Proactively Anticipating Business Insurance Needs

Monday, May 2, 2011 - 01:00

Editor: Please tell our readers about your practice.

Cohen: Along with my colleagues at Proskauer, I represent policyholders in claims against insurance companies, ensuring that our clients receive the full measure of policy benefits. For example, we represented Mr. Silverstein and his lender in the World Trade Center claim against dozens of insurance companies for losses suffered when the buildings collapsed. We've also handled claims related to mining accidents, Hurricane Katrina and other disasters. Current insurance issues in Japan, with the earthquake, tsunami and nuclear threat, are the kinds of insurance claims in which we specialize.

Editor: For those who rely on Japan for supplies, what is the impact of interruption in the supply chain?

Cohen: Supply chain interruption is a major issue in a global economy. Companies operate through a global transportation network, and they rely upon one another for component parts, raw materials and supplies in diverse industries. The impact of this phenomenon is greater than ever before. Right now, American clients can't get the Japanese-made parts they need - because either production has ceased or products cannot be moved out from Japanese ports. Japan accounts for more than six percent of U.S. imports, and the U.S. exports in excess of four percent of our product to Japan, so the impact is substantial.

There is no way to become "less global," so the solution is to avoid being dependent upon one source for any particular item. For example, Japan is the sole source for certain batteries and some flash memory devices, and such dependence is likely to change. Whether companies seek alternate suppliers in India, China or other countries, diversification is the right answer, and companies are focused on mitigating this business risk.

Editor: Why is it important for those holding certain business loss policies to assess losses and invoke their rights immediately?

Cohen: There are many different kinds of policies, but the main objective is to avoid business interruptions, including operations and supply chain disruption, with no option to cover losses. Companies should never be caught short on product without a way to seek remuneration for that loss.

Having the right insurance is critically important, and the best strategy is to work with a broker or attorney with specific expertise in your business to ensure you are be prepared in advance of a disaster.

There are time-sensitive notice provisions in policies with which prompt compliance is critical; waiting only increases the chance of missing a deadline and losing coverage. Further, insurance companies have rules as to how and in what format they want the loss quantified. As these may differ from procedures in company information systems, it is important to be prepared with necessary data - certain costs and expenses, for example - that may not be tracked in acceptable formats and to the required extent.

There is always a chance that coverage will be denied due to delays or loss of evidence. Insurance companies require everything to be documented, so it is critical to preserve all evidence and get organized in advance in order to be able to act quickly.

Editor: What does a professional counsel, such as an accountant or attorney, bring to the table for an individual company?

Cohen: Accountants are invaluable and best suited to work with a company in determining exactly how to value the loss. Accountants and attorneys are trained to think proactively and recognize traps and opportunities that companies may miss.

Large companies employ talented risk assessment people, but not all smaller companies can afford a full-time risk manager. Brokers can be very helpful, but businesses need additional assistance to manage legal and valuation issues. Thus, it is important to assemble the right team, including a risk manager or lawyer who understands your business, to determine what coverage should be included and, importantly, what provisions must not be excluded.

Editor: What are typical issues raised when a claim is made?

Cohen: In a case like the disaster in Japan, companies will apply for business interruption coverage. Issues that arise relate to whether property has been physically damaged and whether or not there is a valid claim. There also are questions having to do with valuation and what specifically is covered. For example, business interruption coverage may require you to expedite repairs, mitigate losses and track expenses - all in a manner that is different from your normal business procedure. Further, companies may incur extra costs, such as rent and hauling, associated with maintaining production while the property is being repaired.

Editor: What about reputational damage?

Cohen: That is a very interesting issue; it really depends upon the policy and specific claim. A typical business interruption claim may not have reputational coverage; however, this is a developing area and worth a careful examination of the language as to what the real loss is. Coverage itself is a debatable legal question, but you always must be able to quantify the loss in a substantive way.

Editor: Regarding the World Trade Center disaster, please discuss the contention that there were two separate causal events.

Cohen: In theory, one could debate whether the damage was caused by the airplane crashing into the tower or by structural deficiencies in the engineering of the tower. In the World Trade Center case, the issue had to do with determining if there was one versus two occurrences relating to the plane crashes. This situation involved a comprehensive general liability policy and issues with respect to business interruption, personal injury and property damage. The question of how many occurrences had a lot to do with specific language in the policy.

Your question raises the related subject of concurrent causation, which was an issue in Hurricane Katrina. The corresponding question was whether the damage was caused by the hurricane itself or by the breaking of the levy. This kind of issue will be raised in the wake of the catastrophe in Japan. It is very complicated because it requires a determination of the root cause of damage, in this case, an earthquake, which caused a tsunami, which caused flooding and led to the compromised nuclear plant and radioactivity. There will be multiple concurrent causation arguments under every policy for the Japanese companies that are directly affected.

Further complicating this issue, each case will require review of policy language in the context of jurisdictional differences in Japanese law. Concurrent causation will be the single biggest issue with claims resulting from the disaster.

Editor: Is earthquake and flood damage usually included in first-party property damage policies?

Cohen: My view is that earthquake and flood coverage is included unless it is specifically excluded. Unfortunately, many business interruption policies contain exclusions for earthquakes and flood damage, particularly for companies that are located in earthquake- and flood-prone areas, such as California and New Orleans.

Again, the key is to think through and plan for potential issues in advance. Getting the right people involved in purchasing earthquake and flood insurance can make all the difference in having adequate coverage, including up-front negotiation on the issue of concurrent causation. Professionals can help companies negotiate policy language that nails down the terms and covers specific causation events. The situation in Japan highlights the importance of these arrangements.

Other important policy components are contingent business interruption and dependent business premises coverage, which cover supply chain disruption and resulting business losses. Many businesses are not aware of the option to be added as an insured under a supplier's policy; thus, one first step is to contact suppliers and ask about this option. As both a proactive and reactive practice, it is important to look beyond internal company policies to those of business partners.

Editor: Is this one way a team of experts can help businesses become educated consumers and maximize insurance options?

Cohen: Absolutely, and supplier policy coverage is an excellent example of just how easy the process can be, once you understand the parameters. Contracts with suppliers simply need a paragraph stating that the company is an additional insured under a supplier's policy. Separately or in addition, a supplier can indemnify against business loss should supplies be disrupted. These all are measures that can be set up in advance, but you have to know they exist.

Editor: With business interruption insurance, why is it sometimes necessary to engage a forensic accountant to assess costs from property damage? How can a policyholder be expeditious in getting his business up and running speedily?

Cohen: First, it's certainly important to act quickly. With all the distractions that arise from catastrophic events, you may miss deadlines, neglect paperwork or lose evidence.

It is necessary to engage a forensic accountant or other qualified counsel because these professionals work with insurance claims every day, and they naturally will think of things a business might never even consider. Further, under most business interruption policies, payments for some professional services are covered under the business policy, so, at the end of the day, there usually isn't any extra cost. Ultimately, these professionals can add tremendous value in ensuring there is no misstep, optimizing coverage options, processing compliant paperwork on time and making sure you get paid quickly.

One final point: companies may be able to apply for a cash advance, an important potential benefit of which companies often are unaware. Don't be shy about asking an insurance company for an advance payment, and seek assistance from a qualified professional to generate specialized paperwork and quantitative reporting. Such payments can be welcome relief as companies process the rest of paperwork and attempt to resume business operations.

Editor: Where utilities are unable to service businesses, as in Japan today, what protections are available?

Cohen: There are some insurance policies that can help. While policies generally require damage to the property of a utility supplier, there also is coverage for your loss of income or burden of extra expense. For example, impounded water coverage applies in the event that water is used as a raw material - for power or in a manufacturing process. Some policies have specific coverage for situations in which such necessary resources become unavailable. One caveat is that sometimes utilities coverage is limited in duration and often subject to waiting periods or deductibles, but businesses should always look for these specific provisions in policies.

Editor: What protection does an owner have when there is a government order that blocks off his premises from occupancy?

Cohen: That does happen. In mining accidents, for example, the government can shut down the mine for safety reasons and, as a result, all operations cease.

Unlike business interruption coverage, some policies require no physical damage to invoke the civil authority coverage. It is important to be aware of specific provisions in most business interruption policies that cover a civil authority intervening and blocking off access to the premises.

Editor: In light of the enormous and unforeseen losses in Japan, how can business owners respond today and plan for the future?

Cohen: In responding to disaster, the first step is to determine current coverage by locating and analyzing every active policy. Next, businesses should consult with a team of professionals - accountants, lawyers and brokers - and try to understand exactly what coverage is available. Most laypeople never actually read their policies and might have difficulty understanding insurance language; thus, a team of professionals can manage this process of identifying business and insurance issues.

Proactively, companies should identify business needs and purchase policies in advance that address those needs. Given that not every business can afford insurance to cover every possibility, companies must prioritize risks and then purchase policies that strategically cover as many as possible.

Please email the interviewee at ncohen@proskauer.com with questions about this interview.