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Important Considerations when Purchasing Insurance to Protect
By John E. Heintz and Kenneth Berline
Trotter The week of May 27
through June 2, 2012 has been declared National Hurricane Preparedness
Week.
According to the National Weather Service, “history teaches that a lack
of
hurricane awareness and preparation are common threads among all major
hurricane disasters. By knowing your vulnerability and what actions you
should
take, you can reduce the effects of a hurricane disaster.”
In addition to preparing to protect human
life and minimize property damage in the event a storm strikes,
businesses also
should consider in advance whether they have purchased adequate
first-party
insurance for hurricane-related loss. First-party
insurance policies are a valuable asset that can protect your business
from
loss arising from hurricanes. Such policies may provide coverage for
property
damage, coverage for the extra expenses incurred in dealing with the
effects of
a disaster, losses resulting from the interruption of your business or
the
business of a supplier or vendor upon which your business relies, and
even
expenses incurred in advance to minimize any damage or loss. 1. Determine
Whether the Insurance Policy Provides Insurance Coverage for Damage due
to both
Wind and Flood.
It is essential that you carefully review all aspects of your property policy, including policy exclusions, to determine if loss from both flood and wind is covered. Standard property insurance policies used by the insurance industry typically do not provide coverage for damage to or loss of real or personal property caused by flood. In some locations, insurance companies also may exclude coverage for windstorms, such as hurricanes. Do not be misled by a characterization of an insurance policy as an “all risk” or “all peril” policy—such policies still may contain exclusions for flood and windstorm. Accordingly, it is critical that you carefully examine any exclusions or limitations in the policy for flood and windstorm. If loss for flood and windstorm is excluded, you may want to purchase supplemental coverage or a separate policy to cover loss from these perils. If you decide to purchase coverage for one of these perils (e.g., you buy insurance for windstorm, but not flood), pay careful attention to any language in the policy that may purport to bar insurance recovery entirely if your business sustains loss due to both covered and uncovered causes of loss. 2.
Consider Purchasing
Coverage for Loss of Business Income and Other Coverage Extensions.
The most basic first-party property policy
indemnifies the
insured for the value of the covered property that has been lost or
damaged.
Business owners, however, should also consider purchasing additional
coverage
to compensate the business for loss of income that may occur as a
result of
damage to the insured’s property or the property of its key customers
and
suppliers. Business interruption coverage may indemnify the insured for
the
income that is lost as a direct result of damage by an insured peril to
insured
property. Contingent Business Interruption (CBI) coverage protects
against
income loss or increased expenses suffered as a result of damage by an
insured
peril to the property of another business or individual upon which the
insured
depends. For example, CBI coverage protects against economic losses
caused by
the inability of a “direct” supplier to get its goods to the insured
because of
damage to or destruction of the supplier’s property by a peril covered
under
the insured’s policy. CBI coverage comes in many forms with a variety
of
limitations, so insureds need to choose carefully based on their
particular
critical business relationships. In addition, other important coverages may
provide a
valuable source of recovery. These coverages may include: extra
expense,
interruption by civil authority, ingress/egress, accounts receivable,
leasehold
interest, rental value, royalties, course of construction, demolition
and
increased cost of construction, decontamination costs, debris removal,
and
service interruption. In particular, you should consider the scope of
losses
your business could suffer if an evacuation order is issued in advance
of a
storm and the extent to which such losses would be covered. Your broker should be able to provide
further information
regarding all these coverages and assist you in determining if these
coverages
are right for your business. Similarly, your counsel should be able to
assist
in providing you with an assessment of particular policy wordings that
often
receive various interpretations by courts after disputes have arisen. 3. Consider the Amount of the
Deductible.
In the event of a
loss, you may be required to pay a “deductible,” which is the amount
that you
must pay toward your losses before you can recover from your insurance
company.
For example, many policies set a specific deductible for loss due to
windstorm
and flood. In addition, some policies also may require that a
deductible be
paid for each affected location. The amount of the deductible and
whether it
applies on a “per occurrence” basis typically are negotiable terms that
should
not be overlooked during the renewal process. Although a higher
deductible may
result in a lower premium, carefully consider whether your business
will be in
a position to pay the deductible if disaster strikes. 4. Consider the Per Occurrence Limit,
Aggregate Limit, and Sublimits.
Your policy will
have a limit on the amount of coverage that will be paid by your
insurance
company for a covered loss. A “per occurrence” limit is the maximum
amount that
the insurance company will pay for one particular incident. An
“aggregate
limit” is the maximum amount the insurance company will pay for the
entire
policy period, meaning the entire duration of the policy. A “sublimit”
is any
limit of insurance which exists within another limit. For example, your
policy
may have a sublimit for “flood” or “windstorm,” which limits recovery
for loss
arising out of such events to a specified dollar limit per occurrence,
even
though the policy has a higher overall limit. Your policy also may have
a
provision limiting the amount of coverage for loss due to a “named
windstorm”
(i.e., a storm that has been declared by the National Weather Service
to be a
hurricane, typhoon, tropical cyclone, or tropical depression)
regardless of the
number of coverages, locations, or perils involved including, but not
limited
to, both flood and wind. 5. Compare the Value of Your Property
with Policy Limits and Analyze the Policy's Valuation Provision.
In order to ensure
that you purchase the proper amount of coverage, it is important to
determine
the value of the business’s real and personal property. Real property
value can
be determined in two ways—market value or replacement cost. Market
value
reflects how much money you would get if you sold your business’s real
property. Replacement cost reflects how much it would cost to replace
your
business’s real property based on current construction prices. The
value of a
business’s personal property can be established by examining
inventories of
personal property, including equipment and machinery, which should be
complete
and current. 6. Consider Whether Your Property Is
Underinsured.
In exchange for a rate credit, most
commercial property
insurance policies contain a coinsurance provision that requires the
insured
business to insure the covered property to a specified percentage of
its full
value—usually 80, 90, or 100 percent. If the business sustains a loss,
and it
is determined that the limits carried are less than those required by
the
coinsurance provision, the insured business’s recovery for loss will be
limited
to the same percentage of loss as the ratio of the amount of insurance
carried
to the amount of insurance required.
Your business may be able to
avoid this issue by obtaining a policy with an agreed value provision.
An
agreed value provision typically provides that the requirements of the
coinsurance clause have been met by the insurance amounts shown in the
policy.
The insurer typically will require you to submit a signed statement of
the
property values as a condition of including an agreed value provision
in the
policy. You may be required to provide a recent appraisal or
explanation to the
insurer setting forth how the values were determined. __________________________________ About the Authors: John E. Heintz and Kenneth Berline Trotter are attorneys in Dickstein Shapiro LLP’s Insurance Coverage Practice, and both have represented clients in securing coverage for property and business interruption losses arising out of hurricanes and other catastrophic events. Mr. Heintz may be reached at [email protected], and Mr. Trotter may be reached at [email protected]. This article is copyright protected by Hotel-Online. Reuse by other media or news outlets or organizations is prohibited. Personal use and sharing via social media tools are permitted. |
Contact: Dickstein Shapiro LLP John E. Heintz [email protected] Kenneth Berline Trotter [email protected] |