Insurance Report: Property
Assess the effectiveness of your underwriting and claims handling procedures by seeing how courts have ruled in insurance coverage cases involving organizations or risks similar to your own. A coverage decision constitutes a useful “lessons learned” for improving upon the manner in which you purchase insurance and/or seek recovery in the event of a claim or loss. With the hurricane season upon us, this month focuses on property insurance and protecting an organization’s assets and lost income from Nature’s wrath. As you will see, Hurricane Sandy offers multiple opportunities to learn from.
Scrutinize your insurer’s attempt to limit its payout on your claim if your property policy appears to cover the nonreimbursed losses.
In the wake of a 2013 hail storm and the ensuing damage to the insured/manufacturer’s buildings, including damaged siding and HVAC units, and indentations in the metal roofs, a Kansas federal court ruled that the property insurer improperly limited coverage to only what its adjuster found to be the “functional damages” to the buildings, i.e. to just the damaged siding and HVAC units. Rather, held the Court, the insurer should have paid for all repairs involved including the cost to fix the indentations in the roofs. Great Plains Ventures, Inc. v. Liberty Mutual Ins. Co., 2016 U.S. Dist. LEXIS 17751 (D. Kan. Feb. 11, 2016). After the insured/manufacturer timely submitted its claim, the insurer’s adjuster issued its report concluding that the damage to certain of the roofs at issue – hail-caused indentations – were merely “aesthetic in nature” rather than “functional damage”, because the indentations did not compromise the roofs’ expected service life and did not warrant repair. When the insurer agreed and limited its payout accordingly, the insured commenced suit. In agreeing with the insured that the insurer should have paid for the entire claim, the Court noted that the property policy at issue stated that it paid for “direct physical loss or damage to covered property . . .,” i.e. “a loss to covered property at a covered location,” resulting from an insured peril, and that nothing indicated that the cosmetic losses were somehow excluded from the scope of such coverage.
Fully understand the application of any sublimit(s) in your property policy.
In the wake of 2012 Superstorm Sandy, the owner of an office building located in downtown Manhattan had incurred approximately $26 million to repair the physical damages resulting from the wind and flooding, plus another $15 million to address the non-physical damages and losses, i.e., “expediting costs, service interruption time element loss, on-premise service coverage debris removal, demolition and increased cost of construction, and professional or loss adjustment fees.” However, when its insurer paid out $25 million and refused to pay any more, and litigation ensued, the Court agreed that the property owner was not entitled to anything more. The Court agreed with the insurer that the non-physical losses were also subject to the $25 million flood sublimit contained in the property policy at issue, which sublimit had been exhausted by the insurer’s payment toward the physical damages. Almah LLC v. Lexington Ins. Co., 2016 Del. Super. LEXIS 47 (Del. Super. Ct. Jan. 27, 2015).
Fully understand the scope of your business interruption and food spoilage coverage in the event of a loss of power or other utility service.
One of the unfortunate consequences of Superstorm Sandy (2012) was the damages suffered by New York City restaurants due to power outages arising from the flooding of the utility (electricity) companies’ substations. The power outages forced restaurants to close for extended periods of time and food inventories to spoil. In more than one such situation, the insurer denied the restaurant’s claim for lost business income and/or food spoilage coverage on the basis that the “cause of loss” – power failure – was due to a flood and subject to the flood exclusion contained in the property policy at issue. The restaurant owners have tried to argue that the flood exclusion does not apply because the flood took place off premises, at the electric company’s substation. However, the courts have looked to the wording of the lost business income and/or spoilage coverage parts and concluded on more than one occasion that the flood exclusion applied “regardless of the location of the flood.” See, e.g., Northern Spy Food Co., LLC v. Tower National Ins., 2016 N.Y. Misc. LEXIS 1033 (N.Y. Supr. Ct., N.Y. Cty March 22, 2016); see also La Casa Di Arturo, Inc. v. Tower Group, Inc., 2015 N.Y. Misc. LEXIS 3797 (N.Y. Supr. Ct., N.Y. Cty Oct. 14, 2015) (holding no coverage for restaurant’s damages arising out of Superstorm Sandy and the resulting power outage (approximately 1 month), including business interruption expenses, lost income, and food spoilage, because the damages arose out of an off-premises power outage at the electric company’s substation which itself was caused by flooding; policy explicitly excludes coverage for “any loss caused by flood”).
For assistance with understanding your risks and/or insurance, or with a claim or loss, contact Fannie Minot at email@example.com or (978) 578-2076.
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