Wednesday, March 2, 2016 Houston, TX. 9:30 11:00 a.m. MANAGING AND RESOLVING THE BUSINESS INTERRUPTION CLAIM

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1 Wednesday, March 2, 2016 Houston, TX 9:30 11:00 a.m. MANAGING AND RESOLVING THE BUSINESS INTERRUPTION CLAIM Presented by David Goodwin Partner Covington & Burling Mark O Rear Managing Director Navigant Consulting (PI) LLC A catastrophic event has affected your company or even one of the major suppliers for your company. As a risk manager, you have several critical decisions to make. This workshop will explore the introductory and complex concepts of a business interruption claim surrounding direct and contingent (supply chain) business interruption losses. Throughout the session, the presenters will follow a sample business interruption claim to highlight important considerations and potential pitfalls. Copyright 2016 International Risk Management Institute, Inc. 1

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3 David Goodwin Partner Covington & Burling Mr. Goodwin is partner in Covington & Burling s San Francisco office and a member of the Insurance Coverage, Arbitration, and Appellate practice groups. Mr. Goodwin is one of the nation s leading insurance coverage practitioners, ranked in the highest tier by Chambers USA both nationally and in California. Law360 has named him one of the country s top three most valuable players in the insurance practice area. With nearly 30 years of experience representing corporate policyholders in insurance coverage disputes and litigation, Mr. Goodwin has served as a party arbitrator in numerous insurance arbitrations. He also is a highly experienced appellate advocate who has argued more than 50 appeals. Mr. Goodwin is a vice chair of Covington s litigation practice. He also has served as an adjunct professor at the University of California at Berkeley Law School, where he taught courses on insurance law. Mr. Goodwin s education includes University of California, Santa Cruz (A.B., 1974); University of Oxford (B.A., 1976; M.A., 1981); and Stanford Law School (J.D., 1982). Mark O Rear Managing Director Navigant Consulting, Inc. Mr. O'Rear is a managing director in the Disputes and Investigations practice. He has more than 10 years of insurance claims and litigation support in energy, chemicals, manufacturing, and retail matters. His experience includes the preparation of business insurance claims for business interruption, property damage, extra expense, delay-in-startup, and expediting expenses, as well as the quantification of damages in support of litigation. Mr. O Rear has been retained to provide consulting and testifying expert services for matters involving damages to real property in the context of litigation and insurance claims. Mr. O Rear received his bachelor of business administration in Finance from Texas A&M University Mays Business School. 3

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5 Managing and Resolving the Business Interruption Claim Presented by: David Goodwin Partner Covington & Burling Mark O Rear Managing Director Navigant Scenario You are the risk manager of a large energy company. Your company has numerous locations along the Gulf Coast. A large hurricane is bearing down on numerous facilities but will have an effect on almost your entire company. You have in place an all risks property damage and business interruption insurance policy. A major property damage and business interruption claim seems likely. How do you resolve the claim in a timely manner to ensure your company receives all the money it is owed under your insurance policy? 2 5

6 3 Your company, operating as a prudent operator, shuts down all processing locations, shores up the sites and sends all employees home. Questions: Can the loss period begin as your company is shutting down its facilities in anticipation of the hurricane? If so, can your company claim BI losses or start their BI deductible as soon as they shut down? Does it make a difference if there is a formal mandatory evacuation order? Can your company claim the costs incurred to shore up the property? What if some of your company s properties are located in areas that turn out to be unaffected by the hurricane? Can you recover for the lost revenues during the shutdown for those facilities? Should you give the insurers notice of the impending claim or is it better to wait until the hurricane has struck and damage has occurred, to avoid any false alarms? The Hurricane makes landfall and causes physical damages and BI losses to several of your company s properties. Locations experienced damage due to flooding, wind, service interruption and a fire that erupted as a result of wind damage to equipment. Your policy does not have a Named Windstorm Deductible. Questions: What deductible would apply? What effect does the ultimate cause of the losses (i.e. hurricane causes power outages or flood) have on coverage? More generally, what happens if the chain of events that leads to the loss includes a variety of perils, some covered and some not? Do different deductibles and sublimits apply? Is the fire a separate occurrence? What happens if the storm circles back two days later and causes modest additional damage? Or if the hurricane causes a flood, which damages one of the company s facilities a couple of days after that? Is that damage subject to a separate deductible? 4 6

7 Each specific cause of loss has a different deductible and sublimit. The deductibles listed in the policy are as follows: Service interruption straight dollar deductible; Flood 30 day wait period; Windstorm/Fire 30 day ADV deductible. Questions: Does only one deductible apply or do all of them apply? Is the ADV deductible and the Wait period deductible calculated the same way? Do deductibles apply to all coverages or just certain coverages (i.e. deductible for extra expenses, claims preparation)? Absent policy language addressing the issue, can the same deductible apply to multiple perils? 5 Within the policy there are numerous sublimits: Service Interruption is 30 days, maximum period of interruption is 2 years, and various PD aspects such as rolling stock, stock loss, etc. each have a specific dollar amount listed. Questions: Are they straight dollar sublimits applied prior to the deductible or after the deductible? For the service interruption sublimit, when do you start to erode the sublimit, from the date of loss or after the retention period? Is this still accurate for an ADV deductible? Assuming that the primary policy has sublimits and the claim exhausts them, though the claim has not reached the per occurrence limit in the primary policy, who pays the next part of the claim the primary insurer or the first layer excess policy? 6 7

8 At one of the offshore locations affected by the service interruption, product inside of the pipes and various equipment have filled with sludge and cannot be used until the sludge is removed. Questions: Is sludge and the costs to remove it a part of the property damage claim? Would this be subject to the service interruption retention and sublimits? What if the loss dealt with an undersea pipeline being moved from its right of way and your company is required to place it back in the correct location? What if your company could hire barges to carry product from the platforms rather than repair the pipeline and that doing so would be slightly less expensive over the expected life of the pipeline. Must the company use the slightly less expensive remedy rather than repair the property damage to the pipeline? 7 OSHA inspectors come to one of your facilities and shut the undamaged portion of the facility down, pending inspection to determine whether restoration of operations would be safe. Questions: Is there coverage for BI during the shutdown? What if the shutdown is during the deductible period? Does it make a difference if OSHA physically cordons off the facility? What if OSHA orders the company to include safety enhancements as part of the repairs, and doing so increases the loss period. Is that extra time covered? 8 8

9 At an initial meeting with the adjuster the topic of what the reserve should be is addressed. Questions: Should you assist the adjuster in helping to calculate a potential loss value? Should you provide any documents or timeline to the adjuster at this point? Is this the same number you should present to internal management as to the potential value of the claim? Should you book a receivable based upon the claim estimate? What is the best way to manage expectations at the meeting? 9 After an initial meeting with the adjuster you received a very lengthy document request list from his accountant, requesting among other items 5 years of P&Ls and budgets, all customer contracts, all rebuild invoices, vendor contracts and all purchase orders. Questions: 10 Should you immediately start sending information over to the insurance company s accountant? Do you have to provide contacts or financial documents? Should you have each owner of the information deal separately with the adjuster and their consultants? What if you object on the ground that the adjuster seeks irrelevant materials? What is the best way to keep track of the documents that are sent to the insurer s accountant? Should your company allow the insurer s accountant to speak directly to personnel at the damaged facilities? 9

10 Before you have a chance to submit a full claim you receive a very lengthy reservation of rights letter from your carriers. Questions: Should you respond, and if so what should you say and not say? Does this change if you receive the letter after a claim has been presented and discussed? What is the role of your broker in this exchange? Should outside counsel be consulted regarding the response? 11 During the loss period, to keep supplying customers, your company purchases product from a third party competitor to resell to your customer. The competitor purchase price is actually higher than the sales price to the customer, additionally your company incurs significant transportation costs. Questions: Would these costs be covered by the policy? Do Extra Expenses have to reduce the claim? Are these actions potentially mitigating the extended period of indemnity loss? What is the difference between Extra Expenses and Expense to Reduce Loss? 12 10

11 During the rebuild, the contractor hired to repair the damage at one of the facilities, causes a major accident damaging not only equipment damaged by the hurricane but some surrounding equipment that was originally undamaged. Questions: Can this be claimed as a part of the overall original claim? Would this be filed as a new PD/BI claim or would it need to be filed under a Builder s Risk/Delay in Start-up policy? Can you sue the contractor to pay for the PD and BI? Does the BI loss for the hurricane claim now stop for this location? What happens to the claim if you decide not to rebuild the facility and instead abandon it? 13 The insurance company argues that the hurricane causes a major shift in customer demand and therefore your company was not going to sell as much product. Questions: Can the insurers take the event itself into account in adjusting the claim? Do you have an Area Wide Impact Exclusion Language? Did your loss directly affect the marketplace (i.e. drove up prices)? What if your company is only one of similar numerous companies in the marketplace affected by the hurricane? Is there an argument for calculating loss as if your company were the only one in the area that was undamaged? 14 11

12 After continuous discussions with the insurance company the Insurers are not providing schedules or coverage opinions in writing. Questions: What options do you have available? Do you file a hostile proof of loss? How do you work with your broker? Do you demand an appraisal? Do you file suit? 15 The insurers state that the intent of the policy is different from the actual language of the policy? Questions: Does the intent matter or just the actual language in the policy? Who decides? When? 16 12

13 To enter the drawing for a cash prize, affix your personal bar code label here or complete this evaluation online. H1. MANAGING AND RESOLVING THE BUSINESS INTERRUPTION CLAIM Rating scale for all questions: 4 = Excellent 3 = Very Good 2 = Average 1 = Somewhat Disappointing 0 = Very Disappointing Overall rating for this workshop? David Goodwin Preparation and quality of information Energy and enthusiasm of delivery Educational focus (not a sales pitch) Mark O Rear Preparation and quality of information Energy and enthusiasm of delivery Educational focus (not a sales pitch) Comments: