Business interruption cover has proved a useful addition to property covers when ice storms hit By Ronald Gift Mullins.

The US had never seen anything like it, at least in living memory. The 'Storm of the Century', also known as the 'Blizzard of 1993' and 'SuperStorm 1993', began in the week of 13 March 1993, as warm air from the Gulf of Mexico swept northward, colliding with a massive cold front which triggered a devastating blizzard, dumping tons of wind-driven snow, freezing rain, sleet and ice from Florida to Maine, and across Eastern Canada.

For the first time, every major airport on the East Coast was closed at some time or another by this ferocious, four-day blizzard, and several remained shut for days. Hundreds of roofs collapsed due to the weight of the heavy, wet snow. Layers of ice built up, weighing down power lines and poles, and causing massive power outages. More than three million customers, both consumer and commercial, lost electrical power during the storm, and some areas were without power for a week or more.

Thousands of people were caught in the open, subject to sub-freezing temperatures and biting sleet, and had to be rescued by the National Guard in many states. The number of deaths either directly or indirectly in the US and Canada from this storm totaled 275. This figure is more than three times the number of deaths from Hurricanes Hugo and Andrew combined.

Destruction by the record snowfall, gale force winds, freezing rain, ice pellets and extreme cold of the Blizzard of '93 as it stormed across 20 states left economic damages of up to $6bn, with insured property damage close to $1.8bn. Of the ten most costly catastrophes, the March 1993 winter storm ranks as the ninth. But other ice storms have also racked up billion-dollar insured losses. In 1996, there were three winter storms in the US: on 6 February, insured losses were $735m; 6-9 January, $600m, and 17-20 January, $395m, for a total of $1.73bn. The Insurance Services Office (IS0) estimates that each year about 10% of catastrophe losses result from winter storms.

In Canada, an ice storm lasting from 5-10 January, 1998, directly affected more Canadians than any other previous weather event in the country's history. The storm blanketed a massive area, extending from Kitchener, Ontario, through Quebec to New Brunswick and Nova Scotia. Neither was the US immune, with the storm hitting parts of New York and New England. Freezing rain in some regions lasted more than 80 hours. And what made all this rain doubly dangerous was that there were no spells of sunshine or thawing between downpours. The ice layers got thicker and thicker.

Twenty-eight people died, many from hypothermia. Hundreds of transmission towers were destroyed and more than 30,000 utility poles fell. Millions of trees were brought down by the freezing rain, and more continued to break and fall during the rest of the winter. Milk processing plants were shut, and about 10.5 million quarts of milk had to be dumped. Much of the sugar bush used by Quebec maple syrup producers was permanently destroyed, with production not expected to return to normal for 30 to 40 years. Most claims fell into the categories of automobile (from weather-related accidents and cars damaged by falling trees), home (caused by falling trees), business interruption (from loss of sales due to closures during storm) and agriculture (for farm losses, barn and equipment damages).

Estimated economic cost of the ice storm was C$5.4bn ($3.8bn) with about 700,000 insurance claims. Of the more than C$1.4bn paid or reserved by primary insurance companies, about C$965m or 66%, was paid by Canadian or international reinsurers through catastrophe, risk excess or proportional treaties and facultative placements.

Estimating insured and economic damage from winter ice storms is difficult because of their state-wide path of destruction, unlike that left by hurricanes or tornadoes where the significant damage is usually limited to a small geographic area. During ice storms, most often shut down are extensive sections of the vast Interstate Highway System which trucks use to deliver materials to manufacturers and goods to customers. And ice and snow pull down electrical lines, cutting off power and closing businesses. With the roads impassable, few employees can get to work, and most consumers delay shopping for a calmer, brighter day.

BI to the rescue

During these periods when severe winter weather halts production or closes businesses, business interruption (BI) insurance can indemnify a company's losses and enable it to survive until it can resume operations. A type of property insurance, BI coverage is usually purchased as an endorsement to a property policy or as part of a 'package'. BI protects a business owner against losses resulting from a temporary shutdown because of fire, storm damage, vandalism and other perils. It provides compensation for lost income and profits. No precise figures are available as to total industry premiums or losses associated with BI, as neither ISO nor the National Association of Insurance Commissioners require re/insurers to report premiums or claims separately for BI.

Bruce R Kaliner, partner at law firm Mound Cotton Wollan & Greengrass, New York, said that most all BI policies are manuscript. "There is no standard BI policy that fits all risks," he said. He advised risk managers to carefully scrutinise a BI policy before signing off on it. "It is difficult to anticipate all the circumstances that could affect a business's operation, but a wise risk manager will consider most situations that could possibly have a detrimental impact on the business and attempt to have them in the policy while balancing the cost."

David DiCenso, claims director for commercial property, GE ERC, Avon, Connecticut, said primary insurers will lay off direct property and BI cover with reinsurers, but the levels vary, depending upon whether it is in a catastrophe program or on a per risk basis. "Manuscript policies are mostly written," Mr DiCenso said, "but in a softer market, insurers will write more all-risk standard BI forms, with just a few exceptions. Coverage is usually very broad."
Frederic R Mindlin, a partner at Mound Cotton Wollan & Greengrass, said that within the past few years there has been a change in how policies are written. "It used to be that BI manuscript forms included named perils and it was the responsibility of the insured to prove the loss came from one of the perils. Today, there has been a turn around in favour of the insured with BI policies being written with few restrictions on perils covered."

There are various types of BI coverage available. A BI policy can include extra expense coverage, providing funds to set up a business at a different location because of insured damage at the original place of business.

Before an insurer issues a BI policy, it will request the policyholder complete a worksheet that details income, expenses, net profits, operating locations, suppliers, size and location of biggest customers, and other relevant financial information.

Most BI policies have a time element restriction that determines how quickly coverage will respond following a loss. The greater the time deductible, the less the premium will be, though the type of additional endorsements and conditions can affect total cost. There are also specific provisions and time limits that determine how long the indemnity in a BI policy will last following a loss. Often the time restriction is up to one year, though other limitations may apply as to when the building is restored or when it could have been repaired if it cannot be rebuilt. Sometimes, the indemnification period extends through the expiration date of the policy.

Contingent BI

Another type of BI is contingent business income (CBI) insurance or contingent business interruption insurance. This coverage has grown in importance as outsourcing domestically and overseas, as well as 'just-in-time' production lines, have become increasingly indispensable for manufacturing and service industries to accelerate production and reduce expenses. If one or more of a firm's suppliers shuts down and/or fails to deliver goods or services on time, the revenues of the insured could be affected negatively. Further, if one of the policyholder's major customers is forced to close because of a peril covered by the BI policy, the insured is covered by loss of revenue.

CBI protects a firm against interruption and extra expense losses resulting from damage caused by an insured peril to property that it does not own, operate or control, but whose operation is crucial to the continued operations of the insured's business. This coverage can be purchased as an extension of the standard property insurance, though some insurers will write it as a stand-alone policy. Coverage is usually triggered by physical damage to customers' or suppliers' property or to property which the insured company depends upon to attract customers.

The CBI policy usually covers loss of profit, loss of revenue, liquidated damages and, additionally, it can cover third party strikes, political risks, pollution and contamination, epidemic and disease, denial of access and terrorism. Depending on the type and location of a business, other perils can be included.

Other important endorsements to BI policies include: loss caused by order of civil authority that prohibits access; loss caused by impairment of egress or ingress; and off-premise power. This endorsement extends coverage as a result of destruction to power lines, as many insurance companies include a clause in most BI polices that restricts the cover to exclude loss "resulting from damage to or destruction of off-premise poles, towers and transmission or distribution lines". Without the off-premise power endorsement, this restriction has the effect of removing the coverage for business interruption loss resulting from damage to poles, towers and transmission lines.

Loss of power accumulation

Ed Radzinski, senior vice president, Chubb Commercial Insurance, White House Station, New Jersey, said that BI coverage for loss of utilities tends to be risky as an insurance company faces an aggregation issue.

"If a significant section of an electric grid goes down during an ice storm, it could create a substantial accumulation of BI claims for an insurer in a very short time," he said. "This coverage has to be very carefully underwritten."

The highest number of losses from an ice storm is inevitably in personal lines business, but the majority of the dollar loss emanates from the commercial sector. Also, as an ice storm may affect a huge geographic area, there is a potential for damage to multiple insureds of one insurance company. Mr Radzinski said Chubb has insureds throughout the world, so any large ice storm will result in claims for the insurer. "But losses from winter storms do not rank in the top five total losses for Chubb," he said.

Mr Radzinski added that claims from ice storms "tend to be more difficult to handle than straight property claims because you are trying to get the insured back to a prior-loss position. We look at revenue, expenses, net profits, and attempt to project all of these factors into the future. We ask, what would have been the expenses, the revenue and profits in a few months, a year or longer? We have to consider where the economy or a specific market is headed and how does this affect profit and continuing expenses. It is a little more complicated than just replacing property, because putting on a new roof is more or less finite ... When adjusting a BI claim, there is usually a lot of communication back and forth between Chubb and the insured as we try to project the past into the future."

Agreeing that the difficulty with settling a BI claim is attempting to quantify the insured's damages and then determining future operating results, Mr Kaliner commented: "It is like opening Pandora's box. A lot of factors emerge that are often not considered when the policy is purchased. Such as overhead issues, what expenses are within coverages, is purchasing new equipment covered?" His advice to risk managers is to thoroughly document the claim by providing relevant historical data to support it from the past.

Typically a BI claim comes in with the property loss, and the payment for BI usually outpaces the dollars for the property loss, according to Mr DiCenso. "Settling a BI or CBI claim depends on how the insurer interacts with the insured," he said. "If both parties can agree on the projections of the loss and what the insured's financials were pre-loss, then the rest falls into place."

Remembering the winter storm of 1993, Mr DiCenso said what really stuck out in his mind from handling the claims was how many roofs collapsed in the South due to the heavy, wet snow. "Buildings aren't constructed in that area of the country to withstand the weight of a heavy snowfall followed by freezing rain," he said. "Lots of collapsed roofs destroyed the facility, then business interruption responded."

Mitigating BI losses

Companies can take a number of measures to mitigate their exposure to losses from an ice storm, according to Mr Radzinski. "Is the building protected from the weight of snow and ice?" he said. "Is the building and equipment properly valued? Building costs have risen - inflation does come into the picture. If an insured is concerned about loss of power, it can buy an emergency generator, or have an emergency plan to move some production to another plant or operation."