“It's not unusual for a large retailer to have 40, 70, 100-plus properties, and many of them could be affected,” he explains. “The storm was so big and the damage was so widespread. And it's not all one thing: You have wind damage and power outages and flooding and snow—

or a combination of those—affecting different locations as well as customers and suppliers.” 

In the coming months it will be made clear how insurance policies will respond to losses depending on the specific terms and conditions of each contract. But Schweers says he definitely anticipates disputes over deductibles, even though regulators in some of the hardest-hit areas have told insurers they cannot use hurricane deductibles—which are based on a percentage of insured value, rather than a flat deductible (see stories on pages 6 and 42).

“From the attorneys I have spoken to, they clearly think disputes will arise if there's enough money at stake,” Schweers says. “We could be talking about a claim for $500 million. There's a lot riding on that [deductible] decision.” 

MYRIAD FACTORS IN PLAY

Another issue yet to be determined is whether companies' policies are occurrence-based or location-based. In occurrence-based policies, one event—in this case, Sandy—would be considered a single occurrence causing a loss to all locations. But with a location-based approach, separate deductibles could be applied to losses at each location. 

“Companies are consulting their legal counsel, asking how this is all going to shake out,” says Schweers, who advises clients to stay in communication with insurers and to collaborate with them. Companies should give their insurer immediate notice of a potential loss and, after several weeks, should provide insurers with a range of the magnitude of losses in order for the insurer to properly reserve. 

“This is critical to the end result: the settlement,” he says. It could take six to 12 months to reach a settlement, he adds, but it's not unusual for it to take up to 24 months on a large account.

Al Tobin, managing principal of Aon Risk Solutions' Property Practice, says Aon expects “direct property damage, power outages, blocked buildings and civil authority to cause large Business Interruption losses.” 

“Most commercial policies provide flood coverage; however, some policies contain specific language limiting or even excluding coverage in flood-susceptible areas,” he notes. “All organizations should review their existing policies immediately.”

Dan Gerber, co-chair of Goldberg Segalla's Global Insurance Services Group, agrees that causation will be an issue in Business Interruption claims, adding, “Most policies that exclude storm-surge flood coverage afford limited coverage for flooding caused by sewer or drain backup. Here, again, causation will be an issue. A determination is required as to whether the loss resulted from initial flooding or perhaps debris in a drain.

“One of the key issues is determining appropriate restoration periods,” Gerber adds. “This is the period when a business is again able to commence normal operations. Generally, coverage is only afforded for loss up to the point of restoration of normal business.” 

Agents and brokers may also face litigation. Gerber says some can expect scrutiny over the coverage they have recommended to clients, resulting in some Errors & Omissions claims. 

'HUGE BATTLES' AHEAD

Finley T. Harckham, shareholder in the Insurance Recovery Group at law firm Anderson Kill & Olick, says he expects “huge battles” between business policyholders and insurers over whether Business Interruption losses are covered. 

“It all depends on the policy and triggers,” he says. “Much of the coverage is tied to physical damage—damage covered under your policy.” 

While Business Interruption covers businesses for losses stemming from unavoidable interruptions in their daily operations as a result of physical damage, he explains, if that damage was due to an uncovered peril—flood, for instance—coverage may not be available. 

Also, businesses may have coverage for loss resulting from evacuation by order of civil authority—triggered when authorities close off access to a damaged area. Damage to the insured's own property is not required to trigger coverage, but the order typically must result from property damage of a type covered by the insurance policy. 

Businesses that are not actually forced to close may be able to tap their CBI coverage, which is triggered when policyholders do not themselves suffer physical damage but still lose revenue after a property loss sidelines a major supplier or customer base. CBI is a standard provision in many Property insurance policies, though many small businesses are not aware of it, Harckham says. “For larger companies, Business Interruption dwarfed Property losses after Hurricane Katrina,” he notes. “Sandy won't be Katrina-like [in terms of loss size], but there are some parallels.” 

Harckham recommends businesses research their policies as they assess income losses from Sandy's destruction and delays. 

“Too many businesses do not think about insurance unless their premises are damaged—or if they do, they fail to calculate the full range of loss,” he notes. “Small businesses in particular may not even be aware of their Business Interruption coverage, let alone their Contingent Business Interruption coverage.”