No one ever wants to see a tragedy, and no one wants to see injuries and loss of life such as we are seeing in the wake of Wednesday’s massive explosion at West Fertilizer Co. in central Texas. Our thoughts are with those who have lost loved ones or suffered injury or destruction of property. While insurance is of no solace in these circumstances, it can be a key factor in recovery from such disasters. Policyholders must act promptly to protect their rights and to obtain the full extent of their coverage.
Companies whose business includes large-scale industrial operations should make sure that they have appropriate liability insurance to cover claims brought by those alleged injured from their operations. However, they also should make sure that they have the following types of insurance coverage, which may be crucial not only to their recovery, but also to better ensure jobs for their employees.
Property insurance coverage for commercial insureds is usually written on a “named perils” or “all-risk” basis. “Named perils” coverage provides insurance for an enumerated list of events, typically including earthquake, fire, and windstorms. “All risk,” on the other hand, is a broader form of coverage, which covers “all risk of loss or damage” to the insured’s property unless specifically excluded. All risk coverage shields an insured from catastrophes that an insured (and sometimes even an insurer) is unable to imagine at the time the policy is procured.
Commercial insureds should be aware of their policy exclusions, which may be common to property policies (e.g., flood damage), or specifically inserted into a policy based on the nature of the insured’s business (e.g., a “virus or bacteria contamination” exclusion in the policy of a food producer).
Insureds with industrial operations should look for exclusions based around chemicals or materials stored onsite, or specific hazards of the insured’s operations. See Causes of Loss, Form CP 10 30 06 07 at B.1.I. (ISO Properties, Inc. 2007); see also Building and Personal Property Coverage, Form CP 00 10 06 07 at H.2 (ISO Properties, Inc. 2007) (pollutant definition). Even an included peril, such as a fire, may become excluded if the direct cause of the fire is excluded, such as a hazardous chemical stored on the premises.
Business Interruption Coverage
In addition to covering physical damage, many commercial property policies also provide “time element” coverage that may help the policyholder recover for other losses caused by an industrial accident. To be implicated, policies typically require damage by a covered peril to property.
Business interruption coverage often reimburses the policyholder for “actual loss sustained,” which frequently is measured in terms of either (i) the net reduction in gross earnings minus expenses that do not necessarily continue, or (ii) net profit that is prevented from being earned plus necessary expenses that continue during the period of interruption. Such coverage may be implicated if a plant ceases or limits production for a time after a fire or explosion at its site.
Business interruption lasts for a “period of interruption” defined by the policy, usually the reasonable time it would take the insured to recommence operations after necessary repairs or rebuilding. Some businesses purchase an extended period of indemnity coverage. Although policy language can vary significantly, an extended period of indemnity coverage frequently covers lost gross earnings from the time repairs were completed through the time the business returns to the condition that would have existed had no loss occurred.
Contingent business interruption coverage typically covers two types of business interruption. First, it protects against economic losses caused by a “direct” supplier’s inability to get its goods to the insured due to damage to or destruction of the supplier’s property by an insured peril. Second, it protects against economic losses caused by damage to or destruction of a customer’s property that prevents the customer from accepting the insured’s products. In the example of a fertilizer plant, home and garden stores who are unable to meet customer demand for fertilizer in the immediate aftermath of the explosion may have a contingent business interruption claim for lost revenue based on their supplier’s loss.
Commercial property policies often contain additional coverage that a major loss, such as the fertilizer plant explosion in Texas, may implicate. Policyholders should carefully review, for example, their civil authority, ingress/egress, and extra expenses coverage. .
An Insured’s First Steps Toward Maximizing Coverage
Most property insurance policies contain conditions or other provisions that state things that an insured should do. While many jurisdictions recognize that a policyholder’s failure to comply with a condition will not result in a forfeiture of coverage unless the insurer is prejudiced by the non-compliance, not all jurisdictions agree and not all conditions are subject to such a test. Therefore, a policyholder should attempt to honor all conditions to the extent reasonably possible. Some of the more common conditions include the following:
Notice. Most insurance policies specify that an insured notify the insurer “as soon as possible” or “as soon as practicable” after a loss or other insured event. This notice should be in writing for purposes of creating a record, although early oral notice may suffice, followed by written confirmation.
Cooperation. Almost all policies also contain a more general “cooperation” provision stating that the insured is to cooperate with the insurer in its investigation of a loss and otherwise.
Proofs of Loss. Most first-party insurance policies call for an insured to provide a proof of loss, signed and sworn to by the insured. Many policies state a specific time within which the proof of loss is due, while others call for it after request by the insurer.
Examinations Under Oath. Most first-party insurance policies give the insurer the right to conduct, by any person it names, an examination under oath as often as may be reasonably required about any matter relating to the insurance or the loss and require that the insured produce relevant books and records for examination. A failure to reasonably comply may result in a loss of coverage.
Limitations Periods. Policyholders should be aware of contractual limitations periods that are frequently contained in property insurance policies (that is, a contractual statute of limitations). These provisions often are shorter than their statutory counterparts and many jurisdictions enforce them as written.