SDV's Natural Disaster Recovery Group presents the Hurricane Handbook: A Policyholder's Guide to Handling Claims during Hurricane Season. This handbook intends to be a practical guide on policyholder issues, both homeowners and business owners alike, when preparing for hurricane season and handling claims after a loss due to a hurricane. The handbook is a living document that will evolve over time, as our Natural Disaster Recovery Group members continue to contribute new and expansive content on the complex issues arising in this area. Remember to check back for additional information and updated content regarding the Hurricane Season Policyholder’s Handbook.
I. Are You Adequately Insured for a Hurricane?
Understanding the various types of coverage policyholders can purchase is vital to weathering the financial storm following a natural disaster.
a. Business Interruption Coverage.
- Water and wind damage are just some ways a hurricane may temporarily halt a business’ operations.
- Business Interruption (“BI”) coverage, or “Business Income Insurance,” can be included in a commercial property policy or added by endorsement. It covers lost earnings that result from a disruption to the insured’s business due to fire, weather, or other covered peril. Since there are no standardized BI forms, policyholders should always review the specific language of their policies prior to a business interruption occurrence to be sure they are adequately insured.
- Almost all BI policies will require that the insured’s business sustain direct physical loss or damage.
- SDV recommends obtaining coverage that addresses the potential risks each policyholder’s business is likely to encounter. Policyholders should strongly consider BI provisions with the broadest scope of coverage, including contingent business interruption, loss of utility service, civil authority, and ingress/egress coverage.
b. Contingent Business Interruption Coverage.
- Contingent Business Interruption (“CBI”) coverage is an extension of BI insurance. It covers earnings lost because of damage to facilities that are not owned, operated, or controlled by the insured, but upon which the insured depends to conduct its own business. For example, when a hurricane disrupts a supply chain that a business relies on for products or raw materials, this insurance could cover the lost earnings caused by that disruption.
- SDV recommends businesses have CBI coverage in the following circumstances:
The Insured’s business (1) depends on suppliers for materials or merchandise, (2) depends on one or more businesses to purchase its products, and/or (3) depends on neighboring business(es) to attract customers.
c. Loss of Utilities Coverage.
- This insurance expands BI coverage to specifically include loss of utilities, which may otherwise be excluded because of the “direct physical loss or damage” requirement in most BI policies. There are two types of coverage here:
1. Time Element Coverage: Expands coverage to loss or damage the insured sustains by a covered peril through interruption to utility services caused by damage to its infrastructure. This endorsement helps cover lost business income during the time electricity or other utilities are interrupted. For example, a hurricane damages a power plant, cutting power to a grocery store. The store remains closed until power is restored. This insurance will pay for the lost revenue due to the closure and, potentially, any spoiled food.
2. Direct Physical Damage Coverage: Insures specific property (often listed in the policy) from direct physical damage to the property caused by an interruption in utility service when that interruption results from a covered peril. For example, after a hurricane-related power outage, power is restored, and a power surge damages the grocery store’s electrical system. This insurance covers replacement or repair of any damaged utility systems.
- SDV recommends that policyholders in areas prone to hurricanes carry both forms of utility interruption coverage to protect against the broadest scope of damages that may result from a loss of utilities.
d. Civil Authority.
- Hurricanes often cause governments to order road closures or restrict access to specific areas. These closures prevent customers, employees, or goods from reaching an insured’s business. Adding Civil Authority coverage to your policy can cover business revenue loss when government actions prohibits access to the insured premises.
- The primary issue associated with this coverage is the requirement for the government action to be tied to physical damage. For example, if a hurricane demolishes a building, and requires authorities to block a road, there will be coverage if there is no other route to the insured’s business. However, if roads are closed because of a chemical spill or viral outbreak, there will likely be no coverage from this endorsement because there is no physical damage involved. Additionally, this coverage is only triggered if there is no reasonable access to the insured’s business. If there are two routes to the business customers can take and only the most convenient one is closed, there is still access and thus, no coverage.
- SDV recommends this coverage for businesses that operate in areas of limited access. If there are multiple ways to access your business and a low risk of all of them being closed, this coverage will not likely be triggered.
e. Ingress/Egress Coverage.
- What if a natural disaster severely limits access to your business but there is no government order closing the roads? Business owners can purchase “Ingress/Egress” coverage to protect their businesses in this circumstance. Like Civil Authority coverage, Ingress/Egress coverage is designed to pay for the loss of income triggered by physical damage caused by a covered peril to non-covered property that prevents or hinders ingress to or egress from the insured’s business. However, an act of civil authority is not always needed to trigger Ingress/Egress coverage. Even when there is no requirement for a government closure order, there is generally still a requirement that a covered peril cause the closure of access to the insured’s business.
- One of the main hurdles to coverage under an ingress/egress provision is the requirement for a road closure to be the result of physical damage. Policies often place limits on the distance away from the insured’s property that physical damage must occur in order to have coverage. The distances vary by policy from less than a mile to over five miles. Policies also require that the physical damage be caused by a covered peril. For example, if a hurricane destroys a building that blocks the only road to your business, there will be coverage for the interruption period because the prevention of access is a direct result of physical damage. However, if roads are closed because a chemical spill, there will likely be no coverage from this endorsement because there is no direct physical damage involved.
- Another issue raised by Ingress/Egress coverage is the level of restriction in access to the business premises. Generally, Ingress/Egress coverage is only triggered if there is no access using reasonable means to the insured’s business. If there are multiple routes to the business and only the most convenient, or primary, route is closed, there is still access to the business. Even if there is a reduction in business income because of the closure, there will likely be no coverage because there is still reasonable access to the business.
- Like Civil Authority coverage, SDV recommends this coverage for businesses that operate in areas of limited access. If there are multiple ways to access your business, this coverage may not be necessary.
f. Flood Insurance Coverage.
- Although hurricanes often result in flooding, Flood Insurance is never included in a standard property policy and must always be purchased separately for both businesses and residences.
- Flood Insurance covers damage to your real and personal property caused by a flood. When it comes to Flood Insurance, it is important to understand how your policy defines a “flood.” Generally, a flood will include water overflowing a river or stream, a storm surge, or a broken dam or levee. Disputes often arise as to whether the water damage was caused by an actual “flood.” This issue will only arise if you do not have Flood Insurance, or if you do, over which deductible applies. It is also important to understand the limitations of Flood Insurance. Flood Insurance will only cover the physical damage a flood causes. Any consequential damages, such as lost revenue to a business or additional living expenses to a homeowner, should be addressed in other policies.
- SDV recommends that policyholders in areas susceptible to hurricanes should carry Flood Insurance even if their property is not located in a high-risk flood zone or floodplain.
II. Claims Issues Following a Hurricane.
Having the right coverage is only the first step toward protecting your home and business from natural disasters. Once disaster strikes, policyholders must be prepared for the claims issues following a claim.
a. Increased Wind Deductibles.
- If your policy contains an increased wind deductible, it usually will appear on the “declarations” page of your homeowner’s or commercial property insurance policy. These deductibles are calculated using a percentage of the property value instead of a flat deductible that applies to other types of losses. The three most common deductibles are Windstorm Deductibles, Named Storm Deductibles, and Hurricane Deductibles. Windstorm Deductibles are the broadest, meaning they will apply to losses caused by most wind-related weather events, even if not particularly severe. Named Storm and Hurricane Deductibles are higher and meant to incentivize policyholders to take additional steps to mitigate their damages resulting from those more significant wind-related weather perils.
- Windstorm Deductibles: Apply whenever damage is caused by wind; this includes hurricanes, tropical storms, winter nor’easters, and summer thunderstorms.
- Named Storm Deductibles: Are often higher than Windstorm Deductibles and only apply to named storms designated by the U.S. National Weather Service and/or the U.S. National Hurricane Center (or some other similarly recognized and accepted weather agency).
- Hurricane Deductibles: Are the most restrictive because they only apply to actual hurricanes (Category 1–5). Hurricane Sandy is a good example of the distinction between Named Storm and Hurricane Deductibles. When Sandy made landfall in New Jersey, it had been downgraded from a Category 1 hurricane to a tropical storm. Thus, the lower Named Storm Deductible applied to policyholders with both Named Storm and Hurricane Deductibles designated in their policies. Hurricane Deductibles have become less common due to the potential for political interference after the fact, as was evident with Sandy - i.e., some suggested that the downgrade of Hurricane Sandy to a named tropical storm was precisely announced to shield homeowners from their increased Hurricane Deductibles.
- SDV recommends that policyholders review their property insurance policies to verify which deductible will apply in the event of a hurricane.
b. Anti-Concurrent Causation Clauses.
- Policyholders should try to eliminate Anti-Concurrent Causation (“ACC”) provisions from their property policies. An ACC clause indicates that the policy will not cover a loss caused by a combination of covered and excluded occurrences.3 ACC provisions apply in either sequential-cause or concurrent-cause situations. In the sequential-cause scenario, the first event sets in motion a chain of events that causes a second event that causes the loss (i.e., a chain reaction of interdependent events). In the concurrent-cause scenario, two or more causes of loss happen simultaneously to produce the same injury or damage (i.e., a combination of simultaneous independent events). In either situation, if any cause of loss falls within the terms of an exclusion in a policy that contains ACC language, the loss will be excluded in its entirety, regardless of whether another covered cause of loss qualifies as the “proximate” or “predominant” cause under the applicable jurisdiction’s common-law rules.
- For example, a residence that is insured by a homeowner’s policy which provides coverage for water intrusion damages but excludes damages from mold. After a hurricane, the insurer investigates and finds the residence is saturated with water and has suffered subsequent mold damage. Where the policy contains an ACC clause, even though the water damage is covered, the presence of the mold damage may bar coverage for the homeowner’s losses entirely.
- SDV recommends avoiding the inclusion of any ACC language in a property policy because insurers can use it to disclaim coverage for losses from covered perils if there is any damage concurrently caused by an excluded occurrence.
c. Insured’s Duty After a Loss.
- After a hurricane, take immediate action to document all the damage with photographs and video, mitigate further damage as safely and thoroughly as possible, and communicate with your insurer early and often. For example, if there is a leak in your roof, you must go and buy a tarp (or take some other reasonable action) to mitigate any further damage to the building’s interior. Typically, insurance policies will reimburse you for the tarp or other materials you are required to purchase to mitigate those damages, even if those materials are being sold at higher than market rates due to unavailability.
- Timely Notice: Most policies require that an insured timely notify the carrier of a loss. Some states have statutes that specifically address this issue.
- SDV recommends immediately submitting written notice of a claim to the insurer according to the policy’s notice provisions and keeping a copy for your records. Accurate and thorough record-keeping is invaluable in pursuing any claim.
In North America, Hurricane Season lasts from June 1 to November 30. There is no better time to review your insurance to ensure you are adequately covered in the event of a hurricane. For more information, please contact SDV’s Natural Disaster Recovery Group at firstname.lastname@example.org.
1SDV is a national law firm which focuses on insurance coverage law for policyholders of all types.
2The Natural Disaster Recovery Group was created in order to provide content and expertise to policyholders who suffer these types of losses.
3A handful of states refuse to enforce ACC clauses: CA, ND, WA, and WV.