Katrina and Wilma, many insurers are attempting to apply the percentage deductibles to the total limits available under a policy even though the insured is only entitled to a lesser amount contained in a sublimit. Using the example above, if the policy has total limits of $60 million but a $10 million sublimit for hurricanes, insurers often are applying the 5% deductible to the $60 million (resulting in a $3 million deductible), rather than applying the 5% to the $10 million sublimit, which are the actual limits available, which would result in a deductible of only $500,000. Again, rather than wait for a disaster to hit, it is critical to clarify the language in the policy now to make sure that “TIV” refers only to the total limits available for a particular claim, including any sublimits.
Business Interruption—Waiting Periods. Some policies impose a waiting period (e.g., 24 hours or 72 hours) before business interruption (or lost business income) losses are recoverable. The purpose of waiting periods is to ensure that the loss is of a minimum magnitude before coverage is triggered. Insurers do not want to expend the resources necessary to evaluate a business income claim in situations where a company is down for less than one or two days.
There are two very important considerations for directors. First, it is imperative that the waiting period is expressed as total hours or even days rather than in business
hours. For example, certain policies state that the waiting period is “72 business hours,” and certain insurers have argued that it is equivalent to nine calendar days for those businesses that do not operate on a 24-hour cycle. Second, some insurers have argued that the waiting period acts as a deductible. Thus, for example, with a policy that has a 24 hour waiting period and an insured’s business was closed for three days, rather than compute income for the full three days, some insurers have argued that the policies only cover lost income for the last two days. It is essential that the policies be clear that once the waiting period has been met, the policy covers lost income incurred starting on day one.
Business Interruption—Total Suspension vs. Partial Interruption. A key issue with business interruption coverage is whether the policy requires a total suspension of your operations, or whether it also covers partial interruptions of your business. Most policies cover only “actual loss of business income you sustain due to the necessary suspension of your operations” from the date of the loss to the date the property should be repaired or replaced. Some policies contain broader language, covering business interruption losses when the policyholder is “wholly or partially prevented” from producing goods or continuing business operations or services. Considering that a significant number of claims involve an interruption of only a portion of
a company’s business, such as the partial shutdown of a factory or a wing of a hotel, it is important to make sure your policy covers for partial interruption.
The question every CEO, board member, general counsel and risk manager must ask is this: if your office building, hotel, factory or distribution center is destroyed tomorrow by a hurricane, earthquake or terrorist attack, will your claim team be ready to respond immediately and will your insurance cover both the physical damage to your property as well as the resulting lost business income? Recent experiences have shown that many companies are not ready to evaluate, prepare or submit their claims, and that there are significant gaps in coverage that otherwise could have been addressed in the underwriting/renewal process. It is imperative that companies, working with their brokers and outside counsel, start to address these issues now in order to better prepare themselves for the next disaster.
Peter M. Gillon is a shareholder in theWashington, DC oce of GreenbergTraurig, LLP and Brian G. Friel is of counsel in theWashington, DC and the Morristown, New Jersey oces of Greenberg Traurig, LL , where they counsel corporate policyholders on the procurement of all lines of insurance, including property and business interruption policies, and prosecute coverage disputes on behalf of their clients.They currently are handling some of the largest claims arising from the September 11, 001 terrorist attacks and Hurricanes Katrina andWilma, along with the hurricanes that struck Florida in 004.
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Boardroom Brieng: Business Continuity and Disaster Recovery