Hurricane Season: Common Insurance Coverage Questions Restaurants Should Consider

Hurricane Irma walloped Florida leaving millions of businesses without electricity for days, and for some, for more than a week. Commercial property insurance may help these businesses recover damages from the loss of power, but many factors come into play. An insurance policy is a relatively unique contract between a company and its insurer. As a result, the coverage it affords will vary depending on a variety of factors, including the insurer who issued it and the policy form. Additionally, policy endorsements, i.e. amendments, are commonplace and may specifically address utility service interruption and spoilage. Companies affected by power outages should carefully consider the coverage available under their existing policies.

Here are some common questions to consider when assessing a potential claim for damages due to a loss of power under typical commercial insurance policies.

Is Wind a Covered Cause of Loss?

Many Florida businesses suffered from the statewide loss of power due to heavy winds that downed power lines. The resulting damage was widespread. Perishables spoiled; machinery and temperature-sensitive equipment failed. Millions of dollars of revenue were lost from the inability to operate. But in Florida, and in contrast to residential homeowners’ insurance policies, commercial property insurers are not required to provide windstorm coverage for non-residential properties. Accordingly, the first thing to consider is whether the company’s policy includes wind or windstorm as a “Covered Cause of Loss.”

Where Did the Power Failure Occur?

Many commercial property insurance policies include an “off-premises” exclusion that purports to exclude direct or indirect damage that a company suffers as a result of a power failure that occurred away from the insured premises. An insurer may argue that this provision excludes business losses due to damaged transmission and main distribution lines, substations, transformers, or utility poles, located outside of the insured premises. The applicability of the off-premises exclusion depends on the specific facts of the loss and the specific policy language.  For example, an “off-premises” exclusion may include an exception that applies when the off-premises power failure causes a Covered Cause of Loss. In such a case, if the off-premises power failure causes a mechanical breakdown on the premises, which results in a fire, the policy may still cover the fire damage if fire is a Covered Cause of Loss. Further complicating the assessment, courts of different states have taken different positions on whether particular “off-premises” exclusions are enforceable or impermissibly vague, which remains an open question in Florida.

Did You Suffer Direct Physical Loss or Damage?

Typical commercial property policies require a “direct physical loss of or damage to Covered Property at the premises.” A policy will define “Covered Property,” often describing both the included and excluded property. Disputes often arise over whether a business’s particular damaged property falls within the scope of “Covered Property.”

Direct physical loss or damage is widely interpreted as a change in the property’s condition or structure. Spoilage of foods or temperature-sensitive medicines is typically considered a direct loss resulting from a loss of power caused by windstorm. But an aggressive insurer may argue that there is no coverage if the windstorm did not make physical contact with the perishable items. Mold growth from the loss of air conditioning and dehumidification equipment should likewise be considered direct damage, but insurers may seek to avoid paying on a mold claim arguing a more narrow view of “direct damage” or invoking a policy exclusion related to mold.

Courts outside Florida, broadly interpreting direct physical loss or damage” requirements, have considered the loss of use or access to computer data to be a direct physical loss, but that is still an open issue in Florida.

Can You Claim Business Interruption Losses?

Many commercial property insurance policies cover business income a company loses when it suspends operations due to a hurricane. Business income is often defined as the net profit or loss the company would have earned or incurred, less normal operating expenses, including payroll. If windstorm is a Covered Cause of Loss under such a policy, then the business income the company lost due to a Hurricane Irma shutdown may be covered.

But business interruption, or “time element,” provisions may include a requirement, either within the coverage grant or pursuant to an exclusion, that the suspension be caused by a direct physical loss of or damage to the insured premises. This may not be a complication if the suspension is the result of inventory or equipment that was damaged as a result of the power loss. If, however, there is a risk that the insurer will perceive the claim as one for lost profits arising solely from the inability to operate without power, without an accompanying physical impact on the premises, the company must take care in analyzing the impact of the power loss on the company, and in presenting its claim.

Evaluating and Challenging Insurer Positions

Commercial property policies are not always easy to parse and their construction is further impacted by the governing law, which may not always be settled. In these circumstances, companies often benefit from the support that can be provided by experienced insurance coverage counsel to assess the viability and strength of a company’s claim for coverage, to monitor and deal with the insurer’s loss adjusters, and to maximize the company’s potential insurance recovery.

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