Individuals, businesses and their insurers are still tallying the harm Hurricane Sandy caused, including tragic loss of life and property. Hurricane Sandy damaged infrastructure, including railways, roads, bridges, ports, utilities and communications networks. And Hurricane Sandy has had – and is having – significant economic consequences because of damage to businesses. Many companies with facilities in its path were forced to suspend some, if not all, of their operations. The impacts of Hurricane Sandy, like previous disasters – both natural and man-made – also will give rise to important insurance issues, particularly with respect to business interruption losses.
Whether coverage is afforded will depend on the scope of insuring agreements, the operation of exclusions, conditions and limitations on the policy, and the facts of each claim. While there are legal precedents from cases litigated after disasters such as Hurricanes Katrina and Rita, and 9/11, there also are important business coverage issues with unsettled law.
Physical damage to a policyholder’s business property is covered under a first party property policy, subject to its terms and conditions. First party property policies generally are written either on an “all risk” or a “named peril” basis. An “all risk” policy covers losses caused by any peril, except specifically excluded perils. By contrast, a “named peril” policy covers only losses caused by the perils named in the policy.
After Hurricanes Katrina and Rita, there were many disputes about whether particular homeowners’ losses were caused by a covered cause, especially where what may have been a covered cause (such as wind) combined with an excluded cause (such as flood) to cause property damage. Questions about the cause of a loss and whether it is a covered cause also may arise after Hurricane Sandy. For instance, loss may have been caused by the combination of wind and water, or the combination of wind or flooding with fire (for instance, where fires were triggered by electrical malfunctions that arose from wind or water damage). These issues can be complex. Many modern property insurance policies contain anti-concurrent cause clauses, which limit coverage where a loss is caused by a covered cause combined with a non-covered cause of loss. Courts have differed on the effect to be given to such clauses, which can be outcome-determinative in instances where multiple causes of loss are present.
There are other important issues concerning coverage for physical damage to a policyholder’s property. For example, the application of deductibles has garnered attention after Hurricane Sandy. Special hurricane deductibles may be applicable depending on the policy’s definition of "hurricane" and facts concerning the character of the storm at the time and place of the loss. In some instances, state authorities have attempted to dictate whether higher hurricane deductibles will apply. These questions deserve close scrutiny. Even more complex than questions of coverage for physical damage, however, are issues concerning the key parameters of coverage for business income losses.
During and after Hurricane Sandy, many companies shut down and/or suspended their operations in the affected areas. These business interruptions obviously resulted in income losses for directly affected companies. Moreover, some business shutdowns, as well as transportation delays and power shortages, led to business income losses for other companies operating outside areas directly damaged in the storm. The affected companies will likely look to their insurers to cover the setbacks they faced.
Lost business income claims fall under “business interruption” or “contingent business interruption” coverage. Business interruption coverage addresses lost profits caused by damage to the policyholder’s property, whereas contingent business interruption coverage addresses losses resulting from damage to the property of companies that supply the policyholder with goods or services.
Business interruption and contingent business interruption provisions contain important exclusions, conditions and limitations. As the experience with claims after 9/11 bears out, many commercial claims for lost business income will be outside the scope of coverage and/or covered loss will be only a portion of the claim presented. Courts generally acknowledge and uphold the parameters of coverage under commercial insurance agreements, even when this means no insurance recovery for many effects of a disaster on business operations.
Most fundamentally, business interruption losses are insured only if caused by a covered peril. See, e.g., Diamond Shamrock Corp. v. Lumbermens Mut. Cas. Co., 466 F.2d 722 (7th Cir. 1972) (insured was not entitled to recovery for its business interruption loss because the damages were caused by fire, a risk expressly excluded in the policy providing protection against business interruption losses). Also, as a threshold matter, insurers must determine whether an exclusion such as an “act of God” or flood exclusion bars coverage.
Under most property policies, there also can be no insured business interruption loss without covered damage to or loss of physical property. See, e.g., Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006) (no “direct physical loss to property” under “business income” or “action by civil authority” coverage provisions when an embargo rendered unshippable to the United States Canadian beef that the policyholder had purchased and that had been prepared for shipment to the policyholder; the beef at issue was not physically contaminated or damaged in any manner). Thus, if a policyholder lost business income after Hurricane Sandy but did not itself suffer physical property damage, a policy’s business interruption provision may not afford coverage. Likewise, under a contingent business interruption provision, typically the company that failed to meet contractual obligations to supply the policyholder with goods or services must have suffered property damage interrupting its business operations. Accordingly, it is important whether the interruption of business was caused by property damage, as is required in widely used language of property policies, or by some other uninsured factor associated with Hurricane Sandy.
A “civil authority” provision often will cover lost income even when there is no damage to the insured premises, although the precise terms of such provisions vary. Under a civil authority provision, an insurer agrees to pay for the loss of business income and any necessary extra expense caused by action of civil authority prohibiting access to the insured premises. Because Hurricane Sandy caused evacuations, shelter orders and the like, commercial policyholders might seek coverage for losses attributable to actions of civil authorities that prevented access to a policyholder’s property.
However, there usually is no coverage where the civil authority’s order only has an indirect effect of restricting or hampering access to the premises. See, e.g., S. Hospitality, Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137, 1141 (10th Cir. 2004) (no civil authority coverage where the Federal Aviation Administration’s order grounding flights after 9/11 did not itself “prevent, bar, or hinder access to [the insured’s] hotels in a manner contemplated by the policies”); 54th St. Ltd. Partners, L.P. v. Fid. & Guar. Ins. Co., 306 A.D.2d 67 (N.Y. App. Div. 2003) (no coverage where “vehicular and pedestrian traffic in the area was diverted, [but] access to the restaurant was not denied; the restaurant was accessible to the public, plaintiff’s employees and its vendors”). In other words, if access to the property is made difficult or otherwise limited by a civil authority’s order, coverage is not necessarily triggered. For example, road closings by the government based on the storm do not give rise to civil authority coverage unless the government specifically prohibited access to the property. See, e.g., Syufy Enters. v. Home Ins. Co., No. 94-0756 FMS, 1995 WL 129229, at *2 (N.D. Cal. Mar. 21, 1995) (no civil authority coverage where curfew did not “specifically prohibit any individual from entering a theatre; rather, the cities imposed dawn-to-dusk curfews to reduce the possibility of rioting and looting”).
Policyholders might further look to ingress/egress provisions in their policies for coverage. A policyholder may recover loss of business income under an ingress/egress provision even where there is no order by a civil authority. However, like a civil authority provision, an ingress/egress provision typically does not afford any coverage if access to the premises is still possible.
Limits on the damages recoverable under business interruption coverage often have been disputed. For instance, insurers and their policyholders have litigated over the period of restoration after business operations were halted, as well as whether coverage requires a complete cessation of business rather than a slowdown in operations. See, e.g., Abner, Herrman & Brock, Inc. v. Great Northern Insurance Co., 308 F.Supp.2d 331 (S.D.N.Y. Mar. 12, 2004) (no civil authority coverage for business income loss after access was restored to premises following 9/11 attacks, despite continued diversion of traffic in area and employees' confusion regarding access to building; fact issue remained regarding whether policyholder incurred business income loss due to employees' inability to work on premises following terrorist attacks); Admiral Indemnity Co. v. Bouley International Holding, LLC, No. 02-Civ-9696, 2003 WL 22682273 (S.D.N.Y. Nov. 13, 2003) (no business income loss coverage where bakery damaged by 9/11 attacks gained lucrative contract with charitable organization for food services; end of “period of restoration” under business interruption clause occurred when bakery should have been repaired).
There undoubtedly will be other policy-specific disputes between policyholders and their insurers over the ability to recover for storm-related losses. There are many variations in commercial property coverage and the scope of insured risks, e.g., Key3 Media Group, Inc. v. Commerce and Industry Insurance Co., No. BC 278751 (Cal. Super. Ct., Los Angeles County July 30, 2003) (no coverage for losses for a conference held shortly after the events of 9/11, because reduced attendance and cancellations by certain exhibitors did not constitute a “cancellation” under the policy where the trade show itself was not actually interrupted or limited in its duration).
Insurance claims after Hurricane Sandy are still emerging. Many issues presented may parallel questions that arose after Hurricanes Katrina and Rita and the September 11 attack. The case law from those disasters will provide important guidance for claims following Hurricane Sandy, but there also are likely to be new tests to the scope of commercial property coverage, particularly business interruption and contingent business interruption coverage.
Laura A. Foggan is Chair of Wiley Rein's Insurance Appellate group. Practicing for more than 25 years, Ms. Foggan has made significant contributions to the development of key insurance law precedents across the country. She serves as lead counsel in trial and appellate matters involving complex insurance claims. She can be reached at (202) 719-3382.
Jeremiah Galus is an Associate at Wiley Rein. He assists clients with a variety of trial and appellate matters before federal and state courts, focusing primarily on representation of insurers in complex coverage litigation. Mr. Galus can be reached at (202) 719-7112.