Don't let the polar vortex freeze you out of insurance coverage

The so-called “polar vortex” of frigid air that swept the United States in late January 2019 was blamed for more than 20 cold-related deaths and shattered low-temperature records across the country. One hospital in Chicago treated more than 50 people for frostbite during the polar vortex.

The bitter cold also wreaked economic havoc on businesses throughout the world, including a costly halt to the aviation and hospitality industries, and devastated businesses in the Midwest and Northeast U.S. regions through major losses resulting from freezing water and fuel pipes. Preliminary estimates indicate that the polar vortex will cost the U.S. economy billions of dollars.

As the situation stabilizes and the focus turns to economic recovery, businesses will begin to examine their operations, assess their losses, and look to their insurance for compensation. Many businesses may have a valuable asset available in the form of property insurance that can play an important role in helping to recover losses stemming from the polar vortex.

This insurance may provide coverage not only for physical damage to and loss of property, but also for economic losses arising from an inability to conduct business at the same levels as before. It is important that businesses take the following steps as quickly as possible:

1. Assess the extent of their losses;
2. Assess the scope of coverage for those losses; and
3. Provide their insurers with prompt written notice of a loss or claim.

Pursuing an insurance claim following a large-scale loss is often a complex and challenging process. We find that a well-coordinated team of internal business people, outside coverage counsel, and an accounting consultant can play key roles in helping to maximize any insurance recovery.

Businesses pursuing claims for polar vortex losses may face a host of coverage issues that insurers are likely to assert. The following are key issues that we believe are likely to arise.

Related: Preparation tips for the ‘average’ winter weather event

Triggering coverage

First-party property policies generally provide insurance for “direct physical loss of or damage to property.” An “all-risk” property policy insures against all risks of loss unless specifically excluded. Traditional losses under first-party property policies involve tangible property, including buildings, permanently installed machinery or equipment, inventory, and fixtures.

Most property insurance policies also insure personal property. These policies or endorsements will cover a business’ personal property, including product, supplies, materials, machinery, and stock. Property insurance may exclude intangible losses. However, some cases hold that if the property is rendered unusable, such as by freezing or the presence of contaminants, a first-party property policy may provide coverage.

Insurers may contest whether freezing constitutes property damage. Under an “all-risk” policy, a policyholder only bears the burden of showing that it suffered a fortuitous physical loss of or damage to insurable property during the policy period. To avoid paying an otherwise covered loss, an insurer bears a steep burden of proving that the loss is excluded.

Related: 10 ways to prevent frozen pipes & avoid costly insurance claims

Specifically, regarding freezing during the polar vortex, businesses may have experienced property damage by way of expanding—and then contracting—pipes and personal property damage to material or products transmitted in pipes, such as fuel, left unusable by an altered physical state caused by extreme cold.

Losses stemming from ruptured pipes caused by freezing should constitute property damage triggering a policyholder’s property coverage. Under commonly used commercial property policy language, to exclude losses arising from “water, other liquids, powder, or molten material that leaks or flows from plumbing heating, air conditioning, or other equipment (except from fire protective systems) caused by or resulting from freezing,” an insurer must prove that a policyholder did not “exercise reasonable care to maintain heat in the building or structure” and did not “drain the equipment and shut off the supply if the heat is not maintained.”

The fine print

Accordingly, a policyholder’s reasonable care leaves the policy exclusion inapplicable. At worst, for a policyholder facing a recalcitrant insurer relative to this exclusion, an insurer’s denial premised on this language raises questions of fact on which the insurer faces a steep burden.

Likewise, losses stemming from the altered physical state of material or products transmitted in pipes should also constitute property damage under an all-risk property policy. All-risk policies typically do not contain any exclusion applicable to this situation.

Moreover, courts have found in the liability insurance context that physical injury unambiguously connotes damage to tangible property causing an alteration in appearance, shape, color, or in other material dimensions. The same reasoning applies here to find that a policyholder’s losses arising from materials that were left unusable by freezing constitute covered property damage.

Related: Here’s your winter storm reality check: Are you prepared?

Deductibles and policy limits

Experience tells us that when a policyholder makes a coverage claim, insurers frequently seek to reduce their exposure. In response to claims for polar vortex losses, insurers may rely on deductibles and policy limits to pay less.

A deductible is the amount that the policyholder must pay toward its losses before recovering from the insurance company. Some policies call for a complex calculation tied to a percentage of the value of the insured premises to determine a policyholder’s deductible. In connection with time element coverages, such as business interruption, deductibles may be stated as a number of hours or days that must pass before coverage applies. Policyholders should pay attention to make certain that it is not paying a greater deductible than what the policy requires.

Property insurance policies also limit the dollar amount that an insurer will pay for a covered loss (i.e., limit of liability). A per occurrence limit is the maximum amount that the insurance company will pay for one incident. An aggregate limit is the maximum amount that the insurance company will pay for the entire policy period. A sublimit is any limit of insurance that exists within another limit. Policyholders should not necessarily accept an insurer’s determination of what policy limit applies. Frequently, insurers seek to reduce a policyholder’s claim for economic loss by improperly applying sublimits that are meant for physical damage losses.

An important factor in determining the number of deductibles or limits that apply to a given loss is the “number of occurrences.” Courts tend to focus on the cause of the loss in assessing the number of occurrences. Courts frequently find in large-scale loss situations that a single occurrence has taken place. Insurers may frame the polar vortex as comprising multiple occurrences in an attempt to limit or eliminate coverage by applying multiple deductibles.

Notwithstanding, policyholders possess strong arguments that the polar vortex constitutes a single occurrence. Likewise, policyholders should be aware that a court may rule that one occurrence took place for purposes of determining the number of deductibles, but multiple occurrences took place for purposes of policy limits applicable on a “per occurrence” basis.

Those who have suffered losses because of the polar vortex may have substantial financial protection through their insurance policies. Policyholders should consider their coverage possibilities and act promptly to recover all benefits available under that coverage.

Related: The big freeze: 5 signs your pipes are frozen and how to thaw them

Jared Zola is a partner in Blank Rome’s policyholder-only insurance recovery practice, based in the Firm’s New York office. He can be reached at jzola@blankrome.com.