The earthquake and tsunami in Japan have caused loss of life, destruction, and dislocation on a massive scale. For those who have lost friends, family, employees, homes, and businesses, and who face the continuing threats posed by damaged nuclear facilities, recovery will be a very personal and arduous process. As the situation stabilizes and the focus turns to economic recovery, however, businesses will begin to examine their operations and assess their losses. Obviously, businesses operating nearest the epicenter will have suffered the most severe losses. However, the sheer scale of the disaster, combined with Japan’s critical importance to the international economy, guarantee that businesses throughout Japan and the rest of the world will face related disruption and losses.
Whenever a business faces unanticipated losses, it should immediately consider how its insurance will respond. Insurance is critical to disaster recovery. Specifically, property insurance, including business interruption and contingent business interruption coverages, may protect against not only physical damage to and loss of property, but also financial losses arising from an inability to conduct business (either at all or at the same levels as before); the extra expenses incurred in dealing with the effects of a disaster, including money spent to minimize any damage and losses; and the costs incurred in establishing the extent of the losses. Moreover, contingent business interruption coverage often contained in first-party property policies may provide coverage where a business faces loss due to its suppliers’ inability to provide needed parts and resources, or its customers’ inability to take delivery. Other types of insurance that also may respond include policies for trade disruption, event cancellation, and directors and officers.
Understanding Your Losses and Coverage
Policyholders should act immediately to evaluate both the extent of their losses and the scope of coverage for those losses. That evaluation must not be based on conventional wisdom about the scope of the policyholder’s insurance—this is especially true in the context of property insurance, because policy forms often vary significantly. Rather, the policyholder should examine its policies with a specific understanding of both the policy language and how its business has been, or is likely to be, impacted by events.
Policyholders also must immediately begin to carefully document all expenses incurred as a result of their loss because an insurer will demand a detailed proof of loss upon receiving notice of a claim from its policyholder. For larger companies, special loss-related account numbers should be created within their accounting systems to make tracking these losses easier when the insurance companies raise questions.
Applicable Insurance Coverages
The tragedy in Japan has unfolded on such a massive scale that policyholders will have incurred losses from a wide variety of causes. We have listed below a sampling of potentially available lines of coverage.
First-Party Property policies provide insurance for direct losses to or affecting the policyholder’s property. These policies protect a policyholder’s place of operations and inventory and provide coverage for lost or damaged property. Many property insurance policies are sold on an “all risk” basis, meaning that they cover losses to real property caused by any peril not expressly excluded. Because of the breadth of coverage afforded by an “all risk” policy, once a policyholder shows that it has suffered a loss, the burden of proof shifts to the insurer to show that the loss is not covered.
By comparison, a second type of property insurance—a “named peril” policy—covers only those perils expressly listed. Both types of policies usually contain exclusions to coverage. Earthquakes and floods, for example, are often excluded from commercial property policies, and must be added through endorsements or stand-alone coverage. It is important to carefully review all aspects of a policy to determine whether coverage for the specific loss is clearly excluded.
In addition to covering property damage, many property policies also provide some or all of the following “time element” coverages that are designed to reimburse the policyholder for financial losses. As a senior executive at a major insurer stated with respect to business interruption claims stemming from the earthquake and tsunami, “‘[a] lot of the largest corporations have insurance programs that include coverage for these sorts of things . . . . There’s going to be a ripple effect felt around the world.’”
In order to be implicated, policies typically require damage by a covered peril to property. “Time element” coverage may include:
- Business Interruption: Reimburses the policyholder for the amount of gross earnings minus normal expenses (i.e., its profits) that the policyholder would have earned but for the interruption of the policyholder’s business. Business interruption coverage generally requires that the “interruption” result from damage to covered real or personal property. Policyholders, for example, have obtained reimbursement under such coverage when other widespread disasters such as Hurricane Katrina and the 9/11 terrorist attacks caused business interruption. Coverage may be available for time element losses at interdependent properties, for example, where damage to an insured’s overseas factory cuts off supply, and therefore slows operations, at its domestic facilities.
- Contingent Business Interruption: Protects against economic losses caused by the policyholder’s inability to receive a supplier’s goods or services, or the policyholder’s inability to deliver its goods or services to customers, that arise due to a covered peril to the property of the supplier or customer that leads to the inability to deliver. The term “supplier” should be read broadly, to account for the complex and interdependent nature of businesses today.
- Utility Service Interruption: Provides coverage for losses that the policyholder incurs due to the interruption of utility services that result from physical damage to the property that supplies the utility. This coverage usually is provided through an endorsement to a property policy and may require that the interruption of service has lasted a minimum amount of time—usually 24 hours. Service interruption coverage also can vary widely with regard to what types of utilities are covered.
- Extra Expense: Indemnifies the policyholder for the reasonable and necessary increased costs of conducting its business operations due to property damage caused by an insured peril at its facilities or that of a supplier.
- Civil Authority: Protects the policyholder from losses caused by the inability to access its premises when a civil authority denies such access because of covered damage to, or destruction of, property belonging to others. Some civil authority coverages require physical damage to the policyholder’s own premises, but others do not. A “civil authority” for purposes of this coverage may extend beyond national and local governments. For example, after the 9/11 terrorist attacks, some policyholders successfully argued that the baseball commissioner’s cancellation of games constituted an order of a civil authority.
- Ingress/Egress: Protects the policyholder against lost business income and extra expenses when the policyholder’s premises are inaccessible for reasons other than an order of civil authority. This type of coverage typically requires that the property damage be located within a certain radius of the policyholder’s premises. For example, such coverage has been implicated when public transit or roads providing access to a business were closed and there was also property damage in the business’s immediate area.
- Extensions beyond the time limits set forth in the policy: Some policies allow the recovery period to be measured beyond the interruption period alone and will extend through the end of a period of time ending when the policyholder’s business returns to the levels that were anticipated but for the event that caused the property damage.
Most of the issues raised by the time element coverage of first-party property policies require careful analysis and forethought before the impacted entity asserts any position to its insurers. The hypothetical “what if” world measured by these policies often provides the opportunity for insurance companies to take positions hostile to the policyholder if advance planning and documentation have not been addressed at an early stage.
Trade Disruption policies are designed to protect against loss of earnings and extra expenses caused by disruption in the supply chain, even when there is no physical loss or damage to the policyholder’s assets. This coverage was developed specifically for businesses that depend on global supply chains. This relatively new form of insurance may help to provide consistent coverage to the insured. As is always true of “niche” coverages, however, the insured should understand how its trade disruption insurance interacts with other forms of coverage, including standard all risk policies, and anticipate an overly cautious view of coverage from a claims adjuster.
Event Cancellation policies are designed to compensate policyholders for losses arising out of the cancellation, interruption, or postponement of specified events. These policies typically specify that coverage is triggered if the cancellation, interruption, or postponement is caused by factors that are beyond the policyholder’s control. They typically insure a wide range of events, for example when a policyholder incurred losses arising out of the cancellation of music concerts in the aftermath of the 9/11 terrorist attacks.
Directors & Officers policies may provide defense and indemnity coverage for companies and their directors and officers who may face claims regarding their preparation for, or response to, a crisis. For example, claims may be made against directors and officers for failure to have proper procedures and plans in place for dealing with the crisis.
Travel Insurance policies are designed to cover costs for delays, such as extra hotel stays or the price involved in changing flight reservations, the nonrefundable costs for interrupted or canceled trips, lost or stolen luggage, medical emergencies, and even medical evacuation.
Insurance policies may provide coverage for any mitigation costs that the insured takes to prevent or mitigate actual or imminent damage to its property. Many policies contain clauses specifically covering such “loss prevention” or “sue and labor” expenses, and the common law in many jurisdictions may obligate insurers to reimburse these expenses. Insurers therefore may be obligated to pay for these measures to help prevent property damage, for example the costs of boarding up a building’s windows when a hurricane is approaching. The legal theory is simple: policyholders should take reasonable steps to minimize or reduce their losses, thus saving themselves and their insurers money, and their insurers should pay for these steps.
Additional Insured Coverage
Companies also may be able to access coverage outside of their own insurance portfolios for losses stemming from the earthquake and tsunami if the company is an “additional insured” under another company’s policy. Generally, there are two ways to obtain additional insured status—either (a) via an endorsement that specifically lists the company as an “additional insured” or (b) via a blanket endorsement that automatically extends “additional insured” status to parties entering contracts with the named insured. Whether your company as an additional insured will have the same coverage as the named insured varies by policy; your company may have the same rights as the named insured, or more limited rights, depending on the language. Thus, when looking for coverage for losses stemming from the recent events in Japan, businesses should inquire regarding their additional insured status—it may prove to be another portal to insurance recoveries.
Policy Conditions and Requirements
Policyholders should be wary of potential time traps in their policy. For example, a policy may obligate the policyholder to provide the insurer with notice of a loss “as soon as possible” or “as soon as practicable” after a loss or other insured event. The consequences of failure to give prompt notice differ, depending on the type of policy and the jurisdiction. Policies usually require that proofs of loss be submitted within a relatively short time—often within 60 days after the loss incepts or within 60 days after the insurer requests a proof of loss, unless an extension is secured. Finally, many first-party policies contain a contractual statute of limitations. Therefore, policyholders must be careful to commence a coverage suit within time limits or obtain an agreement with the insurer tolling the running of the limitations period.
Insurer Defenses to Coverage
Insurers may raise challenges to the availability of coverage for losses related to the earthquake and tsunami. These challenges may include disputes regarding: (a) whether coverage for claims related to earthquakes and tsunamis are barred by any policy exclusions; (b) whether physical damage to insured property is required to trigger time element coverage such as business interruption coverage, and, if so, what may qualify as property damage; (c) whether coverage exists for amounts spent to prevent or mitigate damages, even if property damage never takes place.
Companies should not assume that insurer defenses necessarily will defeat coverage. Each policy requires a careful analysis, based on the specific policy language involved, the facts of a company’s particular losses, and the law of the applicable jurisdiction. Careful advance planning is suggested, if time permits, before any claim is made to the insurer.
Obtaining and Maximizing Insurance Recovery
Pursuing an insurance claim following a disaster is often a complex and challenging process. Policyholders should consider obtaining the assistance of coverage counsel, because many issues can significantly affect the existence or amount of recovery under an insurance policy.
Resolution of coverage issues may depend not only on the law of a particular jurisdiction that will be applied and the facts presented by a claim, but also on how facts are presented to the insurance company, or to a court, if litigation is necessary. An attorney may be able to analyze coverage and help the policyholder present its claim to maximize protection under its insurance policies.
Act Now to Evaluate Your Risks
Even if your business has been fortunate enough to avoid direct losses from the events in Japan, the tragedy in that country nevertheless presents a stark reminder of the importance of aligning your business’s insurance coverage with the risks it faces. While typical “all risk” policies are comprehensive in scope, flood and earthquake are often excluded in standard policy forms, and must be added to the insured’s coverage. Moreover, when a catastrophic claim arises, insurers may invoke multiple policy exclusions and defenses to limit coverage. Advance planning can help to clarify coverage and avoid disputes.
Dickstein Shapiro LLP Insurance Coverage Practice attorneys John E. Heintz, Partner (firstname.lastname@example.org), Stephen N. Goldberg, Partner (email@example.com), Geoffrey M. Long, Associate (firstname.lastname@example.org), Jared Zola (email@example.com) contributed to this article.