Author: Blake Berscheid, Senior Property Claims Director, Hays Companies
The 2018 U.S. hurricane season was catastrophic, causing more than $50 billion in damages and 173 fatalities. It took months for business in affected regions like Florida, North Carolina and Georgia to recover from wind and flood damage. While the devastation and destruction were felt most acutely on the Atlantic coast, the impact of two major storms—Hurricanes Michael and Florence—reverberated across the U.S.
With the 2019 hurricane season officially underway, the National Oceanic and Atmospheric Administration (NOAA) is predicting an average season with the possibility of four to eight hurricanes. Of those, two to four could grow into major hurricanes with sustained winds of more than 111 miles per hour.
No one yet knows the ramification of this year’s storm season, but businesses around the country should begin preparations for possible delays in sales, production or delivery of goods and/or services soon. One essential component of that planning is contingent business insurance (CBI). Arnie Mascali of Procor Solutions described CBI in an article for Tort Trial & Insurance Practice Law Journal, writing that the coverage “protects a policyholder from income losses that result not from damage to its own property, but rather damage to property not owned by the policyholder.”
When looking specifically at Hurricane Katrina’s national economic impact, he noted that damage done to suppliers and wholesalers in Louisiana shut down businesses across the country because of supply, delivery and supply-chain logistics.
CBI is not traditional business interruption insurance
Business interruption covers organizations that temporarily close or lose revenue following a catastrophic event, if a property claim occurs that directly affects the insured’s property. On the other hand, CBI covers only property damage inflicted on a third-party organization that is vital to the insured’s revenue. It’s important to note that CBI is not an umbrella policy – specific kinds of damage must be explicitly outlined for coverage to go into effect.
For example, if a storm affects a manufacturer in North Carolina whose product directly impacts an organization in Wisconsin, CBI would be necessary for the Midwestern company to recover any losses while the North Carolina business would file covered claims under traditional business interruption insurance.
Hurricane Harvey and Ethylene
A key instance was the dramatic impact Hurricane Harvey had on ethylene production and delivery throughout the United States. Ethylene is used in everything from clothing to plastics to daily household items used around the world. Texas produces more than 75 percent of the ethylene sold in the United States. Hurricane Harvey decimated the industry, causing the production of goods made with ethylene across the country to slow or stop entirely.
Two weeks after the hurricane, more than half of all ethylene manufacturers were still shut down. Many organizations that relied on the petrochemical leaned on their CBI policy to recoup losses. Those without coverage suffered catastrophic damage.
CBI claims must but covered
Like traditional business interruption insurance, a CBI claim must be covered under an organization’s policy. In an incident such as a hurricane, claims become complicated with wind and flood playing a significant role, as insurers and claims advocates decide what caused the damage to a property.
Most insurance plans cover hurricane or wind damage and exclude flood. It is up to the policyholder to prove that the peril is covered, which is easier said than done when the property is located hundreds or even thousands of miles away. As Shannon O’Malley notes in Insurance Law360, “because the loss is once removed, the insured may have very little information as to the cause of its customer’s or supplier’s inability to receive or provide goods.” In other words, there is a high burden of proof placed on the insured when filing a CBI claim.
The insured must prove that they have lost revenues due to the property damage of a vendor, customer or manufacturer. Organizations must also provide evidence that the loss cannot be recuperated through another means, such as a comparably priced manufacturer of raw materials.
The Lessons of Hurricane Katrina
When Hurricane Katrina hit the city of New Orleans in late August 2005, it shut down one of the busiest ports in the United States, ravaged an entire state and caused approximately $125 billion in direct damage. Of that damage, only $80 billion was covered by insurance. Oil production was reduced to a third in the weeks following the storm and U.S. economic growth dropped an entire percent in Q4 2005.
Businesses across the country were impacted by Katrina, with many left without sufficient insurance coverage to recuperate quickly from one of the most devastating hurricanes in recent history. Since that time, commerce has only grown more interconnected, leaving more companies vulnerable to business loss or interruption in disaster areas.
While CBI coverage is not exclusive to hurricanes, these natural disasters tend to create severe destruction, the repercussions of which can reverberate around the country. Chances are, your organization relies on businesses in disaster zones and would suffer should disaster unexpectedly strike.
CBI is unrelated to traditional business interruption insurance. Your broker can help determine and find coverage for your organization.
To learn more, contact Hays Companies today.