Hurricane Damage: Ensuring Expected Business Profits
By Donald O. Johnson, J.D., LL.M., CPCU [1]
Hurricane Ike recently caused extensive property damage in Galveston and Houston, Texas and other areas on the Gulf Coast. The damage to commercial properties and utility service providers interrupted business for many large and small companies, causing a loss of expected profits and an increase in business expenses. Some companies will be able to recover some or all of these lost profits and extra expenses because they purchased insurance coverage that protects their expected profits and reimburses them for extra expenses. Other companies that had not obtained the appropriate coverage, unfortunately, have to bear the losses themselves, which sometimes will result in business closings.
This article briefly identifies some of the relevant insurance coverage products that risk adverse companies can purchase to protect their profits and to ensure the recovery of extra expenses incurred to mitigate damage to their property and, if necessary, to continue their business operations in other locations until their damaged property is repaired or replaced.
Commercial Property Insurance
The primary and most frequently purchased coverage that insured businesses will look to for compensation after a hurricane has damaged their property is their commercial property insurance coverage. It typically covers damage to covered property caused by wind, rain that enters an insured’s property as a result of wind damage, and mold that ensues from that rain damage. Basic commercial property coverage will pay the lesser of either the cost to repair the damaged property or the actual value of the damaged property as of the date of the loss. Because of inflation and other factors, this recovery may not be sufficient to replace property that is a total loss. To ensure that a business recovers enough money to replace property that is a total loss, businesses can purchase replacement cost coverage, which pays the insured the amount necessary to replace the damaged property.
Commercial property policies do not cover flood damage, which is damage caused by high tides and rising water levels. To cover flood damage, businesses have to look to flood insurance policies if they have purchased such policies. Commercial property policies also do not cover a business’s lost profits unless the policies contain additional business interruption coverage.
Business Interruption Insurance
Business interruption insurance protects an insured from the loss of profits if the loss resulted from damage to covered property caused by a covered peril. In the case of a hurricane, the covered perils include wind, rain that enters an insured’s property as a result of wind damage, and mold that ensues from said rain damage. This coverage pays a business for profits loss from the date of the hurricane loss or some other specified waiting period until the date on which the business could resume business if the insured exercised due diligence in repairing or replacing the damage that caused the interruption of business. Business interruption insurance and the other additional coverages addressed in this article often are added to a commercial property policy with a policy endorsement.Contingent Business Interruption Insurance
Contingent business interruption insurance is similar to business interruption coverage with the exception that it protects an insured against the loss of its expected profits resulting from an interruption of its business caused by damage to the property of one of its suppliers (e.g., electricity supplier) if the damage to the supplier’s property was caused by a covered peril (e.g., wind).Rental Income Insurance
Rental income insurance is tailored to businesses that own rental property. It covers lost rental income caused by damage to the insured’s rental property by a covered peril.
Extra Expense Insurance
Extra expense coverage reimburses an insured for the extra expense that the insured incurs to continue its business operations during the period that it takes to restore its business operations to normal after a covered interruption of the insured’s business operations. For example, extra expense coverage would cover the cost of leasing a building in which the insured can conduct business operations during the period of restoration.Increased Cost of Code Compliance
In some jurisdictions, a property owner who is repairing property that has been damaged beyond a specified extent must repair the property so that it complies with the jurisdiction’s current building code even if the property did not comply with that code before it was damaged. Increased cost of code compliance coverage pays the extra cost to the insured to meet the current building code. Without this coverage, the insurer is obligated to pay only the amount required to return the covered property to the condition it was in when it was damaged by a covered peril.Event Cancellation Insurance
Businesses that have scheduled a profit-generating event, such as a conference or an entertainment event, can purchase event cancellation insurance, which will pay the insured’s lost profits if the event is cancelled because of a covered peril (e.g., hurricane, earthquake, etc.).Exclusions, Conditions and Potential Coverage Disputes
To recover under any of the foregoing commercial property coverages or other similar coverages, the policy must cover the property at issue, the damage must be caused by a covered peril, none of the coverage exclusions can apply, and the insured must comply with all of the material policy conditions. Policy conditions include providing timely notice of claim, submitting a sworn proof of loss, cooperating with the insurer’s requests for documentation of the cause and amount of the loss, and submitting to an examination under oath if the insurer requests one.Potential Valuation Disputes
Beyond potential coverage disputes, sometimes insureds and insurers cannot agree about the valuation of the claimed losses. Valuation disputes sometimes are determined by an appraisal conducted by two independent appraisers and an umpire if the policy contains an appraisal clause and if the insured or the insurer demands an appraisal. Other times, valuation disputes, along with causation and other coverage disputes, are resolved in court through declaratory judgment actions and breach of contract actions.
Conclusion
It is not yet clear to what extent businesses whose property was damaged and whose business operations were interrupted by hurricane Ike had the extended property coverages discussed in this article, but it is safe to say that those that did have the best chance of being profitable in 2008 and 2009.References
[1] Donald O. Johnson, J.D., LL.M., CPCU is an attorney at D. O. Johnson Law Office, PC. He represents clients in insurance coverage and other commercial litigation. He also is General Counsel of the National African-American Insurance Association (a/k/a NAAIA), a member of the Chartered Property and Casualty Underwriters (CPCU) Society’s Diversity Committee, and a Director of the Society’s District of Columbia Chapter. Additional information about Don can be obtained at www.dojlaw.com. 
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