Many Northwest businesses are being impacted by the wildfires close to home, and also by the hurricanes that have or will hit Texas, Florida and other Gulf states. Can commercial insurance help to mitigate losses from these natural disasters? In many cases, yes.
“All risk” property-insurance (fire) policies may provide coverage for property damage from wildfires, including damage to facilities, equipment, and sometimes stock and inventory. Wildfires and other natural disasters may also disrupt operations and force temporary closures. In that case, business income (also called "business interruption") insurance, including civil authority coverage, may cover lost profits and related costs. And, if your company was not directly impacted, but was unable to procure parts or make shipments because of wildfire or hurricane, contingent business interruption coverage may apply.
The devil is often in the details with this kind of coverage. This post will outline some things that business owners and their advisers should look out for in common scenarios.
My company property was damaged by wildfire - what coverage might I have?
Most commercial property policies cover direct physical damage due to fire, including the cost to rebuild damaged structures, and clean ash and soot from buildings and equipment (direct damage to mobile equipment from fire is sometimes covered under a separate policy). It is important to give notice as soon as possible under such policies. But be prepared for a lengthy process while the insurance company "adjusts" the claim. You may be subject to intrusive and time-consuming examinations of the damaged property, and subjected to haggling over the cost of repairs. Your broker should be able to assist with the process, but it may be necessary to retain your own "public adjuster," other consultants, or counsel to protect your rights. You should also consider asking for advance payment, even before the entire loss is adjusted, to cover immediate repairs.
My company also lost income because we had to shut down due to damage - what then?
If your business loses revenue because it is forced to limit or stop functioning, due to a natural disaster, business income coverage may compensate you for some of your losses due to the interruption of business. It may also cover your payroll expense, and other "extra expenses" that you incur to reduce the amount of downtime. Business income coverage is usually packaged with commercial property insurance.
Business income coverage is measured by the amount of time that the business is down, which is why it is known as "time element" coverage. There will likely be a "waiting period" - sometimes hours, sometimes days - before the coverage will kick in. In other words, the first 24 hours of downtime may not be covered, but losses accumulating after that period will be covered. This functions as a kind of deductible on the policy, in addition to the monetary deductible stated in the declarations.
Additionally, some policies require that the policyholder's property have been physically damaged to recover business income coverage. There has been recent litigation over whether wildfire smoke infiltration of a tourist attraction was sufficient to trigger the coverage, where the venue had to shut down because the smoke made the air inside unhealthy. Fortunately, the court held in favor of the business owner.
The warnings above about the "adjustment" process for wildfire-related claims apply doubly to business income loss claims. Insurance companies frequently retain forensic accountants to contest calculations of lost profits. Consider having a similar consultant of your own from the outset to head off problems down the road.
My business lost income because the fire department/police cut off access to our building - is there coverage for that?
Civil authority coverage is a sub-part of business income coverage that becomes particularly relevant during a natural disaster. The coverage applies if access to the business -- for workers, customers, or both -- is prevented by an order from a government power, such as the fire department, or police. The policy will generally set a specific limit on how much down time will be covered (which is true of other sub-parts of time element coverage as well).
Some civil authority coverage provisions are quite unclear whether this coverage is dependent on the insured's property being physically harmed. In addition, some policies require that the declaration by the civil authority specifically or "directly" apply to the insured's property. For example, coverage was denied to hotels that lost reservations when a nearby airport was closed by order of the FAA, on the basis that the civil authority order did not directly impact the hotels.
My business was not damaged itself, but has lost revenue because we can't get parts from our supplier in Houston, and we can't use a freight company that was damaged by wildfire - what about that?
Contingent business income coverage applies if your supplier, a customer, or another business that you rely on for continued income suffers a physical loss, including due to a natural disaster. The coverage will pay your lost income due to that interruption, for a reasonable period of time. Not all businesses buy contingent coverage - it makes sense mostly for companies that are dependent on a robust supply chain.
It is important to keep in mind that in most cases contingent business interruption coverage applies only if the cause of the customer's or supplier's loss falls within the scope of the policyholder's own insurance. This may be a particular problem with hurricanes, because insurers often dispute business losses due to storms that involve wind and rain damage (which is covered), with "flood" damage, which is usually not covered (except under a special flood policy). Therefore, invoking contingent business interruption coverage due to a Houston supplier being cut off may involve you in making complex and subtle arguments about weather events thousands of miles away.
Final Thoughts
Any business that suffers either a direct loss due to a natural disaster should try to mitigate its losses as much as possible, whether that means finding an alternate location to set up in, or finding a new supplier for a particular part. Business owners should also carefully document all losses, and mitigation/repair efforts, and make sure that communications with insurers and their agents are at least confirmed in writing.
These are only some of the complicated issues that can come up in seeking insurance coverage for the devastating business impacts of wildfires here at home, or of hurricanes in Texas and Florida. While insurance is likely not the first thing to think about in these situations, careful attention to these issues - including seeking help where appropriate - can help you get back on your feet, benefiting yourself, your employees, and your community.
