events. We can never know with specificity which particular black swan will come, but we can know with certainty that one eventually will. And, due to their severe consequences, we should therefore consider how to make sure our lives and businesses will be robust against them. 

Insurance for Black Swans

Third-party commercial insurance policies often include business interruption coverage. Business interruption insurance protects against losses sustained due to periods of suspended operation. With COVID-19, many businesses considered non-essential have been forced to close and numerous businesses that are still hanging on have experienced challenges to their revenue streams as a result of coronavirus restrictions. This is where this form of insurance comes into play. However, pandemics are not the only black swans that business interruption insurance would cover. It could also cover losses from unexpected events like natural disasters, cybersecurity attacks, terrorist attacks or fallout from climate change. Also, even if a business’s insurance policy does not cover pandemic disease through business interruption, it is possible that other policies might be triggered due to the chain reaction caused by the black swan, such as:

  • Supply Chain Interruption
  • Loss of Key Customer
  • Subcontractor Default
  • Property (e.g., loss of access to business premises due to quarantines)
  • Catastrophic Risks

However, third-party commercial insurance policies are not always enough. These policies are often riddled with exclusions that prevent coverage during the time it is most needed and can lead to a claim being denied. Commercial insurance for an asymmetrical threat like a black swan event can also be extremely costly or difficult to obtain. And in many cases, coverage is simply unavailable. For example, during the avian flu epidemic, many U.S. insurers added an exclusion to their policies, “Exclusion for Loss Due to Virus or Bacteria” (ISO form COP 01 40 07 06). Similarly, the insurance industry responded to SARS by adding exclusions to preclude coverage for losses triggered by business interruption.

Businesses need to review their insurance policies to identify gaps in coverage. Some may want to consider filling these gaps and strengthening their coverage by supplementing the third-party commercial insurance by pooling their risks in a captive insurance company.

Taking Black Swans Captive

A captive insurance company is a licensed insurance company that is usually owned by a related business or its owner. That company can then insure a wide variety of the related business’s risks—risks likely to be implicated in any black swan event such as supply chain interruption, loss of a key supplier or customer, subcontractor default, bankruptcy of certain counterparties, or losses from governmental actions like forced business suspension or quarantines.

Via reinsurance arrangements, the captive insurance company can then pool its risks with the risks of many unrelated business, usually including those in completely different industries. Some of those businesses and industries will no doubt be the beneficiaries of most any given black swan event.  

For example, some physician practices that specialize in elective surgeries have seen their revenues cut by half overnight due to states prohibiting such procedures in order to preserve medical equipment for use by those fighting COVID-19 on the front lines. But other medical practices have seen their revenues skyrocket as COVID-19 has spiked demand for their services. By risk pooling via a captive insurance company, the claims of those practices that are suffering will therefore be paid in part by those that are prospering. This loss-sharing will allow the former to stay in business and continue covering their costs (such as rent and salaries), thereby making the entire economy more robust. And next time around, the proverbial shoes may just be on the other feet. In some cases captive insurance companies may also receive very favorable tax treatment that also provides additional liquidity during times of crisis. 

Preparing for the Next Black Swan Event

The coronavirus has heightened awareness of the need for both risk management and strategic planning to prevent future crises from negatively impacting company financials and viability. Sadly, not all businesses will remain healthy and viable through this pandemic, and it is too late for those impacted by the coronavirus to insure those particular losses. But business owners and executives can take immediate steps now to prepare for the next black swan, whatever it may be and whenever it may come.