Unlike earlier natural catastrophes, business interruption losses are going to be a major part of the total loss from Hurricane Katrina, warns Ling Ong.

Following Lloyd's announcement of an increase in net loss estimates from £1.4bn ($2.55bn) to £1.9bn ($3.42bn) arising from Katrina alone, Luke Savage, Lloyd's director of finance and risk management, commented at the end of November that business interruption losses are causing the most difficulty for underwriters to calculate as the period of disruption has been longer than anyone had expected. Current Lloyd's net loss estimates for Rita stand at £535m ($947m) and for Wilma £483m ($855m).

The extent of the devastation, and the inevitable effect this will have had in terms of lost and destroyed business records, make the task of assessing such losses truly daunting. In addition, exposure incurred from extensions to “normal” business interruption insurance, such as contingent business interruption, adds to the difficulty in predicting losses.

Contingent business interruption covers losses to the insured arising from damage to inter-dependent properties. This would normally be defined as damage to property that prevents a supplier from rendering its goods and/or services; or a client from receiving the insured's goods and/or services. The extension may respond even if the insured's own property was not affected.

The unique circumstances of Katrina and the way in which it was so closely followed by Rita and Wilma may also give rise to another potentially difficult question specifically related to business interruption losses.

In general terms, business interruption cover normally ends after a specified period of time – often 12 months – running from the date on which the insured peril has occurred. What if an incident takes place, thereby triggering the start of the indemnity period, but is followed by a second incident before the indemnity period has ended. How should the losses be allocated between the two incidents? Clearly, this question will have important implications insofar as the application of deductibles is concerned, and also, to the application of sub-limits (where applicable). There is no easy answer and the outcome is likely to be dependent on the specific facts of each individual case.