Key Insurance Coverage Considerations in the Wake of Superstorm Sandy

The ABC's for maximizing coverage are summarized below:

A) identify possible coverage;

B) identify potential coverage issues; and

C) effectively present the claim.

Identify Possible Coverage

As the aftermath of Superstorm Sandy unfolds, it will be important for impacted businesses to ensure that all potentially responsive insurance policies are considered and evaluated as a potential source of recovery. When attempting to identify potentially relevant types of coverage, it is important to remember that the insurance instruments containing these coverages may take a variety of different forms and may be differently termed. Where a company has a global insurance program, moreover, it is important to check the company's “master” policy, which can include difference-in-conditions and difference-in-limits clauses to plug any gaps in the coverage provided by the relevant “local” policy.

A common source of coverage for many businesses will be the first-party coverage insuring the property and assets of the insured entity. Such policies may be in the form of broadly worded “all risk,” “difference in conditions” or “inland marine” first-party property policies. Other first-party policies may come in other forms, including “fire,” “boiler and machinery,” “equipment breakdown,” or “multiperil” policies. Although the terms and conditions of property policies vary significantly, these policies frequently provide coverage for expense incurred in minimizing or preventing an insured loss and may even cover the insured for costs associated in establishing the extent of a loss.

Some of the other types of coverage afforded under property insurance policies are described below.

First-Party Coverages

Property Damage. Property insurance policies generally cover “physical loss of or damage to” insured property that results from a covered cause of loss. “Insured property” often is broadly defined by the policy or applicable law. In addition to the insured's building or structure, policies typically expressly cover “business personal property” such as furniture and fixtures, machinery and equipment, stock and leased property. Policies also typically provide coverage for unscheduled “newly acquired or constructed” property and the property of third parties that is in the insured's “care, custody or control.” As to the cause of loss, “all risk” policies broadly cover all causes of loss that are not expressly excluded. “Named peril” policies, by comparison, cover against listed “perils” or causes of loss. See 10A Couch on Insurance 3d ' 148:4 (2012). Irrespective of whether a business has “all risk” or “named peril” coverage, the peril of “windstorm” ' which encompasses storms such as Sandy ' is typically a covered peril. For example, the standard-form Insurance Services Organization (“ISO”) “Standard Property Policy,” which is a “named peril” type of policy, expressly includes “Windstorm or Hail” as among the “Covered Causes of Loss.” See ISO Form CP 00 99 06 07 (2007). Evaluation of specific policy language by reference to relevant law is critical.

Preventing or Mitigating Insured Loss. Most property policies contain a separate provision that reimburses an insured's costs and expenses incurred in taking preventative measures to reduce or avoid an insured loss. Historically contained in a “sue and labor” clause, this coverage is now sometimes included as one of the insured's “Duties in the Event of Loss.” See ISO Form CP 00 99 06 07 (2007). Businesses may be able to recover under this separate grant of coverage for preventative expenses incurred, such as the cost of boarding up windows, moving equipment or otherwise securing property in advance of Sandy.

Debris Removal. Most property policies cover expenses that the insured incurs to remove debris on the insured's property following an insured event. For example, the ISO standard form states that the insurer “will pay [the insured's] expense to remove debris of Covered Property caused by or resulting from a Covered Cause of Loss that occurs during the policy period.” ISO Form CP 00 99 06 07 (2007). A business may have coverage under this separate coverage for expenses incurred to clean up its property after the storm.

Business Interruption. “Business Interruption” coverage generally reimburses the insured for its loss of earnings or revenue resulting from covered property damage. For example, the ISO “Business Income (and Extra Expense) Coverage Form” covers the loss of net profit and operating expenses that the insured “sustain[s] due to the necessary 'suspension' of [the insured's] 'operations' during the 'period of restoration.'” ISO Form CP 00 30 06 07 (2007). Business interruption coverage typically applies even if the insured elects not to rebuild, relocate or resume its business. Importantly in a hurricane or storm context, where impact is likely to be felt throughout the country, business interruption insurance may cover loss of business income at premises that are physically remote from the damaged property if such premises are operated in connection with the damaged property. See, e.g., Studley Box & Lumber Co. v. National Insurance Co., 154 A. 337, 338 (N.H. 1931) (“the object of the policies is clear [sic] to insure against loss from the interruption of the business as a whole, whatever part of it may be conducted in or with the property which suffers from the fire”); see also Aztar Corp. v. U.S. Fire Ins. Co., 224 P.3d 960, 970 (Ariz. 2010) (“the concept of 'mutual dependency' applies whether or not the structure that is damaged relates to producing the goods or services or providing the ability for customers to purchase the goods or services”) (quoting and applying Studley Box).

Extra Expense. “Extra Expense” coverage generally covers the insured for certain extra expenses incurred to minimize or avoid business interruption and in order to resume normal operations. For example, the ISO standard form covers, among other things, “Extra Expense” to “[a]void or minimize the 'suspension' of business and to continue operations at the described premises or at replacement premises or temporary locations ' ” ISO Form CP 00 30 06 07. The form defines “ Extra Expense” as “necessary expenses” that the insured “would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.” ISO Form CP 00 30 06 07 (2007). A business may be entitled to coverage for extra expenses incurred in connection with Sandy in the absence of damage to its property. See, e.g., Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 936 F.Supp. 534, 540 (S.D.Ill. 1996) (“the Court finds that the language of [the extra expense coverage grant] is unambiguous and does not require that 'direct physical damage' be to property insured under the property damage coverage of the policies or be to property at scheduled locations”).

Contingent Business Interruption. “Contingent Business Interruption” generally covers the insured with respect to losses, including lost earnings or revenue, as a result of damage, not to the insured's own property, but to the property of an insured's supplier, customer or some other business partner or entity, which damage renders that entity unable to conduct normal business operations. Again, this coverage is important in a hurricane or storm context. A business may have coverage, for example, if it suffers lost earnings or extra expense because a supplier of materials or transportation was impacted by Superstorm Sandy. See, e.g., Archer-Daniels-Midland, 936 F. Supp. at 544 (holding that “[t]he U.S. Army Corps of Engineers, the Coast Guard, and Midwestern farmers who supply raw materials to [the insured] are suppliers of goods and services” and therefore the insured was entitled to coverage for the increased costs it incurred for transportation and raw materials under the policy's contingent business interruption coverage).

Actions of Civil Authority. “Civil Authority” coverage may apply when a business suffers a loss of income and/or extra expenses arising from an “action” or “order” of a civil authority that prevents or impairs access to the premises of the business. Importantly, this type of coverage typically applies even in the absence of property damage to the insured's property, although it may require damage to the property of others depending on the specific policy language and the applicable law. Compare Sloan v. Phoenix of Hartford, Inc. Co., 207 N.W.2d 434, 436-37 (Mich. App. Ct. 1973) (“a plain reading of the policy would lead the ordinary person of common understanding to believe that, irrespective of any physical damage to the insured property, coverage was provided and benefits were payable”) with City of Chicago v. Factory Mut. Ins. Co., 2004 WL 549447 (N.D.Ill. Mar. 18, 2004) (holding that there was no coverage where the civil authority clause predicated coverage on damage “at the described location or within 1,000 feet of it”). Businesses may be able to recover under this separate grant of coverage in light of, for example, the mandatory evacuations, mass transit suspensions and airport closures resulting from Superstorm Sandy. See, e.g., Assurance Co. of America v. BBB Service Co., Inc., 593 S.E.2d 7, 9 (Ga. App. Ct. 2003) (affirming coverage for business losses resulting from Hurricane Floyd after a local authority declared a state of local emergency and ordered evacuation “because of the serious threat to the lives and property of residents”).

Lack of Access to Insured Premises. “Ingress and Egress” coverage is similar to “Civil Authority” coverage and may provide coverage for business losses sustained when access to the insured's premises is prevented by an insured peril. Typical wording provides that the “policy covers loss sustained during the period of time when, as a direct result of a peril not excluded, ingress to or egress from real and personal property not excluded hereunder, is thereby prevented.” See, e.g., Fountain Powerboat Industries, Inc. v. Reliance Ins. Co., 119 F. Supp. 2d 552, 556 (E.D.N.C. 2000). A business may have coverage hereunder if the storm prevented access to its premises. Property damage typically is not a requirement for this coverage to apply. Id. at 556-57. (“Loss sustained due to the inability to access the [insured's] facility and resulting from a hurricane is a covered event with no physical damage to the property required.”).

Service Interruption. “Service Interruption” coverage provides insurance when services to an insured property are interrupted. These services can include electricity, gas, water, phone and sewer services. By way of illustration, a standard ISO endorsement provides coverage for “loss of Business Income or Extra Expense at the described premises caused by the interruption of service. ' ” ISO Form BP 04 57 01 06 (2004). The interruption of service includes “ water supply services,” “communication supply services,” and “power supply services.” Id. Given the widespread power outages caused by Superstorm Sandy, this grant of coverage may also come into play.

Claim Preparation. “Claim Preparation” coverage generally covers the insured for the costs associated with compiling and certifying a claim. Such coverage would apply, for example, to the expenses incurred by the insured in retaining consultants or claims accountants to assist in quantifying and preparing the claim submission to the insurer.

Advance Payments. Businesses often need insurance to resume normal business operations and thus cannot afford a protracted adjustment period. Indeed, an insurer's delay in making appropriate and periodic payments may cause an increase in the covered time frame for business interruption and extra expense purposes. Importantly, many policies expressly require that insurers pay losses as incurred while the full extent of the loss is being adjusted.

Flood Insurance

Coverage for damage directly caused by flooding should be covered under an insured's flood insurance policies. Where a company does not have private flood insurance, it may have purchased coverage through the National Flood Insurance Program (“NFIP”). As with any other insurance policy, businesses should carefully review their NFIP coverage and consider potential coverage issues prior to submitting a claim.

Other Coverages?

It is important to remember that many types of insurance coverage other than property/business interruption coverage may possibly be available to cover hurricane or storm-related losses. Coverage may be available, for example, under commercial liability coverages, directors and officers liability insurance coverages, pollution coverages, and credit risk coverages. In addition, many businesses may have specialty policies potentially responsive to particular situations.

Identify Potential Coverage Issues

Faced with a large property damage or business interruption claim, insurers may raise a number of potential limitations or restrictions on coverage. The availability of coverage may turn on a number of policy provisions or insurer defenses, including the following issues.

What Caused the Loss?

In the case of Superstorm Sandy and other natural disasters, there may be multiple causes of loss. These may include the windstorm itself, high winds, tidal surges, floods, actions of civil authority, and damage to the insured's property or to other property. Determining the cause of loss is important because policies may exclude or limit coverage (including through application of sublimits and deductibles) for certain causes of loss, but not others. By way of example, property policies often exclude “flood” or contain sublimits applicable to “flood” that are substantially lower than the otherwise applicable policy limits. Likewise, “named” windstorms such as Superstorm Sandy may be subject to higher self-insurance features. Courts have taken different approaches in determining the cause or causes of loss or damage. For example, many courts have adopted the “efficient proximate cause” doctrine, which generally “permits recovery ' for a loss caused by a combination of a covered risk and an excluded risk only if the covered risk was the efficient proximate cause of the loss. The efficient proximate cause of the loss is the one that sets the other causes in motion that, in an unbroken sequence, produced the result for which recovery is sought.” 7 Couch on Insurance 3d ' 101:55 (2012). In other words, a covered peril (such as a storm) cannot be excluded or forced into a sublimit simply because the chain of loss-producing events essentially ended in a “flood.” Another approach is the “concurrent causation” doctrine, which generally “takes the approach that coverage should be permitted whenever two or more causes do appreciably contribute to the loss and at least one of the causes is a risk which is covered under the terms of the policy.” Id. State laws vary and causation issues can be and often are nuanced and complex. Finally, although some policies contain “anti-concurrent” causation language, which purports to exclude or sublimit a loss if any part of the causal chain involves the excluded or limited peril, such provisions may be held invalid. See, e.g., Safeco Ins. Co. of Am. v. Hirschmann, 773 P.2d 413, 416 (Wash. 1989) (holding that the insurer may not circumvent the “'efficient proximate cause' rule ' and deny coverage when a covered peril sets in motion a causal chain the last link of which is an excluded peril”). This result is consistent with the fact that “[t]he majority of cases addressing causation disputes under an insurance policy hold that the causal relationship of a loss to a particular alleged instrumentality is a question of fact to be decided by the jury” and that “[t]his is especially true in those instances in which more than one cause contributes to the subject injury, and reasonable persons could draw different conclusions regarding the question of which of the contributing causes is the proximate cause of the injury.” 7 Couch on Insurance 3d ' 101:59 (2012).

Does an Exclusion Apply?

Insurers often respond to a claim by asserting that various exclusions in the policy apply to bar or curtail coverage. Some of the exclusions that insurers may assert in response to a Superstorm Sandy claim may include the following:

Flood Exclusion. Although property policies typically cover a variety of naturally occurring weather conditions, certain property policies may exclude flood and water damage. By way of illustration, a standard ISO form excludes loss or damage caused by “[f]lood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray ' ” ISO Form CP 00 99 06 07 (2007). As noted, however, such damage may be expressly covered by a separately purchased endorsement to the policy or by a separate insurance instrument. By way of illustration, the ISO “ Flood Coverage Endorsement” adds “flood” as an additional Covered Cause of Loss and defines flood to mean “a general and temporary condition of partial or complete inundation of normally dry land areas due to: 1. The overflow of inland or tidal waters; 2. The unusual or rapid accumulation or runoff of surface waters from any source; or 3. Mudslides or mudflows ' ” ISO Form CP 10 65 10 00 (1999). Even where the policy contains a flood exclusion, insureds should not assume that the flood exclusion applies wherever a claim involves water. For example, while damages occurring from a tidal surge and overflowing waterways may be excluded under certain circumstances, rain that compromises infrastructure may not be excluded. Coverage will depend on the specific policy language as applied to the particular facts.

Service Interruption Exclusion. Property insurance policies may exclude coverage for damage caused by interruption of services, such as electricity or natural gas. For example, a standard ISO form excludes loss or damage caused by “[t]he failure of power, communication, water or other utility service supplied to the described premises ' ” ISO Form CP 00 99 06 07 (2007). However, many policies expressly cover “ Service Interruption” coverage as noted above.

Law or Ordinance Exclusion. Insurers have argued in some cases, albeit with limited success, that even if an initial event (a hurricane or storm, for example) is covered, losses from enforcement of laws or ordinances are not covered under an “ordinance or law” exclusion. For example, a standard ISO form excludes loss or damage caused by “[t]he enforcement of any ordinance or law ' [r]egulating the construction, use or repair of any property; or ' [r]equiring the tearing down of any property, including the cost of removing its debris ' ” ISO Form CP 10 30 06 07 (2007).

Pollution Exclusion. Property policies may contain pollution exclusions, which insurers may argue bar losses resulting from, for example, water contamination arising from a hurricane or storm. Standard-form property policies (both named-risk and all-risk) often purport to exclude losses caused by, for example, the “discharge, dispersal, seepage, migration, release or escape of 'pollutants.'” ISO Form CP 10 30 10 91 (1991). “Pollutant” may be defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Id. Again, not all policies exclude pollution-related loss, and pollution-related coverage may be expressly afforded in the policy, by endorsement, by separate policy or through a global “master” policy or umbrella coverage. By way of example, a standard ISO “named peril” policy form expressly covers, for example, the insured's “expense to extract 'pollutants' from land or water at the described premises if the discharge, dispersal, seepage, migration, release or escape of the 'pollutants' is caused by or results from a Covered Cause of Loss ' ” ISO Form CP 00 99 06 07 (2007).

Whether an exclusion applies will depend upon the specific exclusionary language in the policy and whether the insurer can meet its burden to demonstrate that the exclusion unambiguously applies to the loss in question under applicable law. See generally 2 Couch on Insurance 3d ' 22:31 (2012) (“provisos, exceptions, or exemptions, and words of limitation in the nature of an exception ' are strictly construed against the insurer where they are of uncertain import or reasonably susceptible of a double construction, or negate coverage provided elsewhere in the policy”). Ambiguities in policy language typically will be construed in favor of the insured under established principles of insurance contract interpretation. Id. ' 22:14 (“If an insurer uses language that is uncertain, any reasonable doubt will be resolved against it[.]“). Exclusions also may not be enforced where their application would defeat the reasonable expectations of the insured as to the protection afforded under the policy. Id. ' 22:11 (“the objectively reasonable expectations of [the insured] regarding the terms of insurance contracts will be honored even though a painstaking study of the insurance provisions would have negated those expectations”). Finally, whether an exclusion applies may depend, in large measure, upon what is determined to be the cause of the loss, along with the applicable law on causation, as discussed above.

What Exactly Is a 'Business Interruption'?

Insurers sometimes take a narrow view of what exactly constitutes a suspension or interruption of business operations and argue that the phrase “necessary suspension of your operations” requires a complete cessation of all of the insured's operations. On this basis, an insurer may refuse to pay for otherwise covered business income loss because the insured's operations did not completely cease during the period of restoration. Compare Hotel Properties, Ltd. v. Heritage Ins. Co., 456 So.2d 1249, 1250 (Fla. Dist. Ct. App. 1984) (holding that a “diminution in business” to a hotel as a result of a fire on the premises “did not constitute an interruption of the appellant's business within the policies in question”) with Aztar, 224 P.3d at 971 (“the trial court erred in determining as a matter of law that [the insured's] claims could not fall within the business interruption coverage ' of the Policy because the hotel and casino still had the same operational capacity”). This should not be an issue under many policy forms, however. For example, an ISO standard form expressly defines “suspension” to include “[t]he slowdown or cessation of your business activities.” ISO Form CP 00 30 06 07 (2007).

Does Coverage for Business Interruption Depend on Physical Loss or Damage to Insured Property?

Although the business interruption coverage set forth in some policies expressly requires loss or damage to the insured's property, this may not always be the case. “Covered property” may broadly include other property in which the insured may be said to have an “insurable interest.” In addition, as noted above, many policies expressly provide coverage where a supplier or customer suffers damage that results in interruption of the insured's business. This also may be a non-issue if the insured is seeking coverage because of, for example, business interruption due to circumstances created by an action of civil authority or inaccessible ports, roads and closed airports.

How Is Business Interruption Loss Measured?

Insurance policies typically contain provisions stating how business interruption losses are to be measured. Policies sometimes include provisions specifying that the policy will only cover loss of income and related expenses for a specified period of time after an insured event occurs. Where this time is not specifically defined, it may be tied to the time it would take the insured, employing reasonable mitigation efforts, to resume normal business operations under the circumstances. In view of the magnitude of the floods and the number of businesses affected, the length of time it will take to repair property and resume normal business operations may be longer than had the claim been an isolated event affecting a single facility. In most cases, prior experience and projected earnings and expenses will be highly relevant. Because insurers often request detailed proof of claimed losses, affected businesses should keep comprehensive records of lost sales and revenues, and extra expenses that have been incurred. Moreover, accounting procedures should be established to collect and maintain adequate supporting documentation for claimed losses. Retention of the services of a forensic accountant, working with insurance coverage counsel, is often advisable in formulating a claim for business interruption coverage.

What Are the Applicable Deductibles/Retentions or 'Waiting Periods'?

Some policies have language providing that time element coverages only allow coverage after a certain dollar threshold or a certain period of time has expired. The application of these policy features may have a significant impact on the amount of the insured's potential recovery.

Many of these issues are nuanced and their resolution may vary based on the applicable law.

Effectively Present the Claim

The manner in which a claim is presented may have a significant impact upon the insured's ultimate recovery. As noted, policies may have various exclusions, sublimits or deductibles depending on the particular peril causing the loss. The manner in which the insured characterizes a loss and presents its claim may impact upon whether these limiting features of the policy are applied to its claim. In all cases, an insured should evaluate its loss information in light of the policy wording and applicable law, and present the claim to the insurer or insurers in a coverage-promoting manner.

Most policies identify specific procedures that should be followed in presenting and pursuing a claim and usually incorporate time deadlines and other requirements. These provisions usually include the following:

Proof of Loss

Property policies generally require a sworn proof of loss summarizing the amount and extent of the damage or loss. For example, the ISO standard form states that the insured must “[s]end us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request.” Id. An insured should consider requesting a written agreement extending the time for submission of a proof of loss (and potentially other policy conditions) depending on the nature of the loss.

Notice of Loss

Policies may require the insured to notify the insurance company “as soon as practicable” or within a specified period after the insured becomes aware of circumstances that may lead to a claim. For example, the ISO standard form states that the insured must provide “prompt notice of the loss or damage. '” ISO Form CP 00 99 06 07 (2007).

Suit Limitation

Policies may include “suit limitation” provisions, which may provide that an action or suit to recover under the policies must be bought within a specified time (12 months, for example) after inception of loss. Although these provisions may not be enforceable if shorter than the applicable statute of limitations, it is important that insureds take all appropriate steps to ensure that suits, if necessary, are filed in a timely fashion.

Failure to comply with these time-sensitive procedural requirements, insurers will argue, may invalidate an otherwise covered claim. Thus, careful advance attention to these potential requirements is recommended. In addition, virtually all policies contain general “cooperation” provisions obligating the insured to cooperate with the insurer in its investigation of the loss.

Conclusion

Insurance is a valuable asset. Businesses that have suffered losses because of Superstorm Sandy may have substantial financial protection through their insurance policies. Businesses should consider the scope of coverage under those policies carefully and should act promptly to recover all insurance coverage that may be available. Experienced insurance coverage counsel may be able to assist an insured in identifying coverage, assessing the viability and strength of its potential claim, communicating with the insurers' representatives, and ultimately maximizing the company's potential insurance recovery.

Roberta Anderson is a partner in K&L Gates LLP's Insurance Coverage practice group and a member of this newsletter's Board of Editors. She concentrates her practice in insurance coverage litigation and counseling, and has represented insureds in connection with a wide range of insurance issues arising under many different forms of insurance coverages, including general liability, property and business interruption, environmental, fidelity, professional liability, directors and officers, errors and omissions, employers' liability, political risk, terrorism, residual value, nuclear and numerous others. Anderson also counsels clients to assist them with analyzing new insurance products, addressing the adequacy of their existing insurance programs, and negotiating insurance program placements.

Superstorm Sandy ' a post-tropical storm with Category 1 hurricane strength ' struck the United States with a liquid fist on Oct. 29. Sandy devastated the U.S. Mid-Atlantic region and affected at least 24 states with gale-force winds and heavy rains that reached far inland causing flooding, and blizzard conditions in West Virginia. The storm, which was the confluence of an Atlantic Ocean hurricane with two winter weather systems, hit shore five miles southwest of Atlantic City, NJ, with a record storm surge. Although the center of the storm missed New York City, its storm surge flooded streets, tunnels and subway lines in Lower Manhattan, Staten Island, Coney Island, and other areas of the city. The storm caused severe and widespread destruction of property in New York, New Jersey and other states, and left millions without power or transportation in its wake. Even before Sandy made landfall, the storm caused major disruptions as a result of preparedness actions taken across the East Coast, including mandatory evacuations, suspension of mass transit systems, flight cancellations, and closures of airports, businesses and entertainment venues ' even the New York Stock Exchange. There is no doubt that picking up the pieces in Sandy's wake will be challenging. Although the full extent of damage and business disruption will not be assessed in concrete dollar terms for many months, early estimates predict that Sandy has caused at least $20 billion in insured losses in addition to economic/business interruption losses in excess of $50 billion, which would rank Sandy as the fourth-costliest catastrophe in the United States. See Eqecat sees Sandy insured losses up to $20 billion in U.S., Reuters (Nov. 2, 2012).

Following Sandy, the regrettable but inevitable question is not whether, but where and when, the next costly natural disaster will strike ' be it a hurricane, typhoon, cyclone, tornado, earthquake, tsunami or other natural disaster. Insurance can play an important role in helping businesses and individuals weather the financial storm that inevitably follows the natural one. Much of the property damage and business interruption loss suffered on account of Sandy and other natural disasters is insured. Importantly, businesses often have insurance not only for property damage losses, but also for economic losses arising from business interruption, including interruption incurred as a result of actions of civil authorities (such as the evacuations, mass transit suspensions and airport closures) and for extra expenses incurred to minimize or avoid business interruption. Even if the storm did not damage their own property, many businesses will have sustained losses because of damage to the property of others, including important suppliers, customers and other business partners, damage to infrastructure, transit interruption, power outages, interrupted gas and water services and/or disruption of various other forms of production and support systems. Many businesses also will incur substantial expenses to return to normal operations. Even businesses located in areas far outside the storm's path have likely suffered losses that may be covered by insurance given that the storm conditions impacted such a broad area and affected goods traveling by sea and other halted means of transportation.

Businesses affected should seek to maximize insurance recoveries. Careful and proactive attention to insurance coverage considerations could be the key to restoring business operations and recouping losses. Businesses that have suffered losses related to the storm are therefore advised to carefully assess and document their losses, maintaining detailed loss information, and to review all potentially applicable insurance policies promptly, including excess-layer and “umbrella” policies, to determine if such policies may afford coverage. A careful insurance program review will be an important component of a company's efforts to recover from Sandy and other natural disasters. In addition, early identification, characterization and presentation of loss information in light of potentially applicable insurance coverage law can help to maximize coverage and ultimately could make a substantial difference in a company's recovery.

The ABC's for maximizing coverage are summarized below:

A) identify possible coverage;

B) identify potential coverage issues; and

C) effectively present the claim.

Identify Possible Coverage

As the aftermath of Superstorm Sandy unfolds, it will be important for impacted businesses to ensure that all potentially responsive insurance policies are considered and evaluated as a potential source of recovery. When attempting to identify potentially relevant types of coverage, it is important to remember that the insurance instruments containing these coverages may take a variety of different forms and may be differently termed. Where a company has a global insurance program, moreover, it is important to check the company's “master” policy, which can include difference-in-conditions and difference-in-limits clauses to plug any gaps in the coverage provided by the relevant “local” policy.

A common source of coverage for many businesses will be the first-party coverage insuring the property and assets of the insured entity. Such policies may be in the form of broadly worded “all risk,” “difference in conditions” or “inland marine” first-party property policies. Other first-party policies may come in other forms, including “fire,” “boiler and machinery,” “equipment breakdown,” or “multiperil” policies. Although the terms and conditions of property policies vary significantly, these policies frequently provide coverage for expense incurred in minimizing or preventing an insured loss and may even cover the insured for costs associated in establishing the extent of a loss.

Some of the other types of coverage afforded under property insurance policies are described below.

First-Party Coverages

Property Damage. Property insurance policies generally cover “physical loss of or damage to” insured property that results from a covered cause of loss. “Insured property” often is broadly defined by the policy or applicable law. In addition to the insured's building or structure, policies typically expressly cover “business personal property” such as furniture and fixtures, machinery and equipment, stock and leased property. Policies also typically provide coverage for unscheduled “newly acquired or constructed” property and the property of third parties that is in the insured's “care, custody or control.” As to the cause of loss, “all risk” policies broadly cover all causes of loss that are not expressly excluded. “Named peril” policies, by comparison, cover against listed “perils” or causes of loss. See 10A Couch on Insurance 3d ' 148:4 (2012). Irrespective of whether a business has “all risk” or “named peril” coverage, the peril of “windstorm” ' which encompasses storms such as Sandy ' is typically a covered peril. For example, the standard-form Insurance Services Organization (“ISO”) “Standard Property Policy,” which is a “named peril” type of policy, expressly includes “Windstorm or Hail” as among the “Covered Causes of Loss.” See ISO Form CP 00 99 06 07 (2007). Evaluation of specific policy language by reference to relevant law is critical.

Preventing or Mitigating Insured Loss. Most property policies contain a separate provision that reimburses an insured's costs and expenses incurred in taking preventative measures to reduce or avoid an insured loss. Historically contained in a “sue and labor” clause, this coverage is now sometimes included as one of the insured's “Duties in the Event of Loss.” See ISO Form CP 00 99 06 07 (2007). Businesses may be able to recover under this separate grant of coverage for preventative expenses incurred, such as the cost of boarding up windows, moving equipment or otherwise securing property in advance of Sandy.

Debris Removal. Most property policies cover expenses that the insured incurs to remove debris on the insured's property following an insured event. For example, the ISO standard form states that the insurer “will pay [the insured's] expense to remove debris of Covered Property caused by or resulting from a Covered Cause of Loss that occurs during the policy period.” ISO Form CP 00 99 06 07 (2007). A business may have coverage under this separate coverage for expenses incurred to clean up its property after the storm.

Business Interruption. “Business Interruption” coverage generally reimburses the insured for its loss of earnings or revenue resulting from covered property damage. For example, the ISO “Business Income (and Extra Expense) Coverage Form” covers the loss of net profit and operating expenses that the insured “sustain[s] due to the necessary 'suspension' of [the insured's] 'operations' during the 'period of restoration.'” ISO Form CP 00 30 06 07 (2007). Business interruption coverage typically applies even if the insured elects not to rebuild, relocate or resume its business. Importantly in a hurricane or storm context, where impact is likely to be felt throughout the country, business interruption insurance may cover loss of business income at premises that are physically remote from the damaged property if such premises are operated in connection with the damaged property. See, e.g., Studley Box & Lumber Co. v. National Insurance Co. , 154 A. 337, 338 (N.H. 1931) (“the object of the policies is clear [sic] to insure against loss from the interruption of the business as a whole, whatever part of it may be conducted in or with the property which suffers from the fire”); see also Aztar Corp. v. U.S. Fire Ins. Co. , 224 P.3d 960, 970 (Ariz. 2010) (“the concept of 'mutual dependency' applies whether or not the structure that is damaged relates to producing the goods or services or providing the ability for customers to purchase the goods or services”) (quoting and applying Studley Box ).

Extra Expense. “Extra Expense” coverage generally covers the insured for certain extra expenses incurred to minimize or avoid business interruption and in order to resume normal operations. For example, the ISO standard form covers, among other things, “Extra Expense” to “[a]void or minimize the 'suspension' of business and to continue operations at the described premises or at replacement premises or temporary locations ' ” ISO Form CP 00 30 06 07. The form defines “ Extra Expense” as “necessary expenses” that the insured “would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.” ISO Form CP 00 30 06 07 (2007). A business may be entitled to coverage for extra expenses incurred in connection with Sandy in the absence of damage to its property. See, e.g., Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York , 936 F.Supp. 534, 540 (S.D.Ill. 1996) (“the Court finds that the language of [the extra expense coverage grant] is unambiguous and does not require that 'direct physical damage' be to property insured under the property damage coverage of the policies or be to property at scheduled locations”).

Contingent Business Interruption. “Contingent Business Interruption” generally covers the insured with respect to losses, including lost earnings or revenue, as a result of damage, not to the insured's own property, but to the property of an insured's supplier, customer or some other business partner or entity, which damage renders that entity unable to conduct normal business operations. Again, this coverage is important in a hurricane or storm context. A business may have coverage, for example, if it suffers lost earnings or extra expense because a supplier of materials or transportation was impacted by Superstorm Sandy. See, e.g., Archer-Daniels-Midland, 936 F. Supp. at 544 (holding that “[t]he U.S. Army Corps of Engineers, the Coast Guard, and Midwestern farmers who supply raw materials to [the insured] are suppliers of goods and services” and therefore the insured was entitled to coverage for the increased costs it incurred for transportation and raw materials under the policy's contingent business interruption coverage).

Actions of Civil Authority. “Civil Authority” coverage may apply when a business suffers a loss of income and/or extra expenses arising from an “action” or “order” of a civil authority that prevents or impairs access to the premises of the business. Importantly, this type of coverage typically applies even in the absence of property damage to the insured's property, although it may require damage to the property of others depending on the specific policy language and the applicable law. Compare Sloan v. Phoenix of Hartford, Inc. Co. , 207 N.W.2d 434, 436-37 (Mich. App. Ct. 1973) (“a plain reading of the policy would lead the ordinary person of common understanding to believe that, irrespective of any physical damage to the insured property, coverage was provided and benefits were payable”) with City of Chicago v. Factory Mut. Ins. Co., 2004 WL 549447 (N.D.Ill. Mar. 18, 2004) (holding that there was no coverage where the civil authority clause predicated coverage on damage “at the described location or within 1,000 feet of it”). Businesses may be able to recover under this separate grant of coverage in light of, for example, the mandatory evacuations, mass transit suspensions and airport closures resulting from Superstorm Sandy. See, e.g., Assurance Co. of America v. BBB Service Co., Inc. , 593 S.E.2d 7, 9 (Ga. App. Ct. 2003) (affirming coverage for business losses resulting from Hurricane Floyd after a local authority declared a state of local emergency and ordered evacuation “because of the serious threat to the lives and property of residents”).

Lack of Access to Insured Premises. “Ingress and Egress” coverage is similar to “Civil Authority” coverage and may provide coverage for business losses sustained when access to the insured's premises is prevented by an insured peril. Typical wording provides that the “policy covers loss sustained during the period of time when, as a direct result of a peril not excluded, ingress to or egress from real and personal property not excluded hereunder, is thereby prevented.” See, e.g., Fountain Powerboat Industries, Inc. v. Reliance Ins. Co. , 119 F. Supp. 2d 552, 556 (E.D.N.C. 2000). A business may have coverage hereunder if the storm prevented access to its premises. Property damage typically is not a requirement for this coverage to apply. Id. at 556-57. (“Loss sustained due to the inability to access the [insured's] facility and resulting from a hurricane is a covered event with no physical damage to the property required.”).

Service Interruption. “Service Interruption” coverage provides insurance when services to an insured property are interrupted. These services can include electricity, gas, water, phone and sewer services. By way of illustration, a standard ISO endorsement provides coverage for “loss of Business Income or Extra Expense at the described premises caused by the interruption of service. ' ” ISO Form BP 04 57 01 06 (2004). The interruption of service includes “ water supply services,” “communication supply services,” and “power supply services.” Id. Given the widespread power outages caused by Superstorm Sandy, this grant of coverage may also come into play.

Claim Preparation. “Claim Preparation” coverage generally covers the insured for the costs associated with compiling and certifying a claim. Such coverage would apply, for example, to the expenses incurred by the insured in retaining consultants or claims accountants to assist in quantifying and preparing the claim submission to the insurer.

Advance Payments. Businesses often need insurance to resume normal business operations and thus cannot afford a protracted adjustment period. Indeed, an insurer's delay in making appropriate and periodic payments may cause an increase in the covered time frame for business interruption and extra expense purposes. Importantly, many policies expressly require that insurers pay losses as incurred while the full extent of the loss is being adjusted.

Flood Insurance

Coverage for damage directly caused by flooding should be covered under an insured's flood insurance policies. Where a company does not have private flood insurance, it may have purchased coverage through the National Flood Insurance Program (“NFIP”). As with any other insurance policy, businesses should carefully review their NFIP coverage and consider potential coverage issues prior to submitting a claim.

Other Coverages?

It is important to remember that many types of insurance coverage other than property/business interruption coverage may possibly be available to cover hurricane or storm-related losses. Coverage may be available, for example, under commercial liability coverages, directors and officers liability insurance coverages, pollution coverages, and credit risk coverages. In addition, many businesses may have specialty policies potentially responsive to particular situations.

Identify Potential Coverage Issues

Faced with a large property damage or business interruption claim, insurers may raise a number of potential limitations or restrictions on coverage. The availability of coverage may turn on a number of policy provisions or insurer defenses, including the following issues.

What Caused the Loss?

In the case of Superstorm Sandy and other natural disasters, there may be multiple causes of loss. These may include the windstorm itself, high winds, tidal surges, floods, actions of civil authority, and damage to the insured's property or to other property. Determining the cause of loss is important because policies may exclude or limit coverage (including through application of sublimits and deductibles) for certain causes of loss, but not others. By way of example, property policies often exclude “flood” or contain sublimits applicable to “flood” that are substantially lower than the otherwise applicable policy limits. Likewise, “named” windstorms such as Superstorm Sandy may be subject to higher self-insurance features. Courts have taken different approaches in determining the cause or causes of loss or damage. For example, many courts have adopted the “efficient proximate cause” doctrine, which generally “permits recovery ' for a loss caused by a combination of a covered risk and an excluded risk only if the covered risk was the efficient proximate cause of the loss. The efficient proximate cause of the loss is the one that sets the other causes in motion that, in an unbroken sequence, produced the result for which recovery is sought.” 7 Couch on Insurance 3d ' 101:55 (2012). In other words, a covered peril (such as a storm) cannot be excluded or forced into a sublimit simply because the chain of loss-producing events essentially ended in a “flood.” Another approach is the “concurrent causation” doctrine, which generally “takes the approach that coverage should be permitted whenever two or more causes do appreciably contribute to the loss and at least one of the causes is a risk which is covered under the terms of the policy.” Id. State laws vary and causation issues can be and often are nuanced and complex. Finally, although some policies contain “anti-concurrent” causation language, which purports to exclude or sublimit a loss if any part of the causal chain involves the excluded or limited peril, such provisions may be held invalid. See, e.g., Safeco Ins. Co. of Am. v. Hirschmann , 773 P.2d 413, 416 (Wash. 1989) (holding that the insurer may not circumvent the “'efficient proximate cause' rule ' and deny coverage when a covered peril sets in motion a causal chain the last link of which is an excluded peril”). This result is consistent with the fact that “[t]he majority of cases addressing causation disputes under an insurance policy hold that the causal relationship of a loss to a particular alleged instrumentality is a question of fact to be decided by the jury” and that “[t]his is especially true in those instances in which more than one cause contributes to the subject injury, and reasonable persons could draw different conclusions regarding the question of which of the contributing causes is the proximate cause of the injury.” 7 Couch on Insurance 3d ' 101:59 (2012).

Does an Exclusion Apply?

Insurers often respond to a claim by asserting that various exclusions in the policy apply to bar or curtail coverage. Some of the exclusions that insurers may assert in response to a Superstorm Sandy claim may include the following:

Flood Exclusion. Although property policies typically cover a variety of naturally occurring weather conditions, certain property policies may exclude flood and water damage. By way of illustration, a standard ISO form excludes loss or damage caused by “[f]lood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray ' ” ISO Form CP 00 99 06 07 (2007). As noted, however, such damage may be expressly covered by a separately purchased endorsement to the policy or by a separate insurance instrument. By way of illustration, the ISO “ Flood Coverage Endorsement” adds “flood” as an additional Covered Cause of Loss and defines flood to mean “a general and temporary condition of partial or complete inundation of normally dry land areas due to: 1. The overflow of inland or tidal waters; 2. The unusual or rapid accumulation or runoff of surface waters from any source; or 3. Mudslides or mudflows ' ” ISO Form CP 10 65 10 00 (1999). Even where the policy contains a flood exclusion, insureds should not assume that the flood exclusion applies wherever a claim involves water. For example, while damages occurring from a tidal surge and overflowing waterways may be excluded under certain circumstances, rain that compromises infrastructure may not be excluded. Coverage will depend on the specific policy language as applied to the particular facts.

Service Interruption Exclusion. Property insurance policies may exclude coverage for damage caused by interruption of services, such as electricity or natural gas. For example, a standard ISO form excludes loss or damage caused by “[t]he failure of power, communication, water or other utility service supplied to the described premises ' ” ISO Form CP 00 99 06 07 (2007). However, many policies expressly cover “ Service Interruption” coverage as noted above.

Law or Ordinance Exclusion. Insurers have argued in some cases, albeit with limited success, that even if an initial event (a hurricane or storm, for example) is covered, losses from enforcement of laws or ordinances are not covered under an “ordinance or law” exclusion. For example, a standard ISO form excludes loss or damage caused by “[t]he enforcement of any ordinance or law ' [r]egulating the construction, use or repair of any property; or ' [r]equiring the tearing down of any property, including the cost of removing its debris ' ” ISO Form CP 10 30 06 07 (2007).

Pollution Exclusion. Property policies may contain pollution exclusions, which insurers may argue bar losses resulting from, for example, water contamination arising from a hurricane or storm. Standard-form property policies (both named-risk and all-risk) often purport to exclude losses caused by, for example, the “discharge, dispersal, seepage, migration, release or escape of 'pollutants.'” ISO Form CP 10 30 10 91 (1991). “Pollutant” may be defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Id. Again, not all policies exclude pollution-related loss, and pollution-related coverage may be expressly afforded in the policy, by endorsement, by separate policy or through a global “master” policy or umbrella coverage. By way of example, a standard ISO “named peril” policy form expressly covers, for example, the insured's “expense to extract 'pollutants' from land or water at the described premises if the discharge, dispersal, seepage, migration, release or escape of the 'pollutants' is caused by or results from a Covered Cause of Loss ' ” ISO Form CP 00 99 06 07 (2007).

Whether an exclusion applies will depend upon the specific exclusionary language in the policy and whether the insurer can meet its burden to demonstrate that the exclusion unambiguously applies to the loss in question under applicable law. See generally 2 Couch on Insurance 3d ' 22:31 (2012) (“provisos, exceptions, or exemptions, and words of limitation in the nature of an exception ' are strictly construed against the insurer where they are of uncertain import or reasonably susceptible of a double construction, or negate coverage provided elsewhere in the policy”). Ambiguities in policy language typically will be construed in favor of the insured under established principles of insurance contract interpretation. Id. ' 22:14 (“If an insurer uses language that is uncertain, any reasonable doubt will be resolved against it[.]“). Exclusions also may not be enforced where their application would defeat the reasonable expectations of the insured as to the protection afforded under the policy. Id. ' 22:11 (“the objectively reasonable expectations of [the insured] regarding the terms of insurance contracts will be honored even though a painstaking study of the insurance provisions would have negated those expectations”). Finally, whether an exclusion applies may depend, in large measure, upon what is determined to be the cause of the loss, along with the applicable law on causation, as discussed above.

What Exactly Is a 'Business Interruption'?

Insurers sometimes take a narrow view of what exactly constitutes a suspension or interruption of business operations and argue that the phrase “necessary suspension of your operations” requires a complete cessation of all of the insured's operations. On this basis, an insurer may refuse to pay for otherwise covered business income loss because the insured's operations did not completely cease during the period of restoration. Compare Hotel Properties, Ltd. v. Heritage Ins. Co. , 456 So.2d 1249, 1250 (Fla. Dist. Ct. App. 1984) (holding that a “diminution in business” to a hotel as a result of a fire on the premises “did not constitute an interruption of the appellant's business within the policies in question”) with Aztar , 224 P.3d at 971 (“the trial court erred in determining as a matter of law that [the insured's] claims could not fall within the business interruption coverage ' of the Policy because the hotel and casino still had the same operational capacity”). This should not be an issue under many policy forms, however. For example, an ISO standard form expressly defines “suspension” to include “[t]he slowdown or cessation of your business activities.” ISO Form CP 00 30 06 07 (2007).

Does Coverage for Business Interruption Depend on Physical Loss or Damage to Insured Property?

Although the business interruption coverage set forth in some policies expressly requires loss or damage to the insured's property, this may not always be the case. “Covered property” may broadly include other property in which the insured may be said to have an “insurable interest.” In addition, as noted above, many policies expressly provide coverage where a supplier or customer suffers damage that results in interruption of the insured's business. This also may be a non-issue if the insured is seeking coverage because of, for example, business interruption due to circumstances created by an action of civil authority or inaccessible ports, roads and closed airports.

How Is Business Interruption Loss Measured?

Insurance policies typically contain provisions stating how business interruption losses are to be measured. Policies sometimes include provisions specifying that the policy will only cover loss of income and related expenses for a specified period of time after an insured event occurs. Where this time is not specifically defined, it may be tied to the time it would take the insured, employing reasonable mitigation efforts, to resume normal business operations under the circumstances. In view of the magnitude of the floods and the number of businesses affected, the length of time it will take to repair property and resume normal business operations may be longer than had the claim been an isolated event affecting a single facility. In most cases, prior experience and projected earnings and expenses will be highly relevant. Because insurers often request detailed proof of claimed losses, affected businesses should keep comprehensive records of lost sales and revenues, and extra expenses that have been incurred. Moreover, accounting procedures should be established to collect and maintain adequate supporting documentation for claimed losses. Retention of the services of a forensic accountant, working with insurance coverage counsel, is often advisable in formulating a claim for business interruption coverage.

What Are the Applicable Deductibles/Retentions or 'Waiting Periods'?

Some policies have language providing that time element coverages only allow coverage after a certain dollar threshold or a certain period of time has expired. The application of these policy features may have a significant impact on the amount of the insured's potential recovery.

Many of these issues are nuanced and their resolution may vary based on the applicable law.

Effectively Present the Claim

The manner in which a claim is presented may have a significant impact upon the insured's ultimate recovery. As noted, policies may have various exclusions, sublimits or deductibles depending on the particular peril causing the loss. The manner in which the insured characterizes a loss and presents its claim may impact upon whether these limiting features of the policy are applied to its claim. In all cases, an insured should evaluate its loss information in light of the policy wording and applicable law, and present the claim to the insurer or insurers in a coverage-promoting manner.

Most policies identify specific procedures that should be followed in presenting and pursuing a claim and usually incorporate time deadlines and other requirements. These provisions usually include the following:

Proof of Loss

Property policies generally require a sworn proof of loss summarizing the amount and extent of the damage or loss. For example, the ISO standard form states that the insured must “[s]end us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request.” Id. An insured should consider requesting a written agreement extending the time for submission of a proof of loss (and potentially other policy conditions) depending on the nature of the loss.

Notice of Loss

Policies may require the insured to notify the insurance company “as soon as practicable” or within a specified period after the insured becomes aware of circumstances that may lead to a claim. For example, the ISO standard form states that the insured must provide “prompt notice of the loss or damage. '” ISO Form CP 00 99 06 07 (2007).

Suit Limitation

Policies may include “suit limitation” provisions, which may provide that an action or suit to recover under the policies must be bought within a specified time (12 months, for example) after inception of loss. Although these provisions may not be enforceable if shorter than the applicable statute of limitations, it is important that insureds take all appropriate steps to ensure that suits, if necessary, are filed in a timely fashion.

Failure to comply with these time-sensitive procedural requirements, insurers will argue, may invalidate an otherwise covered claim. Thus, careful advance attention to these potential requirements is recommended. In addition, virtually all policies contain general “cooperation” provisions obligating the insured to cooperate with the insurer in its investigation of the loss.

Conclusion

Insurance is a valuable asset. Businesses that have suffered losses because of Superstorm Sandy may have substantial financial protection through their insurance policies. Businesses should consider the scope of coverage under those policies carefully and should act promptly to recover all insurance coverage that may be available. Experienced insurance coverage counsel may be able to assist an insured in identifying coverage, assessing the viability and strength of its potential claim, communicating with the insurers' representatives, and ultimately maximizing the company's potential insurance recovery.

Roberta Anderson is a partner in K&L Gates LLP's Insurance Coverage practice group and a member of this newsletter's Board of Editors. She concentrates her practice in insurance coverage litigation and counseling, and has represented insureds in connection with a wide range of insurance issues arising under many different forms of insurance coverages, including general liability, property and business interruption, environmental, fidelity, professional liability, directors and officers, errors and omissions, employers' liability, political risk, terrorism, residual value, nuclear and numerous others. Anderson also counsels clients to assist them with analyzing new insurance products, addressing the adequacy of their existing insurance programs, and negotiating insurance program placements.