Business Insurance Lessons Learned from California Wildfires
John Pryor | February 8, 2019
Most buildings destroyed in the Camp and Woolsey wildfires were residential, not commercial; however, there are important lessons to be learned for business owners as well.
At the top of the list is getting paid—promptly and reasonably—by the insurer(s).
Insurance policies spell out the steps required to prove your loss. Most losses are partial losses. Therefore, listing each piece of equipment or other personal property damaged or destroyed—and proving its replacement value—makes good sense. However, if you don't replace an item, you still receive payment based on each item's actual cash value (ACV).
In property and auto physical damage insurance, one of several possible methods of establishing the value of insured property to determine the amount the insurer will pay in the event of loss.
An ACV is typically calculated one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property's "fair market value"; or (3) using the "broad evidence rule," which calls for considering all relevant evidence of the value of the damaged property.
However, most wildfire losses were total losses. Little personal property was salvaged. So, why should an inventory be required? Shouldn't the personal property limit on the policy simply be paid by the insurer? Yes! At least most of that limit.
Some insurers were "insightful" and waived the inventory. They quickly wrote a check for 75 percent (or more) of their policy's personal property limit.
In November 2018, California Insurance Commissioner Dave Jones wisely asked insurers to waive their inventory requirement in total losses and pay at least 75 percent of a policy's amount of personal property insurance. Almost all now are reported to have done so.
In addition, advance payments for hotel bills, restaurant costs, etc. and costs incurred for debris removal were usually voluntarily paid in advance by insurers. That really helps!
Translating to Commercial Insurance
So, how does this residential insurance overview translate to your business insurance? If a business sustains a total loss of its personal property, why shouldn't a waiver of the inventory be requested with at least 75 percent of the amount of personal property insurance paid up front without delay? If not volunteered, you should ask for it.
Also, where debris removal, business income, and extra expense claims are in order, why shouldn't at least partial advance payments be requested—and checks written? Ask for them.
In partial losses, the following two questions remain.
- How can we proactively prepare for a major fire, earthquake, or other disasters to minimize, if not eliminate, delay or denial of payments due from insurers?
- What can insureds do to help remember each piece of equipment or other items that have been destroyed beyond recognition?
One popular solution is to photograph (or video) your organization's equipment and inventory, then store the images online in the cloud or elsewhere for safekeeping. An insurance broker friend in the Woolsey fire said, "Photos have been terrific evidence for proof. Most of their supporting documents went up in flames!"
Another recommendation is to work with your insurance broker to draft a step-by-step plan (or checklist) to be monitored by you with your broker as you each work together through this process alongside the insurer's claim adjuster.
It's important to note that this article focuses on personal property risks. Real property risks are addressed very differently and more objectively with competitive (or negotiated) contractor bids based on architectural designs and specifications.
Business income claims can come into play for commercial property, and they are often difficult as well. Direct damage is usually required to trigger coverage; however, many businesses near a wildfire were forced to shut down because of intense smoke and/or evacuation orders. These types of risks are something to explore in-depth with your broker (e.g., law and ordinance, contingent business income, and dependent property income coverages).
As one broker in the Camp Fire commented to me, "Our carriers consistently received high marks for trying to interpret coverage in favor of our insureds." Another in the Woolsey Fire said concerning the future, "Our issue now is nonrenewals—especially those in the (wildfire) area who did not have claims. Carriers need to remain on many of those accounts."
Risk Management Recommendations
Finally, a very important task is to continue to work through the risk management process with your broker to be certain of the following.
- All risks are identified and measured, especially earthquake (plus earthquake sprinkler leakage as these claims are reported to have exceeded direct earthquake losses in the 1994 Northridge earthquake).
- All reasonable, cost-effective steps are taken to avoid or at least mitigate losses, not only to buildings and equipment but also to money, data (cyber security), business income, mobile equipment, and other property risks.
- All significant risks are either (consciously and intentionally) assumed or transferred to insurers (or to others by contract) with adequate amounts of insurance on each type of property.
Once these steps have been taken, you'll enjoy one of several benefits of sound risk management—a quiet night's sleep.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
