Floods, hurricanes, conflagrations or earthquakes strike damaging property and affecting business income – and this year’s hurricane season is predicted to be a blockbuster. Top forecasters, including Colorado State’s Bill Gray1 and protégé Philip Klotzbach2 predict an above-average 2013 Atlantic hurricane season, with 18 named storms, 9 hurricanes and 4 major hurricanes forecast. Commercial risk managers use such predictions to anticipate when or where such a catastrophic loss may occur. In the case of the 2012 Hurricane and Superstorm Sandy, some businesses prepared in advance while others took a “wait and see” approach, only to find their businesses seriously damaged. Although the direction of a hurricane may take a few days to indicate where landfall will generally occur, and up-stream flooding will dictate when flood waters may arrive, disasters such as a tornado or earthquake may give no advance warning. Still, such losses could be anticipated in localities along a fault line, or where there is a history of tornadoes in the past.
Doug May, vice president of Property Claims for Lexington Insurance Co., offered suggestions that may mitigate damage and aid in catastrophe recovery in his article in the September 3, 2012, issue of National Underwriter. These suggestions include establishing service agreements with reputable and experienced restoration and remediation services well in advance of a disaster. Also, he suggests, “Line up alternative worksites: Create a contingency plan to relocate your key operations outside of the area affected by the catastrophe.” (For data processing, “hot sites” with extra computers, where companies can transfer their data processing personnel to continue processing, are available with advance reservations.)May also suggests that risk managers “weigh your need for generators,” and have them, and sufficient fuel, on hand before the disaster strikes.
May includes consideration of the workforce. He says, “After Katrina, one New Orleans fast food franchise owner worked with his insurer to pay idled workers while the restaurant was closed for repairs. He then had an experienced crew ready to go when the restaurant reopened….” Further, he proposes a review of the supply chain for what will be needed, and if suppliers are also affected, to “be ready to source vital materials elsewhere.” He recommends tracking all expenses, and using the experience and the resources of the insurer to help in the recovery of the business.
Sandy also posed an additional potential insurance coverage dispute. Just before the storm hit the New Jersey coastline, it was downgraded from a Category One Hurricane to a tropical storm. Policies in a number of shoreline states contain special “Hurricane Deductibles” different from the deductibles applicable to non-hurricane damages, such as falling trees. Generally these special hurricane deductibles are 5% of the policy limits on the structure. Hence the difference between a non-hurricane loss deductible of $5000 (or whatever amount) on a $300,000 property policy and the 5% hurricane deductible would equal $10,000. Whether insureds will dispute the deductibles charged in Sandy or other hurricanes, where the wind has fallen below hurricane strength when the damages occurred, remains to be seen.
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1 Professor Emeritus of Atmospheric Science
2 Research Scientist
[citation: William Gray; Philip Klotzbach (April 10, 2013). “Extended Range Forecast of Atlantic Seasonal Hurricane Activity and Landfall Strike Probability for 2013” (PDF). Colorado State University. Retrieved April 10, 2013.]