Insurance considerations for extreme weather events
This is an opportune time for business owners to assess insurance coverage for recent weather damage and plan for related legal issues.
As commercial policyholders dry out from the havoc wreaked by this year’s uncharacteristically cold winter in Texas, the relative “calm before the storm” that comes in the springtime provides an opportunity to assess insurance coverage for weather-related events. In connection with that assessment, this article provides a brief overview of both the coverages that may respond to extreme weather events, and insurance-related legal issues that may arise out of those events.
According to the National Oceanic and Atmospheric Administration, there were 22 separate billion-dollar weather and climate disasters in the United States alone in 2020. Losses from the February 2021 winter storm in Texas are estimated to be in the $10-$20 billion range. With a staggering rise in extreme weather events around the globe, there is no indication that the coming years will be any different, or any less expensive.
Assessing available coverage
The structure of commercial property policies can be daunting. Policies differ and should be reviewed in their entirety. Nevertheless, there are common coverages found in most policies that should provide coverage for losses due to catastrophic weather events:
- Property damage coverage: Most commercial policies are written as “all risk,” meaning that they cover all risks of direct physical loss or damage to covered property, unless specifically excluded. Even in an “all risk” policy, it is common to see sublimits for specific perils that are not excluded, such as earth movement, flood, or named windstorms.
- Business interruption (“BI”)/extra expense: ”Time element” coverages, which provide coverage for income loss resulting from the inability to put damaged property to its normal use, are contained in many policies. The most common time element coverage is BI coverage, which is designed to replace income that would otherwise have been earned by the business had no loss or damage occurred. The related extra expense coverage reimburses the insured for those expenditures in excess of normal operating costs that are required to keep the business going while repairs to property are made.
- Contingent business interruption (“CBI”): This “time element” coverage insures against loss of earnings when the businesses the policyholder depends on are disrupted by a covered peril, for example if a hurricane destroyed a key supplier’s or distributor’s facility. Availability of CBI coverage can be critical in an interconnected world that is increasingly facing extreme weather, with recent examples including hurricanes impacting medical device suppliers in Puerto Rico and catastrophic flooding in Thailand disrupting the flow of electronic components.
- Other time element coverages: Other coverages include but are not limited to:
- Civil/military authority: covers losses when a government order bars access to an insured’s property due to a covered peril at a property other than the insured’s premises. Coverage may be limited to instances where the damage is at an adjacent property or at property within a specific geographic area;
- Ingress/egress: covers losses when an insured cannot gain access to its property for a reason other than government action; and
- Service Interruption: covers the interruption of the insured’s business caused by utility failure away from the insured property and caused by a covered peril.
Potential insurance-related legal issues
Although many coverage claims will be resolved outside of the courthouse, legal questions that could arise from extreme weather events include:
- What if a property suffers loss from two separate causes? In an extreme weather event, multiple perils may combine to cause losses. If all of the perils are covered, policies may contain language specifying how the sublimits relate to each other, with the most favorable language allowing policyholders to “stack” sublimits. When one of those perils (such is wind) is covered but another (such as flood) is excluded, courts in different jurisdictions will apply different tests to determine coverage, absent express policy language, such as more restrictive “anti-concurrent causation” clauses.
- Was there more than one “occurrence”? The number of “occurrences” involved in weather events can have an impact on coverage, including the number of limits or deductibles that could apply. For example, is a hurricane that makes three landfalls one or three “occurrences”? In all instances, the first step is to consult the policy language. Some policies define “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Other policies may deem all events occurring within 72 hours of each other as a single “occurrence.” The facts of the event and the law will also have an impact, including whether a state’s courts apply a “cause” theory or an “effect” theory.
- Which deductible applies? Commercial property policies may have different deductibles for different types of perils. For example, Named Windstorm coverage may be subject to higher deductible. Contingent business interruption, on the other hand, may have its own deductible. If a policyholder’s supplier suffers damage from a Named Windstorm that results in a CBI loss to the policyholder, policy language should dictate which deductible applies. Fundamental principles of insurance policy interpretation should be considered when interpreting such language, including the policies must be interpreted as a whole, with meaning to be given to all provisions.
- Which “dependent” businesses are covered under Contingent Business Interruption coverage? Again, policy language is key in determining which dependent businesses are covered. Some policies limit coverage to losses resulting from damage to “direct” suppliers or customers, whereas other policies may contain a schedule of the specific dependent businesses or types of businesses that are covered. Damage to distant suppliers and customers not in privity with the insured may not trigger coverage if the policy does not specifically include coverage for such entities.
Complex weather systems may bring with them complex sets of facts as well as complex legal problems. In the unfortunate event that a company suffers losses due to flooding, tornadoes, droughts, wildfires or hurricanes, policyholders should review their policies in advance so they can be prepared to take full advantage of available coverage.
Emily Garrison (egarrison@honigman.com) is a Chicago-based partner in law firm Honigman’s Insurance Recovery and Advisory practice group. She is an experienced litigator and provides counsel to corporate policyholders in disputes concerning, among other things, commercial general liability, directors & officers liability, cyber liability, professional liability, employment practices liability, first party property damage and environmental liabilities.
Keep reading: