When a weatherman forecasts a hurricane, the sandbags fly off the hardware stores' shelves, people board up their windows and head for higher ground, and businesses move their goods out of the hurricane's path and send employees on their way. But a company's preparations need to start long before disaster strikes.
Hurricanes Katrina and Rita have caused unprecedented devastation. According to the Insurance Information Institute--the industry's public education mouthpiece-- estimates for insured losses from Katrina alone range from $35 billion to more than $60 billion. Nearly 40 percent of these losses are expected to come from commercial flood and related business interruption claims. By comparison, insured losses from Hurricane Andrew in 1992--until now the country's costliest natural disaster--totaled less than $21 billion, and the September 11 terrorist attacks caused $20 billion in insured property losses.
In-house counsel should consider a number of additional options beyond the basic coverage. The first of these is contingent business interruption insurance, which covers losses stemming from damage to a key supplier or customer. For example, Hurricane Katrina's disruption of commerce through the Port of New Orleans and its destruction of petrochemical plants and other key suppliers has wreaked havoc on supply chains of all kinds. Companies such as Minneapolis-based Cargill Inc. have been caught in the supply chain nightmare. The agribusiness company uses barges along the Mississippi to ship soybeans, corn and wheat from the Midwest to four Louisiana export facilities. After the storm, those facilities were shut down for a full two weeks, a situation that is sure to result in massive losses for the company.
Issues relating to accessing the Port of New Orleans also may fall under the "ingress/egress" or "civil authority" language in business interruption polices. The ingress/egress wording covers losses sustained from customers or employees being unable to access the policyholder's damaged property. In negotiating a policy, companies also should consider including civil authority language, which allows businesses to recoup profits lost as a result of the government blocking routes of access to the policyholder's undamaged property.
The current battle over whether it was wind or flood waters that caused the bulk of the damage in the Gulf Coast area has raised serious questions about whether companies will be able to file business interruption claims post-Hurricane Katrina.
"If the roof of your warehouse blows off and two days later it is flooded from a storm-related levee breach, what's the covered peril?" Harckham asks.
Barry J. Fleishman, a partner at Dickstein Shapiro Morin & Oshinsky in Washington, D.C., who focuses on complex policyholder coverage, says the documentation provided to insurance companies in the claims process is particularly important because of its potential effect on future litigation.
"Companies should not underestimate the complexity and time involved in putting these claims together," he says. "In the documentation process, you're hoping to negotiate and settle, but you're preparing in the event you need to litigate."