As the insurance industry makes assessments for superstorm Sandy’s impact, analysts say there is now the potential for significant business interruption (BI) and contingent business interruption (CBI) losses.
Fitch Ratings said that while many lines of insurance will be affected — including property and auto — there could be major BI and CBI losses related to the flooding as the affected areas work to restore power and resume operations following the storm.
The massive storm has impacted a wide variety of businesses in densely populated areas, including retail, corporate offices, transportation, manufacturing, and energy plants.
Fitch: BI and CBI Losses Often Underestimated in Risk Modeling
Extensive BI and CBI losses were experienced by the insurance industry last year in both the Japanese earthquake and tsunami and Thailand floods, as they accounted for a considerable portion of commercial and industrial losses. Fitch said these events demonstrated the extent to which BI and CBI losses have been underestimated in the modeling and underwriting of risks.
In order to incur a BI or CBI loss, an insured must suffer an actual loss of income from the suspension of operations, Fitch said.
In most cases of BI, the interruption must be due to physical loss or damage to its own property as a result of a covered cause of loss. A BI claim can also be triggered if the work location is not accessible due to a “civil authority” order telling people to stay out of an area.
Meanwhile, CBI provides an additional protection that covers loss of income when the insured’s operations are disrupted by a supplier and covers the same perils as the main policy of the insured. However, the majority of companies do not purchase CBI policies.
Coverage typically begins following a waiting period, most often 72 hours, and continues for the length of time it takes to repair, rebuild, or replace the damaged or destroyed property with reasonable speed and similar quality.
Thus, the ultimate insured losses from BI and CBI will be partly depend on how fast businesses resume operations, Fitch said. The vast majority of BI and CBI coverage purchased in the U.S. is included as part of the insured’s property policy, and are thus included within the overall property policy’s coverage limits.
Fitch Ratings said it expects that flooding from excessive rainfall and high storm surge will be a substantial component of damages from Sandy, in addition to damage from strong winds. Homeowners’ policies cover wind losses, but generally do not cover flood losses. Conversely, many commercial policies cover both wind and flood losses, as do crop insurance policies.
Calculating Business Interruption
When it comes to time for actually calculating business interruption, one of the key issues is determining appropriate restoration periods, after which a business can commence normal operations, according to Goldberg Segalla LLP, a New York law firm with a large insurance law practice.
Generally, coverage is only afforded for loss up to the point of restoration of normal business. Here, several factors are usually weighed. These include the market conditions and trends both before and after a loss, said Dan Gerber, co-chair of Goldberg Segalla’s global insurance services group.
Additionally, Gerber said, one must calculate the standing charges, or “savings,” a business must credit to its claim because it is not paying costs of operation during the restoration period.
Danger for Agents/Brokers
Gerber also warned that with all of the issues surrounding insurance, agents and brokers will likely face tough questions and scrutiny over the coverages they have recommended to their clients.
As a consequence, there may be an influx of errors and omissions claims brought against them as a result of Sandy, he said.