COMMERCIAL PROPERTY INSURANCE COVERAGE AND CLAIM MEASUREMENT ISSUES SPECIFIC TO CATASTROPHIC EVENTS FEBRUARY 7, 2013 Raymond S. Hutnik, CPA, CFE, CFF, FCPA Marsh Risk Consulting Tracy Alan Saxe, Esq. Saxe Doernberger & Vita, P.C. Barry Fleishman, Partner Kilpatrick Townsend
RECENT CATASTROPHIC LOSSES A SIGN OF THINGS TO COME? 2012 was a quiet year until Superstorm Sandy Q4 2012 ACC AMERICA 8TH ANNUAL WINTER CLE SKI January 30, 2015 1
OBTAINING APPROPRIATE INSURANCE Direct Physical Damage Time Element Losses Sample First-Party Commercial Property Policy: Contingent Losses Civil Authority Increased Building Costs Ingress/Egress Service Interruption Preservation of Property Valuable Papers Loss Adjustment Consultant Coverage 2
PREPARING FOR THE UNPREDICTABLE ENSURING THAT LOSSES ARE FULLY RECOVERED: STEP ONE Step One: work with your broker and confirm that policy coverages and limits for your property and potential loss of income are sufficient How accurate are your reported values for property and business interruption? Test your business income limits, and calculate your anticipated maximum business interruption loss (AMBIL) amount for key locations Are deductibles too high (flood, EQ, wind)? Are limits and sub-limits sufficiently high (property, BI, service interruption)? Are Contingent Business Interruption coverages in place for both direct CBI and indirect CBI events Exclusions, waiting periods, valuation considerations 3
PREPARING FOR THE UNPREDICTABLE ENSURING THAT LOSSES ARE FULLY RECOVERED: STEP TWO Step Two: have your team in place In-house team - Risk manager - Claims manager - Safety manager - Corporate counsel - Operations, finance, IT Outside experts - Claims advocacy - Forensic accounting - Claims engineering - Legal 4
COVERAGE OBLIGATIONS Don t lose coverage because of an oversight! Timely notice Protect evidence, including computer information and e-mails Responding to carriers/outside adjusters Proof of claim compliance Preservation of property (sue and labor) Avoidance of voluntary payments Independent appraisal (sometimes) 5
ADJUSTMENT = NEGOTIATION Each of these items usually ends up as disputed Quantum - Property damage - Business interruption Coverage issues - Causation - Mitigation - Exclusions Don t self-exclude Expect to need rebuttal ammunition/facts Expect the insurance company to be assisted with lawyers and accountants The adjustment process will be like any other business negotiation/know what you what to get and judge the benefits of formal adjudication ACC AMERICA 8TH ANNUAL WINTER CLE SKI January 30, 2015 6
QUESTION FOR PANEL AND AUDIENCE A manufacturing plant that operates 24 hours per day, 7 days per week is forced to shut-down with the threat of an impending hurricane. As it turns out, the hurricane only causes minimal damage, but the impact of the shut-down causes a significant business interruption loss to the plant. Can the manufacturing plant recover its business interruption losses? 7
TYPES OF COVERAGE PHYSICAL DAMAGE AND TIME ELEMENT Issues typically raised by insurers during the adjustment process Property must be covered under policy Peril must not be excluded Replacement Cost vs. Actual Cash Value Comparable Material and Quality Limitation Code Upgrade Coverage As was vs. As built Traditional Time Element Period of Indemnity time to complete repairs plus extended period Covers lost profits Contingent Time Element Impact due to damage sustained by a supplier or customer 8
QUESTION FOR PANEL AND AUDIENCE As a result of Hurricane Ike, Houston imposed a dawn-to-dusk curfew. Should losses incurred by businesses, such as restaurants and bars, be covered under the Civil Authority Coverage? 9
TYPES OF COVERAGE CIVIL AUTHORITY AND SERVICE INTERRUPTION Losses caused by acts of Civil Authority that impact access to their facilities May apply when government acts prohibit access to property of suppliers, providers, or vendors Some policies require a prohibition of access Often limited to 30 days from date of civil action prohibiting access Damage to utility (electric, gas, data ) interrupts service to your location Damage to T & D lines typically excluded Caused by covered peril (wind vs. flood) What happens when utility intentionally shuts down grid to prevent further damage? 10
ASSESSING COVERAGE PLUGGING THE HOLES Analyze the policy (protect attorney client privilege) Determine applicability of deductibles, retentions, and sub-limits Collect facts that support all losses potentially covered It s up to the insurance company to make the case why a potentially covered loss is not covered Depending on the circumstances, review the cause of loss It s up to the insurance company to establish facts supporting an exclusion There always are disputed issues Assess choice of law and choice of venue issues (which applicable jurisdiction is most favorable?) 11
POST-LOSS ACTIVITIES INITIAL STEPS FOR OBTAINING FINANCIAL RECOVERY Perform initial damage assessments Inspect loss site Take photographs and/or videos to capture extent of damages Create inventory/lists of damaged items Meet with vendors/contractors to obtain replacement cost or repair costs for damaged buildings and equipment Experts needed? Create overall estimate of loss Present estimate to adjuster Adjuster sets reserves Adjuster processes advance payment 12
MEASUREMENT OF THE LOSS MAXIMIZE RECOVERY BY ALLOCATING TO THE RIGHT COVERAGE BUCKETS Physical damage Buildings, equipment, inventory Sub-limits: debris removal, expediting Exclusions: nuclear, environmental Time element losses Business Interruption/mitigating costs Inefficiencies and additional costs to operate = extra expenses Time element extensions Extended period of indemnity Contingent time element/contingent business interruption (CBI) Service interruption Ingress/egress, possibly civil and military authority 13
ISSUES THAT INHIBIT SETTLEMENT ISSUES ENCOUNTERED FOLLOWING RECENT CATASTROPHES Period of Indemnity Multiple Perils Consequential Loss Nuclear Exclusion Rolling Blackout Actual Loss Sustained Loss of Market/ Market Conditions Idle Period Concurrent Causation Contingent Business Interruption 14
CONCURRENT CAUSATION Concurrent: Two or more independent and unrelated events Wind- Storm D A M A G E Flood Courts disagree over application of doctrine of concurrent causes 15
QUESTION FOR PANEL AND AUDIENCE Small fire causes tremendous damage due to mold infestation after sprinklers soak sheetrock, carpets, paper and other organic material. Is there coverage under fire (Commercial Property) policy that excludes mold? 16
CONCURRENT CAUSATION Efficient Proximate Cause Fire Sprinkler Triggered Water Damage Mold Damaged Sheetrock What is proximate predominant, first, or most-recent cause? 17
CBI POLICY LANGUAGE Direct physical loss or damage to a dependent property (supplier or customer) The loss or damage is caused by a covered cause of loss The loss results in a suspension of operations at a location of supplier or customer 18
EXAMPLE OF TYPICAL 2011 JAPAN EARTHQUAKE LOSS SCENARIO Guardsman Nisto Wheaton Digital Indirect Auto Maker 1 Freeweight RENA Indirect Auto Maker 2 National Axle Delta Direct Auto Maker 3 MAX Manufacturing 19
EARTHQUAKE DAMAGE RESULTING BI, CBI CLAIMS (EXAMPLE) Policyholder: BI / CBI Loss Guardsman $20mm Nisto $10mm Wheaton digital $50mm Freeweight $100mm Rena $300mm National Axle $40mm Delta $30mm Max Manufacturing $50mm Carrier Insurer 1 $140mm Insurer 2 $245mm Insurer 3 $215mm BI = $300mm CBI = $300mm 20
KEY TAKE AWAYS Being faced with an event...just a matter of time? Be prepared Review coverage Team in place Have your facts and evidence in place Be proactive Take charge of the claims process Differences are inevitable Assess your options 21
THANK YOU! ANY QUESTIONS? Raymond S. Hutnik, CPA, CFE, CFF, FCPA Marsh Risk Consulting raymond.s.hutnik@marsh.com Tracy Alan Saxe, Esq. Saxe Doernberger & Vita, P.C. tas@sdvlaw.com Barry Fleishman, Partner Kilpatrick Townsend bfleishman@kilpatricktownsend.com 22