Robert M. Horkovich (212) 278-1322 rhorkovich@andersonkill

1. Society of Risk Management ConsultantsIndianapolis, IndianaApril 19, 20131:15 PM - 2:45 PM“insurance Coverage Issues Related To Natural Catastrophe” Robert M. Horkovich(212) 278-1322rhorkovich@andersonkill.com

2. Agenda • Lessons Learned • Don’t Overlook Other Valuable Coverages • FEMA and Insurance • Common BI Claim Issues • Pursuing Natural Disaster Coverage Claims • Claim Submission Process

3. Lessons Learned: • 1. Beware of Anti-Concurrent Causation Clauses • Proximate Cause and the General Rule • Property Policies are triggered by a covered cause of loss • all risk policies – triggered by any cause that is not specifically excluded • named peril policies – coverage for specifically identified perils • Traditionally, the proximate causation doctrine has been used to determine the cause of loss • proximate cause is: “that which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces injury…”

4. Lessons Learned: • 1. Anti-Concurrent Causation Clauses (cont’d) • Anti-Concurrent Causation Clauses • Come into play if an excluded “cause” or “event” takes place at any point in the sequence of the loss • Insurance companies argue that it eliminates the grant of coverage where a covered cause results from an excluded one • Insurance companies argue that it eliminates the concurrent causation rule

5. Lessons Learned: • 1. Anti-Concurrent Causation Clauses (cont’d) • Example of anti-concurrent causation clause: • We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.ISO Form (CP 10 30 04 02)

6. Lessons Learned: • 1. Anti-Concurrent Causation Clauses (cont’d) • What To Do About Anti-concurrent Causation Clauses? • avoid entirely – broker forms • revise or even flip them during placement • if necessary – choose the least onerous • submit claims with the clauses in mind • challenge enforceability: • based upon state law proximate causation rule (good cases in CA, WA, WV) • based upon reasonable expectations doctrine (Mississippi – federal district court – overruled) • But, provisions have been upheld in New York, Nevada, Alaska • Choice-of-laws is important

7. Lessons Learned: • 2. Beware the Undefined Term “Suspension” • Historically, insurance companies have been quite successful in arguing to courts that the terms “suspension” or “interruption” mean “total cessation” of business (see, e.g., Hotel Properties, Ltd. v. Heritage Insurance Co., 456 So. 2d 1249, 1250 (Fla. App. 1984) • The “total cessation” argument is absurd: • It renders the Period of Restoration redundant • Most modern businesses are fully capable of conducting some business – by fax, Blackberry, telephone, or laptop – despite catastrophic destruction of their premises • Most policies contain clauses contemplating partial operations • Most policies promise Extra Expense coverage for the above-normal costs of engaging in partial operations during the Period of Restoration

8. Lessons Learned: • 2. Beware the Undefined Term “Suspension” (cont’d) • Accordingly, ISO included a definition of “suspension” in its standard-form policy that expressly makes clear that Business Income coverage includes lost profits during slowdowns • Broker, manuscript or insurance company forms do not have the ISO definition of suspension • Insurance companies repeatedly raised the “total cessation” argument in 9/11 BI claims (see, e.g., Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co., 279 F. Supp. 2d 235, 238-39 (S.D.N.Y. 2003), aff’d in part, rev’d in part, 411 F.3d 384 (2d Cir. 2005)) • Insurance companies obtained judgments in 9/11 claims based on the argument (see, e.g., Royal Indemnity Co. v. Retail Brand Alliance, Inc., No. 601164/04 (N.Y. Supr. Feb. 23, 2006)) • Insurance companies continue to make this argument and sometimes win (see, e.g., Madison Maidens, Inc. v. American Mfrs. Mut. Ins. Co., No. 05 Civ. 4584, 2006 WL 1650689, at *3 (S.D.N.Y. June 15, 2006))

9. Lessons Learned: • 2. Beware the Undefined Term “Suspension” (cont’d) • Solution: • Attempt to resolve with adjuster, not counsel • Litigate and win • At the point of sale, insist on ISO definition of “suspension”

10. Lessons Learned: • 3. Beware Arguments re: “Wider Effects” of the Loss • Post 9/11, insurance companies argued that, because the catastrophe was so big, the recoverable loss for any particular policyholder should be smaller • Historic insurance industry rejection of arguments by policyholders, whose businesses were destroyed by storm, that their lost profits should include the hypothetical increased sales levels they would have enjoyed had the storm at issue spared their business but still flattened neighboring property (see, e.g., Prudential LMI Commercial Ins. Co. v. Colleton Enters., Inc., 976 F.2d 727, 1992 WL 252507 (4th Cir. 1992)); American Automobile Insurance Co. v. Fisherman’s Paradise Boats, Inc., No. 93-2349, 1994 WL 1720238 (S.D. Fla. Oct. 3, 1994); but seeStamen v. CIGNA Property & Casualty Insurance Co., No. 93-1005, slip op. (S.D. Fla. June 13, 1994)

11. Lessons Learned: • 3. Beware Arguments re: “Wider Effects” (cont’d) • ISO forms already address wider effects of the loss • ISO’s BI provisions state that favorable business conditions existing in the wake of a catastrophe do not affect the amount of loss • ISO’s Extended BI provision excludes loss “as a result of unfavorable business conditions caused by the impact of the Covered Cause of Loss in the area where the described premises are located” • No cases allowing an insurance company to limit coverage based on “wider effects”

12. Lessons Learned: • 3. Beware Arguments re: “Wider Effects” (cont’d) • Solution: • Reject attempts to limit post-loss revenue projections based on depressed conditions • Note insurance company’s past positions on “wider effects” if post-loss conditions are more favorable for your business

13. Lessons Learned: • 4. Beware Efforts to Limit the Period of Restoration • Selling property and retaining right to recover • SR International Business Insurance Co. v. World Trade Center Properties, LLC, No. 01 Civ. 9291, 2005 WL 827074 (S.D.N.Y. Feb. 15, 2005) (“Especially in a case such as this, where rebuilding is likely to take many years, it would be impractical, as well as inconsistent with the long-standing interpretations of the restoration period clauses at issue here, to conclude that the court and the parties should all be required to await the passage of those years until the new WTC properties are in place to determine for just how long the [policyholder] will be allowed to recover their rental value losses.”) • B.A. Properties, Inc. v. Aetna Casualty & Surety Co., 273 F. Supp. 2d 673 (D.V.I. 2003)

14. Lessons Learned: • 4. Efforts to Limit the Period of Restoration (cont’d) • Assignment of right to recover BI • The majority rule • SR International Business Insurance Co. v. World Trade Center Properties, LLC, 375 F. Supp. 2d 238, 247, 249 (S.D.N.Y. 2005) • Globecon Group, LLC v. Hartford Fire Insurance Co., No. 04-4399-CV, 2006 WL 39413 (2d Cir. Jan. 9, 2006)

15. Don’t Overlook OtherValuable Time Element Coverages: • Contingent Business Interruption (CBI) Coverage • Dependent or Attraction Property Coverage • Civil Authority Coverage • Rental Income / Value Coverage • Leasehold Interest Coverage • Extra Expense Coverage • Expediting Costs Coverage

16. Don’t Overlook Other Valuable Coverages: • 1. Coverages that Don’t Require Damage to Your Property • Contingent Business Interruption • Based on damage to suppliers’ or customers’ property • Period of recovery tied to time needed to restore suppliers’ or customers’ property • Dependent or Attraction Property • Based on damage to property that attracts business to you • Period of recovery tied to time needed to restore attraction property • Service Interruption • Based on damage that interrupts utilities (for time beyond waiting period) • Civil Authority • Based on government order that prohibits access to your property

17. Don’t Overlook Other Valuable Coverages: • 2. Ordinance or Law Coverage • Covers “Demolition Costs” or “Increased Costs of Construction” due to enforcement of ordinance or law following a loss. • Applies to damaged and undamaged property. • Proximate cause can be an issue. • Beware traps when mitigating loss by replacing with existing property.

18. Don’t Overlook Other Valuable Coverages: • 3. Rental Income / Value Coverage • As drafted, many Rental Coverage provisions can be seen as an alternative or supplement to Business Income coverage. • Provide coverage for the actual loss sustained by the policyholder in the form of: • rental income from rented portions of the property under leases in force at the time of the loss; • rental income reasonably expected from the rental of portions of the property that were not rented at the time of the loss; and • the fair rental value for portions of the property occupied by the policyholder.

19. Don’t Overlook Other Valuable Coverages: • 4. Extra Expense Coverage • Typically covers reasonable and necessary costs incurred to temporarily repair damage to insured property or to expedite the permanent repair or replacement of damage to insured property. • Similar to Extra Expense coverage, which includes a component similar to “expediting expense” (e.g., cost to rush repairs in order to reduce business income losses), which often requires that the expense be incurred to reduce the amount of the loss. • Expediting Costs coverage does not necessarily require reduction of loss.

20. FEMA and Insurance: • FEMA relief paid by Federal government to State and local governments • Insurance payments to public and private policyholders. • The Key Overlap – Private Insurance deducted from FEMA payments, based solely on FEMA’s Estimate of Private Insurance Recovery. • Importance of having your FEMA and Insurance teams working together.

21. Common BI Claim Issues: • 1. Types of Hurdles • Policy constraints • Management pressure • Adjuster conflicts • Auditor conflicts • Personnel demands • Situational complexity

22. Common BI Claim Issues: • 2. Common Measurement Issues • Revenues (projections, causation, etc.) • Expenses (projections, causation, etc.) • Time Periods (Idle periods, repair timeline) • Gross Earnings (GE) vs. GE less Non-Continuing Expenses (NCE) • Actual Loss Sustained • Depreciation as NCE • Losing / New Businesses • Calculations under Net Profits Form • Internal Labor (BI vs. PD)

23. Pursuing Natural Disaster Coverage Claims: • 1. Assemble The Right Team • Risk Management • Loss Quantification • in-house • public loss adjusters • forensic accountants • Legal • in-house • coverage counsel • Broker • to be a liaison • NOTE: No privilege protects communications with broker • unless specifically retained as claim consultant

24. Pursuing Natural Disaster Coverage Claims: • 2. Prepare For The Worst • Delays • Denials

25. Pursuing Natural Disaster Coverage Claims: • 3. Delays • Be proactive • Set the agenda and timetable for resolving the claim • decide how long it should take to resolve the claim • then tell the insurer in writing • Volunteer information – don’t wait to be asked • the most common complaint about insurance claim handling: • untimely and repetitive requests for information • Be persistent • Document everything • Create a record in writing to give the insurance company’s adjuster • may result in better service • if not, makes a record of insurer bad faith

26. Pursuing Natural Disaster Coverage Claims: • 3. Delays (cont’d) • Proofs of loss • Comply with deadlines or get written extension • Submission triggers insurers’ obligations under the policy and claims handling practices statutes • so don’t delay • Partial payments • Request partial payments • Present complex claims in parts.

27. Pursuing Natural Disaster Coverage Claims: • 4. Denials • Early coverage analysis to identify issues • Prepare the claim in a way to avoid coverage problems • Engage the insurance company over coverage issues • BellSouth/Katrina – met with insurance companies and their counsel periodically – resolved complex claim • Be prepared for the possibility of a coverage lawsuit • Choice of law • Choice of forum

28. Pursuing Natural Disaster Coverage Claims: • 4. Denials (cont’d) • Comply with policy conditions • Deadlines • Proofs of loss • Suit limitations • Cooperation • Give until it hurts • Courts are not sympathetic to policyholders who withhold information • Loss mitigation • Required under many policies (and the law) • Loss mitigation costs may be covered in excess of limits for extra expense to reduce loss • As long as the additional efforts actually reduce the loss

29. Pursuing Natural Disaster Coverage Claims: • 5. Settlements • Insurance companies typically want: • Policy buy back, or • Occurrence releases, and • and indemnifications • Get those issues resolved before compromising on the payment amount

30. Pursuing Natural Disaster Coverage Claims: • 6. Litigation vs. Appraisal • Appraisal is intended for loss quantification issues • Like arbitration: • 2 party appointed appraisers try to resolve claim • A neutral is brought in if the 2 cannot agree • Don’t use for coverage issues: • No favorable rules of policy interpretation • No right of appeal • Appraisers typically lack legal/contract interpretation training • Litigation for coverage issues

31. Pursuing Natural Disaster Coverage Claims: • 7. Extra-contractual Claims • Consequential Damage • Available when insurance company unreasonably delays or denies • Bad Faith • Available in most states by statute • Generally, must show improper purpose for denial or delay • May lead to recovery of • attorneys fees • punitive damages

32. Claim Submission Process: • 1. Early Decisions • Encourage team to make critical decisions early • Utilize alternate “sister” facilities or outsource to other hotels? • Rebuild “As Was”? Improve? Relocate? • Repair or replace FF&E or equipment? • Repair now or later? • Temporary or alternate facilities? • Delay in decisions can jeopardize coverage for part of your business interruption loss!

33. Claim Submission Process: • 2. Identify All Loss Elements • Lost room occupancy, future bookings, etc • Decreased revenue due to cut rates • Cost inefficiencies, increased labor OT costs • Change in room/guest mix • Relocation expenses • Ordinary Payroll • Extra expenses for maintaining operations (invoiced/ operating) • Level of saved (non-continuing) expenses and/or excess costs • Extended period of losses following recovery

34. Claim Submission Process: • 3. General Claim Design • Proactive claim measurement and presentation • Basis to approach – Good “story” • Detailed calculations for each claim item • Complete Documentation in support of all claims – every number • Follow an “insurance” format • Claim estimates • Use good timing

35. Claim Submission Process: • 4. Milestones in Claim Process • Scope of damage Determination • Recovery plan • Information exchange • Claim Submittal • Obtaining timely advances • Position determination • Issue determination • Final resolution • Final payment

36. QUESTIONS & ANSWERS