When Disaster Strikes: Are You Sure that Your Business is Adequately Insured?
By Peter M. Gillon and Brian G. Friel
What companies must do to prepare for the next catastrophic loss
Peter M. Gillon
9 /11, and the recent devastation inflicted by Hurricanes Katrina and Wilma, have forced companies across the United States to take a hard look at how they manage the risk of disaster—both man-made and natural.1 Of all the tools available to manage catastrophic risk, none is more important than property insurance. This is the one risk management tool
Brian G Friel . that can ensure the
survival of a corporation following the devastating effects of a terrorist attack, hurricane, earthquake, tornado, or fire. Unfortunately, the number of coverage disputes and unpaid claims related to September 11 and the recent hurricanes losses suggests that companies too often overlook or simply fail to understand the critical details of their property insurance programs.
Far too often companies wait until after a disaster strikes to determine what they need to do to adequately prepare, evaluate and present their claims to their insurers. When disasters like September 11 or Hurricane Katrina hit, many companies find themselves playing “catch-up” and lose valuable time in adjusting their claims as a result.
More than 30% of all businesses that close
down following a disaster never re-open again. ALFA
Insurance,“CanYour Business Survive a Natural Disaster?”
This is understandable. In the immediate aftermath of a large-scale disaster, directors and officers are pressed by other competing and vital matters impacting their companies, such as employee deaths and injuries, employee relocations, office relocations, customer issues, media inquiries, and the like. This is why a clear, coherent risk management plan in advance is essential to maximize and expedite insurance recovery during a crisis.
Many companies have developed a disaster response protocol, to be put in place in advance of a disaster. A claim team should be identified and assembled in advance, setting forth the roles of the risk manager, the general counsel and other response personnel. Pre-determine what you need to do, and by when, with respect to notifying the insurers of the loss. Have a process in place to obtain, analyze and maintain the necessary documentation to support your claims. Establish accounting procedures for capturing loss expenses accurately and efficiently. Establish communication protocols internally and externally.
Insurance Coverage Issues
There are many issues to consider in evaluating a property policy, including whether it provides the broadest coverage available at a reasonable cost. Below are some
of the most important policy considerations that are not being adequately addressed in the underwriting process.
Hurricane Deductibles and Sublimits. Many commercial property policies contain a deductible for hurricanes (or “windstorms”) and other specific perils, based on a percentage of “total insured value” or “total insurable value” (“TIV”), rather than based on a flat dollar amount. This deductible is typically between 2%-5%. Thus, for example, if a policy’s deductible for hurricanes is 5% of TIV and the total limits of the policy are $60 million, an insured would be responsible for the first $3 million of damages. For many small- to mid-sized claims, this deductible effectively acts as a bar to coverage. One possible modification is to negotiate a lower deductible percentage; another is to reduce the limits for purposes of the deductible.
Another common feature of commercial property policies is a sublimit (i.e., a lesser amount) for hurricanes and other perils. In light of the extremely active hurricanes in Florida and along the other parts of the Gulf Coast over the last few years, it is imperative that companies operating in hurricane regions re- evaluate their sublimits, if any.
In the wake of the vast number of claims filed because of Hurricanes
Boardroom Brieng: Business Continuity and Disaster Recovery