Potential Risks and Legal Issues Associated With Technical Assets after an Environmental Impact Event November 17, 2010 By: Benjamin W. Newman, Esq. Gary S. Salzman, Esq. GRAYROBINSON, P.A. ATTORNEYS AND COUNSELORS AT LAW 301 East Pine Street Suite 1400 Orlando, Florida 32801 Tel: 407-843-8880 Fax: 407-244-5690 ben.newman@gray-robinson.com gary.salzman@gray-robinson.com www.gray-robinson.com Fort Lauderdale Jacksonville Key West Lakeland Melbourne Miami Naples Orlando Tallahassee Tampa
I. PURPOSE OF WHITE PAPER This white paper discusses in general terms various insurance issues relating to the assessment, evaluation and recovery protocol for high value, technical assets. This white paper relies primarily on general principles of American law and is based upon the assumptions and qualifications described below. II. BACKGROUND There are several companies which specialize in providing damage assessment, support, restoration and recovery solutions for technical assets. These services are required before and after the occurrence of a disaster or an environmental impact event, ranging in significance from a hurricane, flood, fire, or act of terrorism to infiltration of humidity and construction dust. In the aftermath of such an event, the restoration experts use their services to evaluate the impact and damage incurred to the technical equipment, determine whether the equipment has been compromised and whether it can be restored or replaced, neutralize and remove all contaminants, and restore the asset, where appropriate, to its pre-event functionality and warranty status. Many assessment and restoration companies specialize in evaluating and restoring electronic, electromechanical or IT systems, production machinery, medical and dental equipment and electro-mechanical devices. The services of such restoration companies can be instrumental in assessing the various ways in which an insured's business can be affected by a disaster or environmental impact event. These companies can quantitatively analyze the effect an event may have on the function, performance or life cycle of an insured s technical assets through the use of a scientific impact study or survey. The restoration companies also develop disaster recovery plans that may include corrosion abatement, emergency preservation and, if necessary, restoration and repair service options. However, all interested parties should ensure that recovery protocols adhere to all nationally or internationally accredited standards, where applicable. III. ANALYSIS Insurance carriers should consider formulating insurance provisions specifically pertaining to technical assets. 1 These provisions should require pre-event, annual evaluations of the insured's technical assets to establish their insurable condition, warranty status, functionality and level of maintenance. These provisions should also mandate the post-event procedures for assessing and evaluating the technical assets to determine whether they may be restored to a pre-event condition, in lieu of full replacement of the assets. Finally, the provisions should give the insurance carrier the 1 Sample provisions are set forth below. www.gray-robinson.com 1
ability to directly engage a qualified restoration company of the carrier s choice to conduct these pre and post event services. A. Underwriting Insurance Policies Before an insurer issues an insurance policy covering technical assets, it is advantageous for the insurer to require or conduct full diagnostic testing to evaluate the insurable condition and warranty status of all such equipment. Failure to do so could expose the insurer to coverage issues concerning the pre-event condition of the technical asset. Additionally, an insurer could be exposed to avoidable liability if there was an unreported or undisclosed event prior to evaluation. B. Requiring Insured to Comply with OEM Specifications Insurance policies and policy riders should require the insured to maintain and service all covered technical assets in accordance with applicable specifications and standards of the Original Equipment Manufacturer ( OEM ). Additionally, the insurer should require the insured to follow the OEM s recommended disaster recovery protocol after an event. Adding this language to insurance policies has the potential to reduce the insurer s coverage exposure to unwarranted claims and reduce the amount of exposure in the event of a valid claim. For example, where the insured fails to abide by an OEM's standards of maintenance for technical assets, the insurer should not be liable in the event of a claim, as it may be impossible to distinguish the cause of the asset s failure post-event if it had not been properly maintained, inspected and serviced. Failure of insurers to require their insureds to follow the OEM s standards can expose the insurer to an array of claims arising from a disaster or environmental impact event, including claims for business interruption losses, data loss, data theft and lost profits. One example includes medical laboratories that are responsible for conducting analysis of medical specimens for medical offices, clinics and hospitals. Damage to or loss of equipment may negatively impact the ability to conduct diagnosis and treatment. Any avoidable delay in restoring functionality may result in liability exposure to third party claims, as well as business interruption damages of the insured. This exposure could be deemed to be a direct result of the insurer s inefficiency and inexperience in handling damage recovery solutions for its technical assets. Appropriate policy language, as suggested below, may reduce an insurer s exposure to such a scenario. C. Exposure to Insured In the event an insured endeavors to handle the post-disaster recovery and repair of its own technical assets, there may be an increased probability of unreliable results of restoration and possible workers compensation liability. That could be the www.gray-robinson.com 2
case where the insured's personnel lack the required experience and expertise to properly handle contaminated equipment and operate in a hazardous environment. The insured also faces potential liability exposure from third parties, including suppliers, vendors and end users. For example, an insured that stores unique or sensitive data faces potential exposure from customers in the event of data loss or breach of such data. Additionally, manufacturers of fragile or perishable goods face potential thirdparty exposure in the event of equipment damage, resulting in an interruption in a supply chain and an insured s inability to promptly restore the delivery of its services or goods. Under these scenarios, it would be much more expeditious and desirable to engage a qualified independent recovery company. IV. RECOMMENDATIONS A. Suggested Policy or Rider Language for Insurers 1. Underwriting Process "Prior to the issuance of the Policy, the Insured has disclosed all Property and Equipment to be covered under the Policy, and has allowed the Insurer to inspect, evaluate and test, through an independent contractor of the Insurer s choosing and at its expense, such Property and Equipment to determine its current insurable condition and warranty status with the Original Equipment Manufacturer ( OEM ) of the Property and Equipment." 2. During the Life of the Insurance Policy "As a duty under the Policy and during the Policy Period, all Property and Equipment shall be inspected, maintained, serviced and repaired by the Insured, on a timely basis and at the Insured s expense, by an independent contractor approved by the Insurer. All such inspections, maintenance, service and repairs shall be performed during the Policy Period in accordance with all applicable standards and procedures of the OEM for the Property and Equipment. If no standards or procedures are published by the OEM, the Insured shall be required to engage, at the Insured s expense, an independent contractor approved by the Insurer to inspect, maintain, service and repair the Property and Equipment on a biannual basis in accordance with generally accepted standards and procedures for the Property and Equipment. The Insurer shall not be liable for any coverage for any damage of any nature due to the Insured s failure to strictly comply with this provision. " www.gray-robinson.com 3
"In the event of a disaster or environmental impact event, including, without limitation, a hurricane, flood, fire, act of God, terrorism, and infiltration of humidity or construction dust, the Insured shall notify the Insurer no later than twenty-four hours after the occurrence of such an event. Should an aforementioned event occur, the Insured shall follow all recommended disaster recovery protocols procedures and standards of the OEM for the Property and Equipment. The Insurer may, upon notice to the Insured and the Insurer s own expenses, retain an independent contractor to perform the disaster recovery protocols procedures and standards of the OEM for the Property and Equipment." 3. When a Claim is Made "At the time of reporting a Loss relating to Property or Equipment, the Insurer, prior to determining whether or not the Loss is covered, reserves the right to inspect, assess and evaluate, at its own expense, the Property or Equipment using the services of an independent contractor of the Insurer s choice. If the Insurer determines that the Insured has suffered a covered Loss under the Policy, the Property or Equipment will be repaired to its condition and warranty status, if applicable, prior to the date of the Loss, by said independent contractor. If the independent contractor determines that the Property or Equipment may not be so repaired, the Insurer shall replace the Property or Equipment, subject to any deductible, at the expense of the Insurer." B. Potential Benefits of Suggested Policy Provisions Involving an independent restoration company prior to the issuance of an insurance policy or rider covering technical assets should be able to verify that the insured is not overstating the value, warranty status, condition and functionality of the covered assets based on an unreported or undisclosed event or lack of proper maintenance. Requiring insureds to comply with the OEM's schedules and standards for maintenance and service of the technical equipment, including any standards for disaster recovery, may also eliminate the potential for differing standards to be met and the resulting costs of competing consultants. This ensures that underwriting and claims are administered efficiently and consistently, and otherwise guards against selective enforcement of the maintenance and service provisions. Additionally, the suggested policy additions may reduce the cost of litigation due to objective and more accurate data grounded in contractually agreed upon standards. The exposure from litigation for denial of coverage may be further minimized as failure to comply with standards should be a valid coverage defense. Should litigation result, www.gray-robinson.com 4
an independent restoration company can serve as an expert witness when a coverage dispute arises and the insured failed to follow the OEM s protocols as required by the insurance policy. The restoration specialist should, at a minimum, detect when maintenance fell below required standards under the Policy. By implementing the proposed policy or rider provisions, an insurer may also be afforded more opportunities to choose restoration over replacement of technical assets as the most cost effective resolution. In the event of replacement of a technical asset, the pre-event replacement value of the assets should be determined based upon an objective, unbiased evaluation and generally accepted scientific procedures and principles. Partnering with an independent restoration company in the wake of a disaster or environmental impact event can mitigate the exposure of the insurer for claims resulting from damage to the technical assets and business interruption damages. The insurer will have formal evaluation protocols for the assets and established procedures to employ should a disaster or environmental impact event occur. Depending on the policy language, the insurer or the insured may also be able to contact the restoration specialist to be immediately dispatched for emergency preservation of the technical assets, monitor the disaster recovery and oversee all necessary personnel. The ability to do so would mitigate the total losses of the insured and exposure of the insurer by protecting and preserving the assets promptly after the event. The insurer has a compelling stake to ensure that the insured's business operations are interrupted for as minimal of a time period as possible. Business interruption insurance is intended to compensate the insured for the amount of profit it would have earned had there been no suspension of operations. Thus, an insured is entitled to recover damages to the extent that it actually lost profit during the period when its technical assets were not functional. A restoration company with the expertise and resources necessary to fully and quickly restore the assets to pre-disaster functionality and warranty status will reduce the insurer's exposure for unnecessary business interruption claims. Further, safety of the work force is of the utmost importance following a disaster. By collaborating with such a restoration company following an event, the insurer can ensure that only qualified experts are exposed to the various hazards of a disaster, rather than personnel employed by the insured, who may lack the proper experience and training to service, restore and repair technical assets under such extreme field conditions. www.gray-robinson.com 5
V. DISCLAIMER Please remember that the information contained in this white paper is based on general facts and may not apply to specific situations. In addition, this information is based on general principles of American law, and the laws of any specific jurisdiction may differ substantially. Readers of this white paper should not consider this information to be legal advice and they should consult with their own licensed lawyer for any legal issues and to apply the law of the applicable jurisdiction to the specific facts of any situation. Further, the authors do not intend to enter into any attorney-client relationship with any reader of this white paper, unless and until the authors speak to the potential client, check for conflicts of interest and receive a fully executed engagement letter. The hiring of a lawyer is an important decision that should not be based solely upon advertisements, articles or white papers. Before any person decides to engage any lawyer, the person should ask the lawyer to send free written information about the lawyer's qualifications and experience. www.gray-robinson.com 6