Damage to business premises and equipment as a result of a catastrophic weather event such as Superstorm Sandy can cause considerable loss to an organisation. However, in many cases, it is the resulting loss of profits caused by interruption to the business that can ultimately destroy an organisation. A business’s inability to operate, fulfil orders or obtain supplies while closed stifles cash flow and revenue. However, employees and overheads may still need to be paid while new business is near impossible to generate.
Traditional commercial insurance policies only provide cover for loss of profits (or “business interruption losses”) where the losses result from actual physical damage. Superstorm Sandy forced business closure as a result of civil evacuation orders and power outages all of which lasted days after the storm. Such causes do not result in actual property damage so any consequential loss of profit is unlikely to be covered. Similarly, international business which was hindered due to travel restrictions or communication failures caused by Sandy is unlikely to be recoverable. Force Majeure clauses in contracts with affected businesses will no doubt be triggered so recovery for breach of contract would be limited. In the absence of any physical damage, traditional commercial insurance coverage is unlikely to respond.
However, even if physical damage is sustained, the insured business must also prove that the damage was caused by an event that is covered under the insurance policy. Superstorm Sandy was a ‘perfect storm’ for insurance cover issues as it caused damage in a number of ways – wind, flood, fire, ingress of rainwater in addition to storm. Whether any particular policy covers all of these perils is a matter that needs to be considered carefully.
Perhaps the most remarkable issue surrounding Superstorm Sandy is that in many instances there has been a failure to learn from similar lessons in the past. There were similar issues on insurance policy cover for businesses following Hurricanes Katrina and Rita. A hotel, which closed for two months, claimed for business interruption losses, which it submitted had resulted from the physical damage to the hotel. However, the hotel’s insurers argued that there was no insured interruption because the curfew and widespread damage to the city would have prevented the hotel from receiving visitors in any event. It was held that the hotel could only recover for losses which it would have suffered if the damage to the hotel had not occurred. Since the wider area damage and curfew would have impacted on the business regardless of damage to the hotel, cover did not extend to most of the hotel’s business interruption claim.
It is important for all businesses that lessons are learnt from Superstorm Sandy. In the current global economic environment, businesses cannot afford to ignore potential risks to their business. Sandy demonstrated that businesses can no longer assume that insurance provides a profit guarantee. Planning for such disasters is now a reality of the commercial world and businesses must have clarity around the insurance cover that they have in place.
Contributed by Kerrie Glynn.
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