Disasters Raising Questions of Insurance Adequacy



According to the Federal Emergency Management Agency (FEMA), the United States experienced an average of 32 disasters per year between 1953 and 2007. In 2007, however, 63 disasters were declared, a figure that had been exceeded only three times in 54 years. In addition to hurricanes and terrorism, recent disasters have included wildfires in California, tornados in the South, flooding in Texas and severe winter storms across states ranging from Texas to Maine.

In light of these alarming developments and the fact that no region is immune from the possibility of such disasters, this discussion explores some of the important areas of risk management and insurance that must be addressed in being prepared for them.

Interruption of Operations

For many occupants of buildings damaged by a disaster, even more devastating than the resulting property damage is the loss of earnings due to the blast. Occupants may suffer loss of business income from shutdown of operations or need to expend substantial sums in extra expense to maintain or hasten re-establishment of operations at the same or another location.

Initially, in such a loss, even tenants that have sustained no damage to their own premises are prevented by order of civil authority from reoccupying their premises to resume operations. In the worst case, they may not even be permitted to enter the building to retrieve business property or records that would allow total or partial transfer of operations to another site.

The civil authority provision of most business income or extra expense insurance policies will normally provide up to two consecutive weeks of coverage for such an event. But beyond that time, there is no coverage if there is no property damage to the involved premises.

Insurance Services Office (ISO), the policy drafting organization for many U.S. insurers, has made some important changes in its business income and extra expense coverage forms. Following their approval, the changes were to be implemented in most jurisdictions in November 2008. Among the changes is a restriction with its civil authority coverage.

Since 1984, the condition precedent to obtaining payment for actual loss of business income or extra expense caused by action of civil authority that prohibits access to the described premises has been direct physical loss or damage resulting from a covered cause of loss—other than at the described premises. In the wake of the many hurricanes that struck Florida and other southern states in recent years, attempts were made by businesses to obtain access when denied by civil authority...