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Insurance Coverage Issues Arising From Superstorm Sandy
By Wystan Ackerman of Robinson & Cole LLP, with contributions by Matthew Jacobs of Jenner & Block
Recent estimates suggest that the impact of Superstorm Sandy may be much larger in scope than Hurricane Katrina, one of the most devastating storms ever to strike the United States.
A Reuters article on November 27 reported that New York Governor Andrew Cuomo has estimated recovery costs of $71.3 billion in New York, and that New Jersey Governor Chris Christie has estimated recovery costs of at least $29.4 billion. Reuters also reported that the number of homes destroyed by Sandy in New York alone has exceeded by nearly 100,000 the number of homes destroyed in Louisiana by Katrina and Rita combined. While Sandy fortunately did not cause anywhere near the loss of human lives that Katrina caused, the property damage, particularly to commercial property, and resulting losses of business income, could prove to be considerably larger than Katrina.
Businesses, homeowners and their insurance companies are engaged in the adjustment of insurance claims from Superstorm Sandy, and significant disputes are already arising regarding a number of critical issues.
Segregation of Wind Damage and Flood Damage
Many commercial property policies and nearly all homeowners policies exclude damage caused by flood. Many properties impacted by Superstorm Sandy were damaged by both wind and flood. The segregation of damage between those two perils and determination of coverage under insurance policies involves complex legal and engineering issues. These issues are most complicated in scenarios where it is difficult to distinguish between wind damage and flood damage. In Katrina cases, Louisiana and Mississippi courts addressed the meaning of “flood” and the burdens of proof of the insurer and the insured with respect to segregation of damage. These cases may provide some insight to the courts in New York and New Jersey but will not answer all of the questions, and the courts that will decide Sandy cases will not be required to follow the Louisiana and Mississippi decisions. The New York Department of Financial Services issued a bulletin stating that insureds, in some circumstances, could clean up damaged property before the insurance adjuster inspected it, further complicating these issues. Congress recently enacted the COASTAL Act to provide a framework in the future to guide the National Flood Insurance Program’s allocation of wind versus flood damage, but the regulations that FEMA must adopt to give that statute affect will not be in place until 2014 at the earliest, and will not directly impact Sandy claims. Some Sandy claims also will involve issues regarding whether a loss caused by a sewer backup is covered where the sewer backup may have resulted from flooding. If there is coverage for sewer backup and not flood, and the property was affected by both of those perils, issues will arise regarding segregation of that damage.
Business Interruption Coverage Issues
Commercial property policies typically cover losses of business income if there is a suspension of business operations caused by damage to the insured property resulting from a covered cause of loss. Application of this coverage in the context of Sandy will involve a number of complex issues. There will be debates over the extent to which damage was caused by wind versus flood, unless the policy covers flood (some commercial properties do). These policies often also provide civil authority coverage, which covers loss of business income caused by a denial of access to the insured premises resulting from a government order. This coverage, however, is often limited to circumstances where the prohibition on access to the insured premises results from property damage to adjacent property caused by a covered cause of loss (wind). Some policies, however, contain civil authority coverage provisions that only require that property damage must have occurred at some point in the chain resulting in the order from the civil authority – in other words, the property damage could have taken place miles away. Issues will arise regarding whether damage that led to a civil authority closure was caused by wind or by flood, or resulted simply from the threat of property damage and not actual damage. Issues also likely will arise regarding whether suspension of subway and rail service or bridge access to Manhattan, for example, constitutes a prohibition on access sufficient to trigger civil authority coverage where pedestrian access was still available. On the other hand, suggesting that pedestrian access was available by walking five miles over a crowded and dangerous bridge to downtown Manhattan might not actually constitute “pedestrian access.” Some commercial property insurance policies also provide contingent business interruption coverage, also known as dependent property coverage, which covers loss of business income caused by an interruption of business operations caused by physical loss or damage to property of an insured’s supplier or customer if that physical damage is caused by a covered cause of loss. Some insureds that did not suffer damage to their own property from Sandy will make claims under this coverage because they were unable to conduct business without a critical product or component from a supplier whose property was damaged by the Superstorm. Issues that are likely to arise include what constitutes a “supplier” or “customer” under the particular coverage forms, and whether the damage to the property of the supplier or customer was caused by wind or by flood.
Business Interruption Loss Measurement Issues
All of the types of business interruption coverages described above can also lead to disputes over the measurement of a covered loss, or portion of a loss that is covered. These policies typically provide coverage for a period known as the “period of restoration,” which is typically defined as the time period beginning on the date of the covered loss or damage and ending when the damaged property should have been repaired with reasonable speed and similar quality. Accountants often retained on both sides to prepare competing calculations, and extensive negotiations or litigation can result. Some policies also provide extended coverage for a time period that typically begins when the damage is repaired or operations are resumed at a new permanent location, and ends when the business income reaches or should have reached the level that it would otherwise have attained had the damage not occurred. These loss measurement issues can be particularly complicated when a loss is caused in part by a covered peril (such as wind) and in part by an excluded peril (such as flood). Loss measurement also can become complicated when a business is impacted, post-loss, by a general downturn in its market as a result of the loss event (which many policy forms exclude).
Power Interruption Coverage Issues
Some policies cover business income losses caused by a power interruption. In many of these policy forms the power interruption must be caused by physical damage from a covered cause of loss to certain types of power company property (often not including overhead transmission lines). How do insureds and insurers determine the cause of a power interruption to a particular property? Who will have the burden of proof in establishing that? What if the power company is not cooperative in providing the information needed to determine coverage? These are just some of the questions that must be answered as coverage for this catastrophic event is debated in the coming months.