Extreme Weather and Natural Disasters: Insurance Tips for Commercial Policyholders | CENTER

Storms and hurricanes, isolated but powerful tornadoes, earthquakes, fires and floods: the question is not if policyholders will face the next natural disaster, but where and when. Climate change is clearly having an impact on the number and severity of natural disasters on a global scale. Businesses may have limited means to protect themselves against the forces of nature, but in this alert we provide advice on ways to protect yourself against denial of coverage by insurers.

Aon’s 2023 Weather, Climate and Disaster Report found that global natural disasters in 2022 caused near-average economic losses totaling $313 billion (4% above the global average). XXI century). The insurance sector is reported to have covered losses worth $132 billion. Climate change is causing extreme weather records to be broken around the world, with some regions subject to extreme rainfall, as recently seen in Dubai, and other regions experiencing prolonged periods of drought and heatwaves. Europe is no exception, as heat waves hit southern Europe during the summer last year and droughts intensified in eastern Spain, while forest fires devastated France. Months later, Storm Daniel produced six months’ worth of rain in just 24 hours in eastern Greece. Closer to home, in February 2022, the Met Office reported that Storm Eunice was the most severe and damaging storm to hit England and Wales since February 2014.

These discouraging data suggest a palpable trend: extreme weather events are becoming more frequent, more severe and more costly. The inevitable consequence is that businesses and other commercial policyholders will look to their insurers to provide coverage in the event of extreme weather events. Affected businesses will need to take steps to maximize insurance recoveries wherever possible. Careful and proactive attention to insurance coverage considerations could be the key to restoring business operations and weathering the ensuing financial storms.

Potentially relevant insurance policies

It is vital that affected businesses promptly review all relevant or potentially relevant insurance policies, including excess layer policies, and comply with loss notification procedures. A variety of losses and liabilities are likely to arise as a result of a natural disaster depending on the circumstances of the particular business and the scope of its operations. Potentially responsive policies may include:

Property Damage and Business Interruption

The most common source of coverage for most businesses is likely to be first-party coverage that insures the property and assets of the insured entity. Depending on the specific policy wording, coverage will typically include the following:

  • Property damage where losses are caused to the insured’s own business premises and assets as a result of an insured peril, for example storm, flood, fire or extreme heat, as experienced in the summer of 2022, when Network Rail had to close main lines in the UK for several days due to buckled rails.
  • Business interruption (BI) when the business experiences loss of profits or income due to property damage caused by an insured peril. According to Allianz analysis, natural disasters are the second most feared in the UK.
  • Contingent BI that generally covers losses arising from damage to the property of a supplier, customer, or other business partner.
  • Denial of access, when use of or access to the insured property is prevented or restricted for a specific period of time, for example, if roads or bridges leading to the property have collapsed.
  • Additional expenses incurred to enable the resumption of business operations or to mitigate other losses.
Public Liability and Commercial Liability Policies

These policies cover the insured with respect to their liability to third parties. Coverage will normally include damages or compensation payable to third parties, as well as legal costs incurred in defending such claims. Such claims may arise when the cause of the alleged injury or property damage originates on the insured’s property, for example, if extreme temperatures cause water pipes at the insured’s premises to burst and cause water damage to a property. neighboring property.

Particular problems may arise when an extreme weather event impacts a company in the manufacturing or chemical industry, resulting in the release of a suspected polluting or polluting substance, as well as damage to its own property. While liability policies may impose pollution exclusions, there may be exceptions to such exclusions for liabilities arising from sudden or unexpected events.

Lawsuits are increasingly being filed against private sector actors based on alleged inconsistencies between speech and action on climate change, known as “greenwashing,” including, in some cases, board directors. This is exactly what ClientEarth argued in its recent case against Shell. While the Court of Appeal upheld the High Court’s dismissal of ClientEarth’s claim, there remains a risk of similar actions being brought against directors in relation to climate change strategies.

Practical tips to maximize coverage

There are a number of steps policyholders should consider when making an insurance claim arising from extreme weather conditions or climate change issues:

Be proactive in notifying insurers

Deadlines for notification of any loss or claim are likely to be specified in the policy, and failure to comply may result in insurers seeking to restrict or deny coverage. Insureds should be aware of other notification requirements, such as any obligation to notify a loss or event that may give rise to a claim. Immediate notification is important to mitigate the risk of denial of coverage.

Collate and retain relevant documents

Insurers may require proof of loss and damage along with extensive supporting documentation. It is crucial to take steps from the beginning to ensure that potentially relevant documents are located and preserved. In the BI context, insurers often argue that a portion of revenue loss is attributable to other causes, such as poor business decisions or an economic crisis, so it is often necessary to rely on historical records.

Early coverage assessment

There are important benefits to assessing coverage at an early stage to understand any issues that may affect the way the claim is submitted. Consulting with experienced coverage attorneys will help identify and analyze responsive policies, as well as anticipate coverage issues or exclusions that insurers might rely on.

Defense of third party claims

Some liability policies provide that the insurer has the right to defend third-party claims, but this clause does not obligate the insured to accept the services of attorneys chosen by the insurer. Policyholders should try to negotiate with insurers to ensure that lawyers with appropriate experience are appointed.

There are additional steps that can be taken to improve insurance coverage in anticipation that extreme weather or climate change may affect coverage at some point:

Fair presentation of risk

Policyholders should carefully consider what information should be disclosed to insurers when obtaining a policy, particularly if they face increased vulnerability to certain weather-related physical risks, which could result in insurers attempting to deny or limit available coverage.

Negotiate policy terms

Policyholders should consider whether policy terms could be improved through negotiation at the pre-contract stage, particularly if insurers seek to impose policy exclusions related to extreme weather or climate conditions. The Lloyd’s Market Association (LMA) has already developed a model climate change exclusion clause (LMA5570) for use in liability policies. The clause is designed to exclude cover for any claim that the insured has contributed to climate change or its consequences, meaning that any such claim against the company (or a director of the company) may be excluded. Exactly how broadly or narrowly a “contribution to climate change” will be defined remains uncertain.

Stay on top of effective adaptation strategies and obtain the right type of coverage

Any company that has a clear natural disaster management plan or warning system, as well as knowledge of the probability and frequency of natural hazards of greatest concern, will likely be in a better position to limit potential damage. If such risks are identified, businesses should be better able to mitigate them and negotiate appropriate (and potentially improved) insurance coverage.

If you have queries regarding policy terms that could be relevant in the event of natural disasters or if you have been affected by extreme weather conditions, please contact Sarah Turpin or any of the lawyers in our Insurance Advice and Recovery team.