Special Report: Hurricane Preparedness - When the storm passes: How to prepare and maximize insurance claims after a hurricane

Hurricane Katrina tore Diamond Offshore’s Ocean Warwick drilling platform (pictured here) loose from its moorings off the Louisiana coast and deposited it 66 miles away on Dauphin Island, Alabama.
Photo by Peter Cosgrove, Associated Press

Unfortunately, there is no way to prevent weather disasters such as hurricanes. We can, however, through thorough insurance coverage and proper claims filings, better protect companies in the energy industry from the inevitable storms that will arrive during the next hurricane season and in the years to come.

The following is an overview of some important considerations for assessing, preserving, and maximizing insurance claims that arise from natural disasters. Adherence to these steps will help put your company in a good position to obtain maximum recovery on available claims.

A review of recent hurricane seasons

We don’t have to look too far back in the weather logs to recall that the 2005 Atlantic hurricane season shattered meteorological records. It featured:

• 23 named storms, 13 hurricanes and 4 major hurricanes making landfall;
• the most Category 5 hurricanes in a season with Katrina, Rita, and Wilma;
• the strongest hurricane on record in the Atlantic Basin with Wilma.

In short, 2005 was the costliest hurricane season in history.

The 2006 season, however, was a completely different story. Not a single hurricane touched US soil.

Current predictions for the 2007 Atlantic hurricane season, which runs from June 1 to Nov. 30, suggest a return to normalcy, with more than a dozen named storms expected and perhaps half as many hurricanes. At least one major storm is predicted to make landfall along the US coast, either the Eastern Seaboard or the Gulf of Mexico.

Impact to the energy sector

When a hurricane hits the Gulf Coast in particular, the energy sector is especially vulnerable to heavy losses to key assets and the revenue streams generated by those assets. For example, Hurricanes Katrina and Rita:

• destroyed or severely damaged almost 200 offshore platforms;
• resulted in the shut down of 16 refineries;
• caused the evacuation of 605 platforms and 87 rigs; and
• resulted in production losses of 1.4 million barrels of oil per day and 6 billion cubic feet of gas per day.

Once a hurricane passes, the first priority is to locate and assist employees in need. In the weeks and months following a storm, the process of repairing and rebuilding begins. Fortunately, insurance coverage is usually available to assist with this process. However, before filing claims, there are a number of critical steps that must be taken in order to secure and maximize the available insurance proceeds.

Know and understand your policies

Being able to navigate the components of a typical policy is necessary to obtain a full understanding of the insured’s rights and obligations. While there is some variance, most insurance policies typically contain the following components.

The declarations page - This is the policy’s roadmap, containing vital information about the policy, including the named insured, the insurance company that issued the policy, the dates of the policy period, the types and amounts of coverage provided, and a schedule of forms. Listing the forms that should be attached to the policy allows the reader to determine if the policy is complete.

The insuring agreements - The insuring agreements provide the substantive grant of coverage. They describe what is covered by the policy and under what circumstances.

Exclusions - Exclusions carve out certain claims from what may be otherwise covered under the insuring agreements.

Definitions - The presence of definitions for terms used in the policy is usually helpful, but they can occasionally be used as a way to limit coverage just as well as, if not better than, an exclusion.

Conditions - Conditions outline certain rights and duties usually associated with the reporting, handling, and resolution of a claim. They are important, and can be perilous if ignored.

Endorsements - Policies very often contain endorsements that are attached to the main form. Sometimes endorsements add provisions to the policy, while other endorsements delete parts of the policy.

All of these policy components must be read together in order to have a full understanding of what coverage is potentially available and what must be done in the days after a storm in order to obtain the greatest possible recovery.

Understand key coverages

Though every policy and every loss is different, the following breakdown of coverages are often found in commercial property policies, and one or more of them can be triggered by a hurricane.

First and foremost, property policies generally pay for “direct physical loss or damage” to covered property. Typically, this includes real and personal property of the insured. It also usually includes personal property of others in the “care, custody, or control” of the insured. An important issue here involves the valuation of a loss. A prompt assessment should be made as to whether the policy provides full “replacement cost” coverage or “actual cash value.”

Second, commercial policies usually provide coverage for lost productivity from affected assets. Known as “business interruption” coverage, this type of coverage is different from most property coverages as it is not designed to provide money to repair or replace any particular property. Rather, it is intended to provide protection to the insured from disruptions in business due to covered perils that damage property crucial to the insured’s business.

In effect, this coverage supplements the insured’s lost revenue while the damaged property is being repaired, rebuilt, or replaced. Although actual policy language can vary, a mere “slowdown” in productivity may not be enough to trigger business interruption losses.

With the widespread damage caused by most hurricanes, business disruptions can also occur due to losses sustained by the insured’s key suppliers or customers. This is known as “contingent business interruption” coverage. It can be a critically important coverage when the company’s operations are ready to resume but certain supply-chain constituents are not.

There are other forms of “time element” coverages as well. They include:

Civil authority coverage - applies when an order by a governmental authority prohibits access to the insured property.

Service interruption coverage - applies when utility service, such as electricity, water, or sewage is interrupted.

Ingress/egress coverage - applies when access to the property is physically prohibited, such as in the case of a collapsed bridge or washed-out road which serves as the only means of accessing the property.

Understand extensions of coverage

Almost all property policies contain certain “extensions of coverage” in addition to the main coverages. There are many different types of coverage extensions. Here are some of the more common ones:

• Pollutant clean-up
• Debris removal
• Expediting expense
• Claim preparation expense

There are three keys to dealing with extensions of coverage. First, the insured must carefully assess whether they apply with respect to a given loss. Second, the insured must determine if there are internal sub-limits applicable to these coverages that reduce the amount of money available for a particular extension. Finally, careful attention must be paid to whether the extensions are part of, or in addition to, the main limits of the policy.

Think and plan strategically to maximize recovery

Once the policy has been analyzed with a view towards identifying every possible source of coverage, strategic planning is required to maximize the recovery. Unfortunately, insurance claims arising out of catastrophic events such as a hurricane can be incredibly complex. A systematic and disciplined approach to handling coverage issues is required to help ensure the greatest possible recovery in the shortest period of time.

This begins with the assembly of a team that is equipped to handle significant catastrophe losses. In most cases, the team should be comprised of both internal and external members. Internally, key personnel should be drawn from the operations, legal, risk management, and financial departments. External members include coverage counsel, disaster recovery specialists, forensic accountants, claim preparation experts, and other similarly skilled professionals with the needed expertise for a comprehensive assessment and quantification of the loss.

Efforts to preserve coverage must begin immediately. A careful review of the policy will not only make the insured aware of its rights under the policies, but its obligations as well. These usually include duties such as notice, proof of loss, cooperation, mitigation of losses, and preservation of the insurer’s salvage and subrogation rights. This typically involves cooperating with the carrier in the claim process, such as allowing inspections of the damaged property and the company’s books and records, as well as submission to examinations under oath.

Finally, the insured must generally take all reasonable steps to protect property from further damage. Attention to the carrier’s rights at the very beginning, and throughout the claim process, is essential in order to avoid jeopardizing an otherwise covered loss.

A successful recovery in a complex first-party loss often depends on thorough documentation. Inventory of all property that was destroyed, damaged, lost, or stolen is a good place to begin. While physical damage assessment activities are under way, key financial records should be pulled to the fullest extent possible. These include items such as property valuation records, asset inventories, records of revenues and profits from affected locations, production records, and other financial data that can support claims for property damage and business interruption losses. It is also important to document the damage to covered assets using photographs and video in addition to written reports of damage assessments.

Just as it is important to quantify the damage to the insured’s property, it is also critical to keep accurate records of all monies expended in the efforts to bring operations back up to speed. Setting up separate accounts to track various expenses (e.g., employee meals, security, overtime wages, temporary lodging, etc.) will help expedite claim payment.

Insureds should understand that adjusters handling losses from massive storms can be literally overwhelmed with work. Compounding this problem is the fact that handling an insurance claim in the energy sector often requires a fair amount of specialized knowledge about the industry itself. For this reason, insureds should attempt to be helpful to the carrier in presenting the claim.

Claims should be well-documented, based in reason and fact, and thoughtfully and logically presented. Claims having these characteristics tend to be more successful than those that do not. Claims having these characteristics also tend to be resolved quicker and less expensively than those that do not.

Once notice has been given and the preliminary loss assessment has been performed, the insured should be prepared to begin the claim presentation process. Not every aspect of a claim necessarily requires a dispute. Where there is clear entitlement to coverage, those issues should be agreed upon and resolved to allow the parties to focus on the issues where a true dispute exists. Advances against the ultimate loss payment should be requested if necessary or appropriate.

As noted previously, virtually every insurance policy contains a notice provision requiring the insured to notify the carrier under certain circumstances, including a loss. Almost all property policies also contain “proof of loss” provisions. Usually, these must be sworn to by the insured, and often they must be provided within certain time limits. The insured must be mindful of these requirements and their deadlines. If necessary, an extension of the deadline should be requested from the carrier and documented in writing. Further, a proof of loss can be subsequently amended under certain circumstances.

In addition to requirements such as notice and proof of loss, another key provision most policies contain is the appraisal clause. It is often invoked where there is a disagreement as to the value of the loss.

Final thoughts

Understanding your company’s coverage and taking a strategic approach to maximizing the available insurance recovery are two of the most important steps one can take towards restoring the company’s pre-loss position. Once these steps have been taken, the insured should be in a good position to obtain maximum recovery on the claim.

If, despite all of these efforts, a covered loss is not promptly paid by the carrier, then the insured will be in a good position should litigation ultimately be necessary to achieve a full and fair recovery.

About the author:

Vince Morgan [[email protected]] practices with the Houston office of Pillsbury Winthrop Shaw Pittman LLP, a law firm with offices across the US and internationally. He represents commercial policyholders involved in coverage disputes, and advises clients on their insurance and risk management needs before losses occur.