Irma’s Business Interruption Claims
Hurricane Irma tore through Florida and the Caribbean destroying tens of thousands of homes and businesses, forcing people to be evacuated, and causing an estimated $25-35 billion in damage. On a commercial scale, however, the industries hardest hit were hospitality, retail and construction, as well as health care and manufacturing, say experts.
But worse than the initial physical damage caused to their properties are the mounting business interruption (BI) and contingent business interruption (CBI) claims from companies forced to shut down because of the storm. At one point it was estimated that 62 percent of residents had lost power, exacerbating the problem and leading to issues such as mold.
And with further storms approaching, notably Hurricane Maria, there’s the added challenge for claims adjustors of scrambling to try and differentiate the damage caused by each event, particularly in the more inaccessible areas. That’s on top of trying to reallocate resources from other storm affected parts of the country including Texas.
“Hospitality clients and real estate clients including commercial condominiums and apartments have had some significant claims,” said Marsh’s U.S. property practice leader Duncan Ellis. “Then there are the school boards and retailers, from strip malls to individual big box stalls, a lot of whom have suffered significant damage.”
Estimating overall insured losses in the “tens of billions,” Lockton’s national property claims director Sheri Wilson expects tourism and hospitals, nursing homes and assisted care facilities to be the worst affected in terms of commercial losses.
“Florida’s tourism industry is going to take a battering, not just because of the short-term damage, but with the high season just around the corner they are not going to be able to recover in time because of the lack of materials and manpower,” said Wilson.
“The hospitals are a bit unique in terms of business interruption because they have so many different sources of revenue, so it takes time for that to work itself through the claims process and we won’t know the true financial impact until later this year.”
Willis Towers Watson’s head of property broking Gary Marchitello also expects Irma to result in “significant business interruption losses” arising from extensive power outages, taking months to resolve.
“These business interruption claims could take months to calculate,” he said. “Even if a specific property is not damaged, the insured’s property may face other obstacles to its operations, for example it could be impaired by civil authority and/or it may not have a means of ingress/egress due to nearby road closures.”
Beazley’s head of property Mark Bernacki added: “A key part of the loss escalation will be what’s covered under the extended period of indemnity. This allows the insured, post the normal period of indemnity, to pick up additional business interruption loss until the business can resume full operations.”
Hospitality clients and real estate clients including commercial condominiums and apartments have had some significant claims. —Duncan Ellis, Marsh’s U.S. property practice leader.
While Irma has forced many businesses to shut, Kevin Kavanagh, a partner at Wilson Elser LLP, believes that the longer-term implications are much worse, including lost jobs.
“How long can you be shut down and not be bringing in any money or paying your employees?” he said. “It’s just devastating for smaller businesses, a lot of whom don’t have contingent business interruption and barely enough business interruption to cover their losses.”
Given the scale of the storm, it could also have a knock-on effect on the supply chain for months or even years down the line, said EY’s Americas Insurance & Federal Claims Services Leader Allen Melton.
“Take for example a manufacturing facility that had to close before the hurricane, came back and discovered they have little physical damage to their facility, but they have suppliers that produce key components or raw materials that were either severely impacted or completely destroyed,” he said.
“If they have coverage for contingent business interruption in their policy, they could have a fairly complex claim that could continue well into next year.”
Another issue is mold. With its humid environment, Florida is susceptible to mold and other diseases like Legionella, exacerbated by the power outages resulting from Irma.
Veronica Benzinger, chief broking officer at Aon Risk Solutions Environmental Services Group, said that mold has the potential to grow within 36 hours of water intrusion of a building. While many policies cover water intrusion, she said that they often don’t extend to mold.
“The chances are that you are also dealing with potentially contaminated water full of chemicals, petrochemicals or biologics including sewage and so the process may become more extensive that just simply drying out, replacing wall board or pumping water out of your property,” she said.
“The protracted period of no power will also add to the severity, potentially, of the loss, which combined with the humid environment and organic material to feed on, will only encourage mold to grow.”