Perspectives: Securing Coverage for Winter Storm Losses
Winter Storm Uri, the storm that swept the United States in mid-February, has been blamed for more than 50 deaths and shattered many low-temperature records, especially in the Central and Southern plains regions.
Uri caused blackouts for millions, including creating a major power crisis in Texas. The storm also brought severe destructive weather to the Southeast, including several tornadoes.
Businesses throughout the country, especially in Southern states that are less accustomed to extreme cold, experienced major losses resulting from freezing water and fuel pipes. Preliminary estimates indicate that this storm may cost the nation’s economy $50 billion.
Many businesses may have a valuable asset available in the form of first-party insurance. Insurance may provide coverage for physical damage to or loss of property and for economic losses arising from an inability to conduct business at the same levels as before; the extra expenses incurred in dealing with the effects of the extreme cold, including those in advance to minimize or mitigate any damages and losses; and the costs incurred in establishing the extent of the losses.
Businesses pursuing claims for winter storm losses may face a host of coverage issues that insurers are likely to assert. While the following are key issues that we believe are likely to arise under property insurance policies, policyholders should also check their pollution liability, environmental impairment, and other types of policies that may cover business interruption losses from this event.
Physical Loss or Damage: First-party property policies generally provide insurance for “direct physical loss of or damage to property.” An “all-risk” property policy insures against all risks of loss unless expressly excluded. Traditional losses not excluded from first-party property policies may include tangible property, including buildings, permanently installed machinery or equipment, inventory and fixtures. Most property insurance policies also insure personal property. This coverage may be provided by an “unscheduled personal property” provision, which provides coverage for unscheduled personal property that is “usual or incidental to the occupancy of the premises” or “used by an insured while on the described premises.” These policies will cover businesses’ personal property, including, for example, products, supplies, materials, machinery and stock. Property insurance may exclude certain intangible losses if the insurer proves the excluded peril is the cause of loss. However, some courts have held that if a property is left unusable, such as by freezing or the presence of harmful substances, a first-party property policy may provide coverage.
Insurers may contest whether freezing is physical loss or damage sufficient to trigger property damage or business interruption coverage. Under an all risk policy, a policyholder must only show that it suffered a fortuitous direct physical loss of or damage to insurable property during the policy period from any cause. To avoid paying an otherwise covered loss, an insurer bears a steep burden of proving that the loss was caused by an excluded peril.
Insurers may seek to attack policyholders’ assertions that their losses involved physical loss or damage. With regard to freezing, during the winter storm businesses may have experienced property damage by way of expanding — and then contracting — pipes and personal property damage to material or products transmitted in pipes, such as fuel, left unusable by extreme cold. A policyholder’s losses arising from its inability to use its insured personal property for the intended function or purpose because of freezing should be viewed as covered property damage.
Losses stemming from ruptured pipes caused by freezing are property damage triggering a policyholder’s property coverage. To exclude losses arising from “water, other liquids, powder, or molten material that leaks or flows from plumbing, heating, air conditioning, or other equipment (except from fire protective systems) caused by or resulting from freezing,” an insurer must prove that a policyholder did not “exercise reasonable care to maintain heat in the building or structure” and did not “drain the equipment and shut off the supply if the heat is not maintained.” Accordingly, a policyholder’s reasonable care defeats the policy exclusion.
Business interruption coverage language may require that interruption resulted from physical loss or damage to covered real or personal property over which the insured has an insurable interest. This coverage frequently reimburses a policyholder for profits that a policyholder would have earned but for the interruption to its business. Business interruption coverage comes in many forms and through several different coverages in first-party insurance policies that do not require loss or damage to insured property.
Coverage without physical loss of or damage to insured property: During the winter storm many roads were impassable or otherwise blocked, mass transit services were suspended, and commercial transportation was largely shut down. Of course, heavy snowfall frequently causes physical damage to insured property that is separate and apart from — or in addition to — property damages involving “freezing.” Also, the winter storm caused many businesses to incur substantial losses even though they suffered no direct property damage. First-party property insurance provides several coverages that reimburse business interruption to businesses that sustain no direct physical loss to their insured property.
Civil authority coverage may provide coverage to a policyholder that loses business income because access to its premises is prohibited by an act of government, such as an evacuation order or curfew. Civil authority coverage varies significantly from policy to policy, and some such coverage is available to the extent physical loss or damage happens away from where the policyholder’s business is located, when a governmental order nonetheless interrupts the insured business.
In addition, commercial property policies frequently provide ingress or egress coverage when access to or from a policyholder’s place of business has been prevented or made more difficult because of a storm. The availability of ingress/egress coverage varies greatly among policies. Frequently, a policy will cover the loss sustained by a policyholder “due to the necessary interruption of the insured’s business due to prevention of ingress to or egress from the insured’s property, whether or not the premises or property of the insured shall have been damaged” if the interruption resulted from damage of a type insured against by the policy.
Also, commercial property insurance frequently provides coverage for service interruption losses. This coverage pays the policyholder for loss, either by way of property damage or more commonly business interruption, from the interruption of incoming or outgoing utilities and other services, including electricity, gas, fuel, steam, water, refrigeration and sewage services. The loss of service must be the result of otherwise covered physical loss or damage to the service provider’s property. Service interruption coverage is typically subject to a time deductible and a sublimit.
Policyholders should review their first-party insurance policies for other coverages providing reimbursement for business interruption losses including contingent business interruption coverage.
Deductibles and Policy Limits
Many insurance policies contain a deductible and state that it must be satisfied “per occurrence,” “per event,” “per loss” or “per claim.” Some policies call for a complex calculation tied to a percentage of the value of the insured premises to determine a policyholder’s deductible. In connection with time element coverages, such as business interruption, deductibles may be stated as a number of hours or days that must pass before coverage applies. Policyholders should pay particular attention to make certain that they are not paying a greater deductible than what the policy requires.
Property insurance policies also limit the dollar amount that an insurer will pay for a covered loss. A per occurrence limit is the maximum amount that the insurance company will pay for one particular incident. An aggregate limit is the maximum amount the insurance company will pay for the entire policy period. A sublimit is any limit of insurance that exists within another limit. For example, the policy may have sublimits for “earthquake,” “flood” or “windstorm” that may limit recovery. Insurers may seek to reduce a policyholder’s claim for economic loss by improperly applying sublimits that are meant for physical damage losses.
An important factor in determining the number of deductibles or limits that apply to a given loss is the “number of occurrences.” Courts frequently find in large-scale loss situations that a single occurrence has taken place in an effort to permit policyholders to access the insurance it purchased.
Insurers may frame the winter storm as comprising multiple occurrences in an attempt to limit or eliminate coverage by applying multiple deductibles. Notwithstanding, policyholders possess strong arguments that the winter storm was a single occurrence.
Those who have suffered losses because of the winter storm may have substantial financial protection through their insurance policies. Policyholders should consider their coverage possibilities and act promptly to recover all benefits available under that coverage. It is important that businesses as quickly as possible: (1) assess the extent of their losses; (2) assess the scope of coverage for those losses from all available policies and coverages; and (3) provide their insurers with prompt written notice of a loss or claim. Pursuing an insurance claim following a large-scale loss is often a complex and challenging process. We find that a well-coordinated team of internal businesspeople, outside coverage counsel, and an accounting consultant can play key roles in helping to maximize any insurance recovery.
“Perspectives: Securing Coverage for Winter Storm Losses,” by Jared Zola and Alexander H. Berman was published in Business Insurance on March 2, 2021.