What are some examples of anticipated coverage problems?

Along the coast it's hard to tell which came first—the winds that took off the roofs or the storm surge that moved houses into roads or simply flattened them. This is different from Andrew because much of the damage is storm-surge related, not wind-related. The flooding in New Orleans wasn't directly caused by the hurricane; it appears to be the result of the levees not holding.

In addition, evacuation orders were given before the hurricane-force winds struck. The hurricane then struck and caused widespread damage in the area, although wind may not have directly damaged an individual business or home. But then the area flooded, directly damaging buildings. How will coverage be determined?

Both the ISO commercial property and homeowners insurance forms provide coverage for direct, physical damage to insured property. The homeowners policy also offers coverage for additional living expenses (ALE) that indemnifies the insured homeowner for the difference between living costs before and after covered loss. In like fashion, many businesses carry business income insurance, which provides coverage for the loss of income caused by a suspension of business. Business income forms require that the suspension of operations be caused by a covered cause of loss.

If we say that windstorm was the cause of loss, direct property damage coverage as well as ALE and business income coverage likely would be available through these policies.

However, if the windstorm didn't actually damage the building or residence, but flood waters did, would direct property damage and consequential loss (BI, ALE) be available through standard property policies? Probably not.

Residents and business owners may carry flood insurance, which would provide coverage for direct property damage caused by flood waters.

However, flood policies written through the National Flood Insurance Program (NFIP) do not offer contingent coverage such as business income or ALE. Therefore, if flood is the cause of loss, insureds calling on NFIP flood coverage will have coverage for direct damages. BI and ALE will not be available.

What happens if, say, a roof is blown off by heavy winds, and then a building is flooded? Since the roof damage would have caused a suspension or business—or residents to flee the premises—contingent business income and/or ALE coverage might be triggered. The coverage might be limited, however, to an estimated time in which it would reasonably take to repair the wind damage. There would be no coverage for extended suspensions that result from flood.

If wind did not damage the building at all, consequential damage coverage would not be available.

ISO business income forms also offer coverage for loss of income caused by a suspension of operations resulting from actions of civil authorities. The civil action must have been caused by damage from a covered cause of loss at property away from the insured premises. Insurers may acknowledge that winds from Hurricane Katrina caused property damage in, say Florida, before hitting the Gulf Coast. If the evacuation order can be tied to this direct wind damage, business income coverage due to civil order may be triggered.

As illustrated in the two cases posted today under Litigation Watch, the actual cause of loss may be a question of fact that is situation-specific. Final coverage determinations and the extent of available insurance will depend upon whether wind or water caused the loss.