How Ida will impact homeowners, business policies
Part 1 of 2: From additional living expenses to lost income coverage, review what’s next as cleanup efforts are underway.
Hurricane Ida has moved through the country, leaving downed trees, flooded areas and other debris in its wake. And this is just the beginning of the story. Many have evacuated, and the storm left 1 million residents of Mississippi and Louisiana without power. Areas of New York have been flooded, and there has been flooding throughout the path of the storm. Central Park received 7.1 inches of rain, and Newark, New Jersey, received 8.4 inches.
Average temperatures in Louisiana and Mississippi range in the 80s and 90s, with heat indexes in the high 90s, which has caused the National Weather Service to issue heat advisories. While officials are trying to restore power as quickly as possible, they warn that it may take weeks for power to be restored. Generators are particularly helpful in providing temporary power and air conditioning. Federal Emergency Management Agency (FEMA) has sent 200 generators to Louisiana and more are expected.
Without electricity, there is no air conditioning in residences, businesses or emergency shelters. Hospitals, nursing homes, police and fire departments are all without power. Vehicles and generators will run out of gas as gas pumps need electricity to pump fuel, and lack of power to appliances will lead to food spoilage and equipment damages. More than half the stations are currently out of fuel, and others don’t have electricity to pump fuel. Cell phones will lose power and water treatment plants will be affected as well. This leaves people without air conditioning, water, transportation and communication. The relief agency World Central Kitchen is already preparing to serve 50,000 meals a day for weeks on end. Those who evacuated have been told to stay away until things are more normal, which brings up an interesting scenario that can readily apply to future storms as well.
Homeowners issues
Homeowners policies provide coverage to insureds when a civil authority has prohibited use of the “residence premises” due to direct damage to neighboring premises by a peril insured against, and coverage is provided for no more than two weeks. Coverage is also provided when a loss makes the “residence premises” not fit to live in as a result of a covered loss under additional living expense coverage. Coverage is for the shortest time required to repair or replace the damage, or if they permanently relocate elsewhere. What does this mean to those insureds who left their premises because of evacuation requirements by the authorities because of predicted but not yet happened damage, and for the inability to return home due to the widespread loss of utilities?
The HO 00 03 policy excludes power failure if the failure of power or other utility service takes place off the “residence premises.” An exception exists for a power failure that results in a loss from a peril insured against on the residence premises; the policy covers that loss. So if the power failure starts a fire that fire is covered.
If an insured evacuated because of orders of civil authority before any damage occurred, and there is no damage to the residence premises, but the insured cannot return to his property because power is out, is there coverage under additional living expenses?
For additional living expenses coverage to apply, a loss must be covered under Section I that makes the premises not fit to live in. Wind from the hurricane caused widespread power outages; wind is a covered cause of loss. Lack of air conditioning and power when the temperature is in the high 80s and 90s could be seen as making the premises uninhabitable; therefore there could be coverage for additional living expenses.
This is much easier if the insured’s premises received damage from the storm as well. If the insured’s property is damaged making the premises unfit to live in, then additional living expense coverage applies as outlined.
Business income
Many businesses are closed as well, and employers and employees alike had to evacuate to avoid the storm. Business income coverage, if purchased, will cover the lost income if a covered cause of loss damaged the business, or if physical damage away from the business caused the business to have to close, such as downed trees causing road closure or due to acts of civil authority. There is, of course, a 72 hour waiting period before such coverage takes effect.
The damage directly affecting the business must be due to a covered cause of loss for business income coverage to apply. Typically wind damage from the hurricane is a covered cause of loss; however, if the damage was due to a flood, then there would need to be flood coverage added to the policy for the business income coverage to apply.
Most small businesses are covered by a business owners policy, which includes business income within the form. However, both the BOP and the commercial property causes of loss forms contain a utility services exclusion that precludes coverage for loss or damage caused by utility failure to the premises if it involves equipment used to supply service to the business from the utility or other source that is away from the business.
Therefore, a problem could arise if, for example, the business lost power but was otherwise undamaged by the hurricane, but the hurricane knocked out transmission lines that were not on the insured’s premises. However, if the windstorm caused damage to a transformer on the insured’s premises, then the exclusion would not apply and coverage would be available. Coverage may be purchased for off-premises power failure. If a business purchased that endorsement, coverage could be available if a hurricane tore down lines away from the insured premises, causing it to shut down.
If covered, the business income coverage would include the insured’s normal operating expenses that continue even while the business is shut down, which would include such things as utility charges for the period of the shutdown, leased operating expenses and salaries of the employees.
For the civil authority coverage to be triggered, the insured must incur a loss of business income because the civil authority prohibited access to the described (insured) premises. The coverage grant requires there be direct physical loss of, or property damage, away from the insured premises as the result of a covered cause of loss.
The forced evacuation of certain areas and the closing of highways and bridges that lay in the path of a hurricane — which already had damaged property elsewhere — would appear to meet this requirement for coverage. Again, a windstorm must be a covered cause of loss on the business’ policy and the business must sustain a loss of business income because the evacuation order shut it down.
Another coverage provision included on the business owners policy is that of up to $5,000 for damage to insured businesses that lose business income because one of their “dependent properties” is damaged by a covered cause of loss. A dependent property is one that delivers materials to the insured, accepts the insured’s products or services, manufactures products under contract for the insured or attracts customers to the insured’s business.
For example, a restaurant may be in a shopping center that a large, prestigious department store anchors. Shoppers might generate the bulk of the restaurant’s business. The occurrence triggering business income coverage for the restaurant would have to occur at the department store for coverage to emanate from the dependent properties provision.
While flooding caused by hurricanes could lead to business interruption losses, flood is not a covered cause of loss on most policies. Although flood insurance may be available to commercial property insureds through the National Flood Insurance Program, the NFIP coverage does not include a provision for business interruption losses. So, if a business is affected solely by floodwaters and not by actual windstorms, business income insurance may not be available.
Editor’s note: Part two of this series will review extra expenses and what insurance departments are doing in response to the storm.
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