According to the National Weather Service, 2020 was the most active Atlantic hurricane season to date, with a record-breaking 30 named storms, of which 12 made landfall in the continental United States. These natural disasters accounted for billions of dollars in damage, and implicated thousands of insurance policies. Yet, last year's hurricane season was largely overshadowed in the insurance industry by COVID-19, as pandemic-related losses led to thousands of claims, subsequent litigation and challenges to coverage.
Pandemic-related losses have exacerbated the hardening of the insurance market over the past few years, leaving policyholders facing pricing and capacity challenges and increased difficulty securing favorable coverage terms. Now, policyholders must deal with the prospect of large-scale disaster losses in an environment characterized by higher insurance premiums and more restrictive coverage for most insurance buyers.
Given these changes in the market and coverage, policyholders should review their property and business interruption policy language for key clauses that may preclude coverage or create confusion within the policy. As the 2021 hurricane season begins, companies should consider the following factors to mitigate exposure to natural disaster losses:
UNDERSTANDING AND INTERPRETING POLICY TERMS
In litigation and other claim disputes, interpreting the insurance policy's terms consistent with their "plain" or "common" meaning to an ordinary person is the accepted general standard. But alternative "plain meaning" interpretations of key policy terms can often lead to two vastly different (and costly) results. Further, policyholders cannot guarantee success under the second most significant rule of interpretation--that ambiguities will be interpreted in their favor.
For example, consider an insured textile company whose clients include major stores and other third-party facilities located throughout Texas. After a large storm, the insured experiences contingent business interruption due to the damage experienced by its client base. The insured has property damage insurance coverage with the deductible set at 5% of the time element values, determined by the experience...