Insurance Coverage Issues When Disaster Strikes
With the recent hurricanes and storms that caused so much destruction and disruption, what comes to mind is whether or not the people and businesses were properly insured for such events.
There is so much to think about…
Was it wind, flood, storm surge, power outage, off-premises power outage, fire, power surge, direct physical damage from a covered peril? How about concurrent causation – heard about that? It is enough to make your head spin, and that’s not even the half of it.
The true test of your insurance coverage is when there is a claim. You can buy insurance as inexpensively, even expensively, as you want. You think you got a great deal – but if your expectation is to have a claim covered and it’s not – how good was the money you spent in the first place?
What we have seen from the recent storms is that once again many insurance companies are letting you know how they view the insurance coverage you bought. They know what every single word in the policy means, and they are holding you to it. If there is a clause or an interpretation that can be used to not pay a claim, they are using it.
In some cases we are seeing denial letters quoting from coverage forms that don’t even exist in a client’s policy, or asking for verification that an event actually took place, while it’s been documented all over the news as to exactly what happened.
Here are the two we have seen come to bite some policyholders in the “you know where”:
Not Reviewing Insurance Coverage in Detail – Insurance policies are contracts. Insurance companies and their claims adjusters know the significance of every word in the contract and it is important for you to know how the policy will respond to a claim. You have an expectation that a loss is covered. Unfortunately, exclusions are not discovered until a loss has occurred.
Coverage gaps, underinsured and even over-insured issues exist. The policies were not reviewed properly or with an eye toward recovery. Companies need to validate their insurance; if the policy is not written correctly from the start, then you are just wasting money as it will not respond the way you assumed it would. The US Department of Labor estimates that 40% of businesses never reopen after experiencing a disaster. 25% of surviving businesses will lose their market and shut down within two years of a misfortune.
After Sandy, many small business owners, especially in the hardest hit New Jersey Shore areas, did not have the resources to get their businesses up and running and, even if they did, their customer base was devastated for some time. Flood coverage was limited at best, and the remaining coverage that they might have had was minimal and did not contemplate the multiple perils involved that wreaked havoc on their businesses.
Not Performing a Risk Assessment – The biggest assumption business owners make is that the current insurance program is set up properly. The real problem is that an assessment has not been performed to evaluate the true risks and exposures of the company business operations. Often the focus is on the premium not the coverage. Without knowing what the true risk and exposures are, you can’t intelligently purchase property insurance. Thus, the insurance program is flawed from the start.
Unfortunately, this error is often discovered when an underinsured or uncovered loss occurs. Beyond the insurance product, often overlooked is the risk transfer mechanism during contract review. Many organizations rely on their lawyers to advise them in this area. The problem is that some lawyers may use boilerplate language or not fully appreciate the insurance language as it relates to the operations and associated liabilities. The business owner or CFO acting as the risk manager and not being an expert in insurance can miss these finer points as well.
Assessing Your Property
Whether you are a very small company or a large multi-national organization here are few things to keep in mind when assessing your property exposures:
- When reviewing certain hazards such as earthquakes, consider what is below ground like the foundation itself, utilities and stored business property.
- Local ordinances, building codes or environmental requirements may be enforced whereby you might be required to demolish partially damaged buildings in order to completely rebuild with property that complies with current building codes.
If the types of codes described above are enforced, that is considered an indirect loss to the undamaged portion of the building, not a direct loss. Your loss now includes the value of the undamaged part as well as the cost of tearing it down and removing the debris.
- In measuring the extent of a possible business income loss, be sure to calculate the time required rebuilding and getting back into business and also the additional time it may take to win back customers that have gone to the competition during your downtime.
- Don’t overlook such things as, buildings or additions under construction, alteration or repair; tanks, towers, stacks, chimneys, windmills, waterwheels or smokestacks; wharves, piers, pilings and docks; retaining walls of any type; foundations, excavations and underground property of all kinds.
Just by these few examples you get the idea that there is a significant amount of exposure that can escape your immediate attention.
Devise a Plan
When it comes to insurance coverage for your business, learn from the misfortunes of others. Rather than become a statistic, put a plan in place that includes reviewing your coverage in detail and performing a risk assessment. The future of your business depends on it.
This is a guest post by Scott Wolff of Premier Risk Management.
Scott is a partner with Premier Risk Management, LLC. He and his team advise clients on property and casualty coverage along with directors and officers, errors and omissions, intellectual property, new media, and internet-related coverage. Premier is an advisory group and does not sell insurance.