Insurance and the Polar Vortex: Recovering Losses from the Big Chill of 2014

Preliminary estimates indicate that the Polar Vortex will cost the U.S. economy approximately $5 billion. As in any natural disaster, impacts varied by industry sector and location. Real estate assets were hit particularly hard. One of the most common impacts of the cold weather was freezing pipes. Pipe freeze-up and unfreezing damages were particularly severe in southern climes, where piping systems lack freeze protection more common in the north. Even in the northeast, property owners saw significant pipe failures. In some cases, fire sprinkler systems froze, allowing fire to spread due to the lack of fire protection. Malls, restaurants and other walk-in retail establishments suffered business interruption, and some lost power as well as other utility services. Travel-dependent businesses were also affected. Approximately 20,000 flights were reportedly cancelled. At JFK Airport in New York, a plane slid off a runway, causing the airport to close for almost two hours. Temperatures were reportedly cold enough in some places to render jet fuel unusable. Major airlines are expected to suffer approximately $50 to $100 million each in lost revenue, according to one report. Of course, the freeze had corresponding impacts on hotels and tourism, among other industries.

In response, insurers are already gearing up for anticipated Polar Vortex-related business interruption and property damage claims. From early responses, it is clear that numerous contentious issues will emerge from this event.

This preliminary guidance is intended to provide an overview of some of the key issues that commercial policyholders affected by the Polar Vortex are likely to face, as well as to assist with the initial insurance claims process.

Anticipated Coverage Issues

Even as affected businesses are completing repairs and returning to normal operation, their insurers are formulating arguments to minimize covered exposure. Here is a brief review of issues already emerging in the aftermath of the Polar Vortex.

I. Number of Occurrences

Some insurers have begun to assert that the Polar Vortex consisted of two or three separate “occurrences” rather than a single “occurrence” -- a transparent attempt to apply multiple deductibles, thus reducing (or in some cases, eliminating) policyholder recovery. Some have argued that the freeze was actually two occurrences, and that the subsequent thawing should constitute a third occurrence. Based upon standard policy language, however, policyholders should be in a strong position to treat this entire event as a single “occurrence,” as that term may be defined. Not every policy is the same, so policyholders should be sure to review their policy's definition of "occurrence," if there is one.

Insurers will look for support from an insurance industry group known as Property Claim Services (PCS), a division of Insurance Services Office, Inc. (ISO), which already has issued three catastrophe advisory notices as a result of this weather event: CAT 31, CAT 32 and CAT 31(A). CAT 31 was issued for the period of January 3 to January 5, 2014. CAT 32 covers January 5 to January 8. In response to inquiries concerning the difference between CAT 31 and 32, PCS issued CAT 31(A), asserting that “weather data” support treating the Polar Vortex as two events -- the first a weather front that ended on January 5, and the second a “Polar Vortex” that followed on January 5.

This is anything but conclusive, however. In fact, the available meteorological data supports the straightforward conclusion that this was a widespread freeze, all constituting a single weather event. More important, the typical “occurrence” definition in a property policy would treat any loss or series of losses arising out of a single weather event such as the Polar Vortex as a single “occurrence.”

We understand that some insurers have pointed to the “occurrence” language found in most ISO form policies, defining an “occurrence” in the case of flood, named windstorm, earthquake, or other sub-limited perils, as an event lasting no more than 72 hours. This may explain the attempt to split the Polar Vortex into two events. Of course, according to meteorologists (and common sense), the Polar Vortex was not a flood, named windstorm, earthquake, or other sub-limited peril; thus, the 72-hour limitation should have no bearing on coverage. At this stage, in the absence of compelling evidence that the weather events of January 3 to January 8 comprise two distinct, unrelated storm events, the Polar Vortex should be regarded for coverage purposes as a single “occurrence,” subject to only one deductible or waiting period. And this is true no matter the number of locations or damages (e.g., pipe bursts) experienced.

II. Specified Perils and Deductibles/Sublimits

The catastrophe notices referenced above identify flood, freezing, ice, snow and wind as the perils causing loss and classify the event as a “Winter Storm.” We anticipate that insurers will attempt to fit this event into one of the named perils that are often subject to specific sub-limits and deductibles, waiting periods, or even exclusions, such as wind or flood. Some insurers have inserted anti-concurrent causation language into obscure policy locations, and have then argued for a broad interpretation of such language (for example, inserting anti-concurrent causation language into wind and flood definitions, and then arguing that a winter freeze event accompanied by wind could be treated entirely as a wind event). In fact, some of these insurers have contended that water damage as a result of a pipe freeze-up falls into the named peril of flood – a policy interpretation contrary to case law in much of the country (see, e.g., Ariston Airline & Catering Supply Co. v. Forbes, 211 N.J. Super. 472, 476 (N.J. Super. Ct. 1986); see also Hernandez-Rodriguez v. A1 Sun Prot., Inc., 2010 U.S. Dist. LEXIS 32508 (S.D. Fla. Mar. 17, 2010) (observing that the common meaning of "surface water" does not include water from a burst pipe)) and common policy language.

A careful review by risk management and legal professionals of the insured’s entire policy, as endorsed, along with the facts and circumstances surrounding the loss, is critical to ensuring that the loss is not incorrectly characterized as stemming from a named peril subject to onerous coverage restrictions.

III. Freezing as Property Damage

As noted, some property damage may be the direct result of freezing, such as the expansion and contraction of pipes as they are frozen and inexorably thaw, or the damage may be to product (personal property) conveyed in pipes, such as the jet fuel that became unusable as it changed physical state due to the cold temperatures. Insurers may question whether freezing itself is property damage. Freezing is an insured peril, and the consequent property damage caused by the expansion and contraction or other change of physical properties is covered property damage under all-risk policies. See, e.g., Cavalier Group v. Strescon Industries, Inc., 782 F. Supp. 946, 956 (D. Del. 1992) (holding that freeze/thaw effect which exacerbated defects to balconies was not specifically excluded, and therefore was covered under an all-risk policy); Harbor House Condominium Ass’n v. Massachusetts Bay Ins. Co., 703 F. Supp. 1313, 1317 (N.D. Ill 1988) (coverage for repair costs under an “all risk” insurance policy extends to a loss caused by a fortuitous freeze event; but since the insured could only show that freeze damage occurred to a small portion of pipes within a heating system, it could only recover for that specific location).

Under standard policy wording, damage to product, supplies, and other materials also triggers coverage. Fuel, chemicals, water and other “Personal Property” damaged (even temporarily) by the freeze may give rise to coverage for both direct physical loss (and/or loss of use) with respect to the frozen property, and resulting business income loss if the business is affected by such freezing damage.

IV. Business Interruption Deductibles/Waiting Periods

Business interruption policies are similar in substance, but vary greatly in coverage terms. Many policies include, in addition to monetary deductibles, “waiting periods” that limit coverage to the loss occurring after a waiting period – typically presented as a number of hours, e.g., 72 hours. Sometimes deductibles are also expressed in terms of days, hours, or even production equivalents, and although insurers and adjusters like to treat them as the same, they are sometimes very different. For example, if a loss continues for 10 days, and is subject to a 24-hour waiting period, there is coverage only for the 9 days after the first 24 hours, typically eliminating the largest day of loss. Some policies even define if the days are business days or calendar days. If the loss is subject to a 24-hour deductible, the insured is entitled to deduct an amount representing 1/10 of the loss, which is typically less. This simple calculation could have a major impact on claims relating to the Polar Vortex.

Another point of tension may be proving and measuring contingent business interruption (CBI) losses. Policyholders with CBI coverage, whose own businesses suffered losses as a result of interruption to a customer or supplier’s business, may be entitled to their resulting loss of gross earnings or gross revenue and contingent extra expense losses. There are, however, challenges in presenting such claims. First, the CBI location must have suffered a loss that is covered under the policyholder's policy. Second, the policyholder must prove that the CBI location's losses impacted the policyholder's business. This is often difficult as the insured has little or no control over, or access to, the facts and circumstances of the supplier/customer’s property damage and the reasons behind consumer behavior. A strong argument can be made that requiring such proof exceeds an insured’s reasonable expectations when such coverage was purchased. Finally, BI -- and especially CBI claims -- are often the most highly contested insurance claims.

Critical to presentation of any BI claim involving this freeze will be whether the insured has put the right team of specialists in place, including forensic accountants, coverage attorneys, and other consultants who specialize in assessing, quantifying and maximizing the extent of coverage. These professionals interact with management to help document the loss, including both financial and physical damages, and, when properly retained by counsel, may be subject to the attorney-client privilege such that their communications and advice are protected.

V. Other Potential Coverages

Depending upon an insured’s particular circumstances, a number of coverage extensions may provide a basis for recovering some or all of the loss caused by the Polar Vortex. For example, Loss of Ingress/Egress coverage typically indemnifies an insured when access to the insured’s property is impaired as a result of road closures, flood, ice and snow, although proof of physical obstruction is usually required. Under this coverage, an insured may recover if access to its property is restricted due to physical damage such as impassable roads, and/or property damage within a certain perimeter of the insured’s premises. Similarly, Civil Authority coverage may apply where a governmental order impairing access to the insured’s premises was issued, typically as a result of physical damage of the type insured by the policy. These are often additional coverages, so a careful review of the policy is necessary before the claim is submitted.

Download: Insurance and the Polar Vortex: Recovering Losses from the Big Chill of 2014