C L A I M D E N I E D March 2002 A publication of the Lowenstein - - PDF document

C L A I M

D E N I E D

March 2002

A publication of the Lowenstein Sandler Insurance Law Practice Group

Introduction

Almost all companies obtain business interruption coverage to protect against losses caused by forced shutdowns. However, stan- dard business interruption coverage forms are complex, and provide rel- atively narrow coverage. These policies become more complex with the addition of “coverage extensions” that fill gaps in the basic policy . Policyholders must also consider whether there are any unique aspects of their operations that require them to manuscript their own individual coverage pro-

• visions. Therefore, companies

must examine their policies and their operations before a loss

• ccurs, to determine the coverage

that they will need in the event of a business interruption. This arti- cle outlines some -- but certainly not all -- of the issues policyholders should consider when examining their business interruption cover- age.

Suspension of Operations

Business interruption coverage is triggered by a “necessary suspension”

• f

the insured’s

• perations.

However, standard policy forms do not define the term “suspension.” Obviously , a total shutdown of the insured’s operations is a “suspen- sion;” in some circumstances, a par- tial shutdown may also satisfy the “suspension” requirement. Note that the analysis of partial shutdowns is highly fact-sensitive, so it is diffi- cult to state a general rule. Therefore, rather than assuming there is no coverage, a policyholder facing a partial shutdown should per- form a thorough coverage analysis to maximiz e the likelihood of recovery .

Period of Restoration

Business interruption policies are triggered during the “period of restoration,” typically defined as

This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only.

A L D

Business Interruption Insurance: Do You Have Adequate Coverage?

by Alexander J. Anglim, Esq.

Inside

DO YOU KNOW WHERE YOUR INTELLECTUAL PROPERTY INSURANCE IS? By Robert D. Chesler, Chair, Insurance Law Practice Group, Lowenstein Sandler PC THE INSURANCE MARKETPLACE 2002: A “HOLE” NEW WORLD By Barron S. Wall, ARM, PMC and Karen Wallace Walter, Esq., ARM Insurance Consulting Associates NEW ARTICLES ON THE OUTPOST

Presents

the reasonable amount of time that it should take to restore the insured’s operations. The inclusion

• f the term “reasonable” is an

important limitation on coverage. Thus, if the insured upgrades its facility , extending the period of interruption, rather than simply repairing it to its pre-loss condi- tion, any profits lost during the additional repair period are not covered. However, this provision can be quite mischievous, as insurers sometimes argue that any losses incurred outside the period of restoration are not covered, regard- less of the reason. For example, consider an insured that suffers a 30-day shutdown. It makes sales from inventory during the shut- down and resumes production on the 31st day . On the 32nd day it gets a large order, but is unable to fill it because its inventory was depleted by the shutdown. Courts are split on whether the lost order is covered. Policyholders should ask their brokers to secure language clarifying their entitlement to cov- erage in this situation.

...companies must examine their policies and their oper- ations before a loss occurs, to determine the coverage that they will need in the event of a business interruption.

Surviving Today’s Hard Market

As premiums increase and capacity decreases, policyholders are vying for their share of coverage. This seminar will teach you the steps you can take to survive in today’s hard market. Learn about:

The Hard Truth about the Hard Market Survival Techniques: Disaster Planning and Emergency Response Proving Your Business Interruption Claim How to Avoid Coverage Litigation

Speakers from:

LOWENSTEIN SANDLER PC

Attorneys at Law

Bollinger Insurance and Insurance Consulting Associates

April 30, 2002, 8:00 - 11:30 am

Park Avenue Club, Florham Park Please register online at www.insurance-lowenstein.com, by phone to Karen Cerreto at 973.422.6466,

• r by email to kcerreto@lowenstein.com.

THE 5TH ANNUAL NEW JERSEY INSURANCE COVERAGE INSTITUTE

The period of restoration also fails to account for the fact that customers do not always return immediately after a shutdown. Many businesses find that it takes time to win back customers after a lengthy shutdown; unfortunately , the standard policy does not cover such post-repair losses. Insureds vulnerable to such a loss should consider purchasing the “extended period of indemnity” endorsement, which provides 30 to 90 days of post-repair coverage.

Physical Damage to Covered Property

The insured must also establish that the suspension was “due to physical damage to covered proper- ty .” There is generally no coverage for shutdowns that are not caused by damage to the insured’s proper- ty . Consider a situation where the police deny access to the insured’s building because of severe damage to nearby property, as occurred when downtown Manhattan shut down after the WTC collapse. The WTC suffered “covered prop- erty damage,” but most downtown buildings did not. Basic business interruption policies do not cover losses arising out of the policyhold- er’s inability to access its undam- a loss of income, the business inter- ruption policy does not presume that to be the case. Rather, the insured must prove the amount of profit it would have earned but for the interruption. Note that a business does not necessarily have to be profitable to sustain a compensable loss. “Business income” is a defined term in the pol- icy , and typically includes net losses. Thus, a money losing enterprise can recover if it can establish that its loss- es were greater than they would have been without the interruption. Conclusion Business interruption policies are dense, complex instruments. Accordingly , policyholders should consider having qualified counsel (or at least a specialty broker or insurance adviser) analyze their policies before a loss occurs. Ideally , this review would occur prior to the purchase or renewal of the subject

• policies. After conducting the

review , many policyholders will find that the basic policy is inadequate for their needs and that they must purchase one or more of the cover- age extensions discussed above. If necessary , an insurance broker or consultant can also help manuscript further changes. For example, it may be desirable to specify the mea- sure to be used in determining lost

• profits. Given the quantity and

complexity of issues inherent in this coverage, policyholders should seek aged building. Note, however, that policyholders can obtain coverage for this contingency by purchasing an endorsement for loss caused “by

• rder of civil authority

.” Another potential scenario to consider is the destruction of a key supplier’s (or a key customer’s)

• building. As in the previous exam-

ple, the loss is not covered because no “covered property” has been

• damaged. The insured can obtain

coverage for this risk by paying an additional premium for “contingent business interruption” coverage. An insured whose business depends upon a single supplier or customer would almost always want to pur- chase this coverage. Coverage is also available for losses due utility or telecommunications outages caused by off-premises events. Depending

• n the nature of the insured’s busi-

ness, a lengthy telecommunications

• r utility outage could be devastat-
• ing. Again, policyholders must

examine their exposures before a loss occurs to make sure their cover- age is adequate.

Actual Loss of Business Income

In addition to a suspension of

• perations and physical damage to

covered property , an insured must also prove it sustained an actual loss

• f business income. Thus, a mere

loss of sales or production does not trigger coverage. Even though lost sales or production usually results in

...a mere loss of sales or pro- duction does not trigger cov- erage.

Every company should review its CGL policy to see what, if any , IP coverage remains. Companies con- cerned about, for example, trademark claims against them should investi- gate the insurance marketplace to see if they can purchase either IP endorsements or stand-alone IP poli-

• cies. Companies with websites or
• therwise involved in E-Commerce

should investigate the new forms of Internet and multi-media policies, which can provide a wide variety of first and third party protections. These policies are not standard- iz ed, differ widely from insurer to insurer, and can be drafted to fit a company’s individual needs. IP risks are prevalent, and companies should guard against them when preparing their risk management portfolios. Robert D. Chesler is the founder of the New Jersey Insurance Coverage Institute and the chair of Lowenstein Sandler’s Insurance Law Practice Group. He can be reached at 973.597.2328 or rchesler@lowenstein.com. THE INSURANCE MARKETPLACE 2002: A “HOLE” NEW WORLD By Barron S. Wall, ARM, PMC and Karen Wallace Walter, Esq., ARM, Insurance Consulting Associates

Before September, Already A Tightening Insurance Marketplace

In the months prior to September, the insurance market- place was already struggling. The national and international insur- ance markets were facing a signifi- cant downturn after enjoying over ten years of solid returns in a soft

• market. Following the economy

, investment returns headed south, and insurance company investment income, long the stable growth fac- tor supporting the bottom line, suf- fered two of the worst years ever. Insurance companies suffered strong negative returns coupled with poor loss ratios and higher than expected catastrophe claims. Where the industry was accustomed to loss ratios (premium dollars to claims paid) under 100%, in many cases actual losses exceeded 120%. Abnormal catastrophe claims, as well as an unanticipated growth in directors and officers liability claims combined to force a tightening of available capacity to write cover- ages, a growth in coverage limita- tions and escalating premiums. All this before September 11th.

Post September: A Jittery Climate Prevails

September arrived, the towers fell, lives were lost and the coun- try's psyche and stability were hor- ribly shaken. Preliminary esti- mates of the total cost to insurance companies from the September 11 disaster range from $30 billion to $100 billion. Further exacerbating these claims are the American Airlines plane crash in Queens, qualified professional help sooner rather than later. Alexander J. Anglim, Esq. is an associate in Lowenstein Sandler’s Insurance Law Practice Group. He regularly represents policyholders in insurance disputes, helping them

• btain coverage for a wide variety of

claims under first and third-party insurance policies. Mr. Anglim is also a former insurance adjuster. He can be reached at 973.422.6410 or aanglim@lowenstein.com. DO YOU KNOW WHERE YOUR INTELLECTUAL PROPERTY INSURANCE IS? By Robert D. Chesler “Advertising injury” coverage is

• ne of the lesser-known coverages

provided by the general liability policy . In many states, including New Jersey and New York, courts have held that advertising injury coverage applies to trademark, trade dress and other intellectual property claims (although not patent claims). As with other claims for which courts have found coverage, such as environmental, employ- ment and asbestos, the insurance industry is now cutting back on this coverage or excluding it entirely . During the past three years, you probably have lost all or a substan- tial part of the IP coverage former- ly provided by your general liabili- ty policy . Your policy may have an advertising injury section that excludes trademark claims, or that contains an absolute IP exclusion.

estate client, all four policies read differently as to whether business interruption coverage was triggered in the absence of direct physical

• damage. Two provided civil

authority coverage when the prop- erties had limited access following the disaster, and two did not. Policies vary so greatly that an astute analysis of policy language is necessary before any claims are filed and, more importantly , before any future policies are bound. Aside from terrorism exclu- sions, new property policies are coming in with a proliferation of

• nerous changes, including new

exclusions for toxic mold and lead paint claims, new lower limits or complete exclusion for flood and earthquake, increased deductibles, and in many instances, the com- plete removal of the blanket limit

• coverage. Where many insureds

may have been lax about providing accurate replacement cost values in the past, as they were relying on the blanket limits and agreed val- ues clauses in their policies, now they will be forced to provide updated, full disclosure of values,

• r be faced with significant under-

insurance and coinsurance penal- ties in the event of a loss.

Claim Valuation - "Worst Case Scenario"

Insurers are also placing renewed vigor on underwriting, and are dropping whole lines of the typical language of the new terrorism exclusions written so broadly and ambiguously that any act of any third party to cause loss could conceivably fall within these new exclusions. One large insured was paying a total of $270,000 last year in property premiums, includ- ing terrorism. At renewal, they received a quote for stand alone terrorism coverage of $1.2 million – just for terrorism – while the property portion offered at renewal was $485,000, totaling $1,685,000 for the same coverage. Business interruption may sur- pass the amount of property dam- age losses from this disaster because so many businesses beyond the World Trade Center were affected when entire sections of downtown New York City were cordoned off during the clean up. Many businesses were shut down entirely , some scrambling for new

• r temporary space, while others

were unable to function at all, even though they suffered no direct physical damage. In an analysis completed of four separate property policies insuring buildings in New York City for a large real New York in November with claims estimated at $1.5 billion and Enron's bankruptcy filing, which insurers estimate at another $3 billion in claims. Although at first glance the property insurers seem to have suffered most from September's disaster, almost no coverage has remained unaffected. Despite the good will and patriotic sentiment which abounds, lawsuits so surely follow any disaster even before the dust settles.

Property Insurance - Beware the Hidden Evils

The property marketplace will be forever changed by these events. Insureds are typically facing increased property premiums any- where from 20% to 400%, if they see a renewal proposal at all. One property owner and manager with a pristine loss history was insured with a strong national property car- rier for forty years. Although pre- pared for an increase, this insured was shocked to receive a cancella- tion notice stating the carrier sim- ply did not want to write that type

• f risk anymore. Other insureds

faced astronomical increases if they wanted to keep their insurance, all while accepting unannounced

• nerous policy changes, exclusions

and limitations none would have dreamed of three months earlier. Terrorism, included previously without so much as a discussion, is being completely excluded, with

Policies vary so greatly that an astute analysis of policy language is necessary before any claims are filed and, more importantly , before any future policies are bound.

insures against politically motivat- ed cyber-terror attacks intended to destroy or damage the country's communication infrastructure. The product is focused on the most vulnerable of insureds, such as financial institutions, power com- panies, government branches or agencies, hospitals and manufac- turers, but has relevance to any company conducting business via the Internet. The insurance mar- ket downturn has also brought renewed attention on alternative risk financing vehicles, such as risk retention and risk purchasing groups and offshore captive pro-

• grams. Numerous entities are in

the process of creating new off- shore commercial insurance cap- tive ventures, many in Bermuda and Ireland. It is predicted that these new coverages and alterna- tive risk financing methods will see tremendous growth given the cur- rent insurance atmosphere. Barron S. Wall, ARM, PMC, Managing Associate, and Karen Wallace Walter, Esq., ARM are from Insurance Consulting Associates (ICA), headquartered in Mahwah, New Jersey. Founded in 1956, ICA provides risk management consulting services to commercial clients on a fee-for-service basis only. ICA does not sell insurance. Mr. Wall and Ms. Walter can be reached at (201) 512- 9600 or BSW@icarisk.com. hard markets found pricing tripled and up, which is where pricing is expected to move. Insureds should pursue layered excess programs, utiliz

• ing numerous carriers rather than

seeking to insure full limits with one carrier. Even the relatively stable market for workers compensation is facing significant increases. Although

• ffice workers have enjoyed one of

the lowest premium ratings for workers compensation in the past, high populations of office workers in large buildings pose newly evaluated

• exposures. Moreover, the anthrax

scare and the threat of bioterrorism is another exposure expected to cause premium increases on workers compensation premiums, as well as

• n liability coverages.

Post September 11 Climate Results in New Products

With each new exclusion limit- ing existing coverages, innovative products are being marketed to fill the gaps. As expected, some

• pportunistic insurance companies

are now

• ffering

Terrorism Insurance for property damage

• nly

, without business interruption coverage, with premiums starting at $100,000. Cyber-Terrorism poli- cies are also now being pushed, to protect this new exposure which until September was overlooked by most U.S. companies. Far beyond a simple computer virus such as the recent Melissa virus, this product business that they feel are particu- larly at risk. Property insurers are now enforcing loss prevention and engineering recommendations, with the threat of cancellation if the insured fails to comply. Underwriters have also drastically changed the way they set reserves for pending claims. Where previ-

• usly they reserved claims based on

the "most likely outcome" or the "maximum probable loss," one large national insurer has admitted to valuing claims now on the basis

• f "worst case scenario," a method

never seen historically in the insur- ance market. This, in turn, bene- fits the insurers as it permits them to charge significantly higher pre- miums and stockpile a profit cush- ion, so long as such catastrophes remain at bay .

The Casualty Market Suffers Casualties

The casualty market has suffered greatly as well, although the full effects are not yet determined. Casualty insurers are seeking signifi- cant increases, with renewal premi- ums often double the expiring premi-

• ums. Coverage cutbacks include sig-

nificant curtailing of all intellectual property coverage, expansion of pol- lution exclusions to exclude bioter- rorism, separate sublimits or exclu- sions for terrorism, and the like. Where a few years ago an umbrella price per million of coverage aver- aged $1,000 per million, previous

www.insurance-lowenstein.com

Robert D. Chesler, Chair of Lowenstein Sandler’s Insurance Law Practice Group, spearheaded the development of the Insurance Outpost. If you have

any questions, please contact Robert D. Chesler at 973-597-2328 or rchesler@lowenstein.com.

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65 Livingston Avenue Roseland, New Jersey 07068-1791 Telephone 973.597.2500 Fax 973.597.2400 www.lowenstein.com

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...finally, an online insurance coverage resource for New J ersey businesses.

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resource dedicated to your insurance coverage needs.

• Read about developments that impact corporate policyholders
• Request articles on how to minimize your risks
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New Articles on the Outpost

“Beware of Changes to CGL Forms”

By Adam S. Cantor

“Key EPL Issues”

By Jennifer A. Lopez

“Coping with Reliance Insurance Company”

By Alexander J. Anglim In addition, the Insurance Outpost has articles on the following topics: Allocation Asbestos Bad Faith Broker Liability Business Interruption Claims Handling Computer D&O Disability Duty to Defend Employment Environmental General Intellectual Property Internet Litigation Missing Policies Mold Workers’ Compensation

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The Lowenstein Sandler Insurance Law Practice Group Credo

Insurance should provide security and peace of mind. In exchange for a premium payment, the policy- holder externalizes risk. However, the relationship of trust between policyholder and insurer that once existed has vanished. The cavalry has turned and run, the umbrella lies in tatters and the good hands are a fist. All too frequently , the insurer’s response to a valid request for coverage is ‘claim denied.’ We, in the Lowenstein Sandler Insurance Practice Group, still believe that insurance policies provide coverage. We will advise our clients of their rights, guide our clients down the tortuous paths of claims-handling, and partner with our clients to pursue coverage through litigation when necessary . We stand prepared to be your insurance advocate. For more information on any insurance coverage matter, please contact Robert D. Chesler, Esq. at 973-597-2328