Presented by

Co-sponsored by

Ray Hutnik, Marsh Risk ConsultingJohn Scordo, K&L Gates LLP

John Cunningham, Marsh Risk Consulting

LESSONS LEARNED FROM SUPERSTORM

SANDY AND WTC

2

Our Perspective – Accounting/Forensic, Engineering & Legal. Superstorm Sandy and WTC.

Market response/issues. Causation issues. Coverage issues. Claims management. Recovery from various policies. Measurement issues.

Overview of the Property Claims Process. Pre-loss preparedness. Post-loss activities. Buckets of coverage.

Our Proposed Agenda

Lessons Learned From Superstorm Sandy and WTC

3

Coverage expertise. Negotiation and interaction with insurers. Quantum. Claims preparation. Interacting with insurers’ experts. Liaison to Risk Management Department. Claims project management. Litigation/Arbitration preparation and prosecution.

What Perspectives Do We Represent?

Lessons Learned From Superstorm Sandy and WTC

4

A Sign of Things to Come?Recent Catastrophic Losses

2012 was a quiet year…until Superstorm Sandy

Q4 2012

5

More named storm deductibles likely to become a percentage deductible regardless of geographic location.

Capacity to staff enough adjusters to respond being tested.

Quantum and complexity of losses resulting in widespread usage of outside experts.

Market ResponseSuperstorm Sandy

6

Direct loss vs. financial loss. Time element.

Service Interruption issues: Power outages in New York caused by storm damage vs. planned shutdown. Overhead transmission and distribution issues elsewhere.

Contingent Business Interruption (CBI) issues: Drove need to carefully document specific reasons customers/suppliers may have been interrupted: damage, civil authority, ingress egress, service interruption, etc.

Threshold Issues

Superstorm Sandy

7

Repair or replace the damaged property and: Business Interruption. Extended Business Interruption. Extra Expense.

Interdependency Extra Expense. Claims preparation costs.

Damage to Insured Property

Superstorm Sandy

8

Prove that there is damage to a third-party’s property and: Business Interruption and Extended Business Interruption.

Service Interruption. Civil/Military Authority. Ingress/Egress.

Contingent Extra Expense.

Damage to Third-Party Property

Superstorm Sandy

9

Insurance policies have varied terms and conditions. When discussions on coverage occur with insurers, they must have reference to specific terms and conditions of your policy.

Losses may be tied to any number of causes: Direct action of wind. Storm surge. Service interruption. Flying debris. Ingress/egress. Surface water. Overflow of rivers and waterways. Civil authority.

Causation Issues

Superstorm Sandy

10

Much debate over storm surge vs. flood vs. wind in 2005, post-Katrina.

Policy definitions of storm surge as flood or windstorm vary. Careful analysis is necessary. Can affect cover, limits, and deductibles.

Flood Issues

Superstorm Sandy

11

Sandy claims are in active debate over storm surge vs. flood vs. wind as opposed to Irene in 2011, which was more of a rain flooding event. Each policy will have its unique issues.

For example, the peril of flood is more often sublimited on a policy than is the peril of wind.

Insureds may have traded pricing or other coverage for how the peril of storm surge will be defined.

Flood Issues (cont.)

Superstorm Sandy

12

Some insureds do not realize they have a general flood sublimit and then a smaller sublimit for the problem areas. As defined by FEMA’s flood maps: The 100-year-flood

zones, also know as zones “A” and “V” or Special Flood Hazard Areas.

Not uncommon on a commercial risk to see a flood limit of “X” along with a further sublimit of one-fifth of “X” for zones “A” and “V.”

Additional Flood Issues

Superstorm Sandy

13

Important for insureds to know their sublimits and which locations are in problem zones. FEMA redraws these maps occasionally. A location that was not in an SFHA zone at renewal might

now be in one.

Additional Flood Issues (cont.)

Superstorm Sandy

14

Most commercial insurance policies refer to “named storm” or “named windstorm.” Can be complicated. Definition of named storm: “Storm or

weather condition declared by NWS as a hurricane or tropical storm.”

Typically, named storm deductible is a percentage of the replacement cost of the location damaged, typically 2% to 5% depending on the location.

There may also be a maximum or a minimum on the dollar value of the percentage amount.

Named Storm Deductibles

Superstorm Sandy

15

Typically applied to locations in counties referred to as “Tier One Counties.”

Percentage deductibles also apply to business interruption.

Named Storm Deductibles (cont.)

Superstorm Sandy

16

Business interruption (BI). A subset of time element. Many unique extensions of coverage. Large portion of the expected losses may arise from BI:

service interruption, leader property, civil authority, ingress/egress.

Business Interruption

Superstorm Sandy

17

Lessons from the 2011 Japanese earthquake and tsunami and Thai floods. Some clients have since calculated their expected BI and

CBI exposure. Other companies have put together business

continuity plans based on identified weak spots and/or critical processes.

Business Interruption (cont.)

Superstorm Sandy

18

In the definition of flood in the policy, what is the scope of the coverage?

Are there distance limitations and requirements of property damage for ingress and civil authority coverage?

For service interruption, are there distance limitations? Are there qualifying periods, such as 24, 48, or 72 hours?

When you look at employee availability, how will it impact indemnity periods?

How does pre-loss evacuation impact an insurer’s position on business interruption coverage?

Coverage and Legal Considerations

Superstorm Sandy

19

Cause of loss: wind or flood? Concurrent causation – is there an anti-concurrent

causation clause? Business interruption or contingent business

interruption. Suppliers and customers – direct or indirect? Suspension or reduction of operations. Calculating business interruption losses.

Coverage and Legal Issues

Superstorm Sandy

20

Extra Expense. Third-party costs. Embedded internal costs.

Expense to avert BI. Increased cost of work (ICOW). Additional ICOW. Increased cost of construction (builders risk). “Pure” extra expense. Expediting expense.

Additional Cost of Operations

Financial Recovery Considerations

21

Rebuild considerations. Resource availability (labor, materials, equipment). Cash flow requirements and considerations. Rebuild contracting strategy.

Reconstruction

Financial Recovery Considerations

22

Insurance policy considerations. Limits and sublimits. Replacement cost value vs. actual cash value policies. “Period of restoration.” Like kind and quality. Code requirements. Time limits.

Builders risk loss scenarios.

Reconstruction (cont.)

Financial Recovery Considerations

23

Demolition, increased cost of construction. DICC or Code Coverage.

“Capital expenditure” options. Not planned as of date of loss. Usual to the insured’s operations. At an insured location. Completed in two years.

Rebuild Considerations

Financial Recovery Considerations

24

ACV is an option for cash payment. ACV = Replacement Cost – Depreciation. Depreciation is NEITHER book NOR tax depreciation.

Effective age. Typical life

expectancy. Standard tables.

Replacement Cost vs. Actual Cash Value

25

BI coverage for a “direct physical loss or damage” to the property.

Nature of “damage” – may not be easily visible or in dispute (e.g., noxious particles in interior of buildings following 9/11).

WTC Disaster

Repair vs. Replace

26

Is There an Imbalance?

Claims Process

Loss AdjusterLoss Adjuster

EngineerEngineer

AccountantAccountant

LawyerLawyer

Risk Risk ManagerManager

InsuredInsured

InsurerInsurer

27

How to Even the “Balance of Scales”

Loss AdjusterLoss Adjuster

EngineerEngineer

AccountantAccountant

LawyerLawyer

Risk Risk ManagerManager

InsuredInsured InsurerInsurer

Marsh Risk Marsh Risk ConsultingConsulting

K&L GatesK&L Gates

28

Coaches and quarterbacks. Directs and controls all communication and exchange

of information. Identifies internal key contacts and delegates to

team. Takes ownership.

Role of Insured’s Risk Manager

29

Agree to loss management and communication protocols early, ideally before loss occurs.

Define roles, responsibilities, and deliverables with specific time frames.

Managing the People

30

Plan for empowered personnel from all parties of interest: Adjusters. Forensic accountants. Building and engineering consultants. Restoration contractors. Insured’s engineering community. Human resources. Risk management. Financial community. Public relations. Legal.

Managing the People (cont.)

31

Meet insurer decision makers as soon as possible post loss.

Help the insurer understand the policyholder's financial and operational goals.

Get the insurer to agree on a “funding" protocol early in the claims process.

Managing the People (cont.)

32

Prepare the claim. Demonstrate conditions found. Link damages back to the event (show causation). Show work done and why it was like kind and quality. Justify replacements (vs. repair).

Make good business decisions, regardless of coverage.

Involve the adjuster.

Your Duties as the Insured

33

Record keeping. Privilege. Chain of custody. Documentation. Bidding and work processes.

WTC Disaster

Claims Management

34

Fundamentals. Adjuster must become comfortable with scope and estimate of

loss. This is not a requirement. Some carriers are more forthcoming than others.

Best ways to achieve: Develop a good rapport with adjusters by actively helping them. Give adjusters easy but escorted access to the loss sites. Have a

member of your claim/recovery team escort them. Prepare a preliminary estimate of the loss and present it to the

adjuster. Provide quotes, invoices, and purchase orders.

Expedited Payments

35

Expect questions about the preliminary loss estimate. Answer all questions. Help your adjuster better understand the claim.

Expect no advance payment against estimated business interruption claims. Concentrate efforts on losses related to fixed assets, clean

up/restoration costs, and inventory. Making a formal request for an advance will force the insurers

to respond.

Expedited Payments

36

Examples of sublimits: Expediting. Temporary services. Demolition, increased cost of construction. Claim preparation.

Adjuster is trained and motivated to shift as much of your loss as possible into categories with sublimits.

Expect your experts to be likewise trained and motivated to maximize your total recovery.

Managing Sublimits

37

Typically included as a specific sublimit. Claim preparation consultants. Reasonable and necessary. Put your architect, engineering, and outside

estimator’s expenses into the cost of recovery, NOT in claim preparation.

(AKA “Claim Preparation”)

Professional Fees Coverage

38

Work with your broker, claim advocate, and attorney and confirm that policy coverages and limits for your property and potential loss of income are sufficient. How accurate are your reported values for property and business

interruption? Test your business income limits, and calculate your anticipated

maximum business interruption loss (AMBIL) amount for key locations.

Are deductibles too high (flood, EQ, wind)? Are limits and sublimits sufficiently high (property, BI, service

interruption)? Are Contingent Business Interruption coverages in place for both

direct CBI and indirect CBI events. Exclusions, waiting periods, valuation considerations.

Ensuring That Losses Are Fully Recovered: Step One

Preparing for the Unpredictable

39

Ensuring That Losses Are Fully Recovered: Step Two

Preparing for the Unpredictable

Have your team in place. In-house team:

Risk manager. Claims manager. Safety manager. Corporate counsel. Operations, finance, IT.

Outside experts: Claims advocacy. Forensic accounting. Claims engineering. Legal.

40

Perform initial damage assessments. Inspect loss site. Photograph and video extensively to capture extent of damages. Inventory damaged items. Obtain quotes of replacement cost or repair costs. Your experts can often spot hidden damage and are alert to code

issues. Create overall estimate of loss, claim books. Present estimate to adjuster, walk them through it.

Adjuster sets reserves. Adjuster processes advance payment.

Initial Steps for Obtaining Financial Recovery

Post-Loss Activities

41

Communication cannot be overemphasized. Establish communication guidelines with the entire

claims management team. All insurer/insurer rep site visits should be monitored.

Communicate, Communicate, Communicate

42

Communication with insurers is critical. Engage them early regarding projected cash need. A claim is a very dynamic process – unanticipated issues

inevitably arise. Effective communication can prevent a small issue becoming a

significant problem. Immediate notice of loss.

(cont.)

Communicate, Communicate, Communicate

43

Communication with insurers is critical (cont.). Provide as much information as possible regarding:

Extent of damage. Impact on the business. Immediate steps being taken to manage the loss.

Many decisions are made early in the process – need to be communicated and made jointly.

(cont.)

Communicate, Communicate, Communicate

44

Physical damage: Buildings, equipment, inventory. Sublimits: debris removal, expediting. Exclusions: nuclear, environmental.

Time element losses: Business Interruption/mitigating costs. Inefficiencies and additional costs to

operate = extra expenses. Time element extensions:

Extended period of indemnity. Contingent time element/contingent business interruption (CBI). Service interruption. Ingress/egress, possibly civil and military authority.

Maximize Recovery by Allocating to the Right Buckets

Measurement of the Loss

45

Detailed budgets and proposals. As-was repairs vs. betterments. Hypothetical as-was repair timelines.

Detailed invoices. Receipts and expense reports for

out-of-pocket expenditures. GL accounting detail and POs. Production, sales, inventory data. Operating statements (forecast and actual).

DOCUMENTATION IS KEY!

You Will Be Asked for More Documents Than You Can Ever Imagine!

Loss Measurement and Documentation

46

Calculate lost sales. Reduce lost sales to lost gross earnings. Deduct non-continuing operating expenses.

BI - “3-Step Method”

Financial Recovery Considerations

47

Gross Earnings Less Non-Continuing vs. Net Income + Continuing Loss Calculations

Projected Actual Loss

Revenue $10,000,000 $0 $10,000,000

Cost of Sales ($7,000,000) $0 ($7,000,000)

Gross Earnings $3,000,000 $0 $3,000,000

Operating Expenses

Variable $1,000,000 $0 $1,000,000

Fixed $1,500,000 $1,500,000 $0

Total Operating Expense $2,500,000 $1,500,000 $1,000,000

Net Income $500,000 ($1,500,000) $2,000,000

Gross Earnings ($3,000,000) less N/C Exp ($1,000,000) = $2,000,000NI + Continuing $500,000 plus $1,500,000 = $2,000,000

48

Adjusters expect to approve to work before you start. Challenges when you do the work first.

Harder to prove as-found conditions as site has been altered. Expect that work you did and work that is covered may be

different. Must prove that replacements made were cheaper than repairs. Must justify upgrades (code changes, obsolescence, etc.).

Coverage for Work Done Before the Adjuster Arrives

49

Coverage Puzzle

Superstorm Sandy

ExcessExcess Insurance Insurance

PolicyPolicy

Insurance Insurance PolicyPolicy

FEMAFEMA

NFIP Flood Insurance Deductibles

Deductibles

50

The National Flood Insurance Plan (NFIP) Government-run insurance program administered by FEMA. The zones in which people typically buy NFIP are “A” and “V”:

Considered 100-year flood plains. Special Flood Hazard Areas (SFHA’s). Limits are:

$500,000 of building repair and cleanup. $500,000 for damaged contents. $1,000 for sue and labor. $10,000 for pollution.

Not covered: Indirect loss, spoilage, or loss of income.

National Flood Insurance Plan (NFIP)

Superstorm Sandy

51

Commercial risks typically buy NFIP on a per-location basis to: Provide additional coverage for flood exposed locations. Buy down the flood deductible.

Marsh has a dedicated Flood Service Center in Austin, Texas.

Important to know what flood zones your locations are in.

National Flood Insurance Plan (NFIP) (cont.)

Superstorm Sandy

52

FEMA provides federal aid and relief to communities that are impacted by disaster events.

Once a disaster declaration is made, eligible applicants may seek FEMA assistance to cover their uninsured losses.

There are two types of FEMA assistance: Individual assistance (residential aid). Public assistance (support for public entities).

Federal Emergency Management Agency (FEMA)

Superstorm Sandy

53

Shared core principles, but drastic policy differences between the two.

Eligible FEMA applicants: States and state agencies. Local governments. Indian tribes. Private nonprofit organizations. For profit companies are not eligible. (No business

interruption cover)

Federal Emergency Management Agency (FEMA) (cont.)

Superstorm Sandy

54

FEMA is a means of last resort. Expects applicants to pursue and exhaust all

available insurance coverage. Eligible uninsured exposures should be pursued with

FEMA, for example: Insurance policy deductibles. Certain policy exclusions (such as asbestos abatement). Limit losses (excess damage above debris coverage limits

or excess losses above total policy limits).

FEMA Coverage

Superstorm Sandy

55

Request for public assistance. Due 30 days after disaster designation.

Applicant’s identification of preliminary damages. Due 60 days after kickoff meeting.

Appeals. Applicant may appeal FEMA’s decision within 60 days of being notified

of that decision. Completing work.

Time limits for all projects begin the date of the disaster declaration (extensions can be granted).

Emergency work (Categories A and B): 6 months. Permanent work (Categories C-G): 18 months.

FEMA Time Limits

Superstorm Sandy

56

As a condition for receiving public assistance, applicant is required to “obtain and maintain” insurance coverage (for the hazard that caused the damage).

Coverage commitment will be based on the total eligible costs associated with permanent work only.

Insurance commitments are based on the peril – recent NY disasters: DR# 4085 – Hurricane Sandy (October 2012) – wind and flood. DR# 4031 – Tropical Storm Lee (September 2011) – flood. DR # 4020 – Hurricane Irene (August 2011) – wind and flood. DR #1957 – Winter Storm (December 2010).

FEMA Insurance Purchase Requirements

Superstorm Sandy

Insurance

FEMA

State

Applicant

57

THANK YOU!

John R. Cunningham, PMP, CFCCSenior Vice PresidentMarsh Risk Consulting

Construction Consulting Practice1000 Main Street, Suite 3000

Houston, TX 77002+1 713 276 8681

John.R.Cunningham@marsh.com

Raymond S. Hutnik, CPA, CFE, CFF, FCPA

Managing DirectorMarsh Risk Consulting

Forensic Accounting and Claims Services

Three Logan Square1717 Arch St, STE 1100

Philadelphia, PA 19103, USA+1 215 246 1456

Raymond.S.Hutnik@marsh.com

John P. ScordoPartner

K&L Gates, LLPOne Newark Center

Tenth FloorNewark, NJ 07102-5285

+1 973 848 4136John.Scordo@klgates.com

58

DISCLAIMER

K&L Gates includes lawyers practicing out of 38 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.

K&L Gates comprises multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Brussels, in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp.k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office.

K&L Gates has offices in: Anchorage, Austin, Beijing, Berlin, Boston, Brussels, Charlotte, Chicago, Dallas, Doha, Dubai, Fort Worth, Frankfurt, Harrisburg, Hong Kong, London, Los Angeles, Miami, Moscow, Newark, New York, Orange County, Palo Alto, Paris, Pittsburgh, Portland, Raleigh, Research Triangle Park, San Diego, San Francisco, Seattle, Shanghai, Singapore, Spokane/Coeur d’Alene, Taipei, Tokyo, Warsaw, and Washington, D.C.

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2013 K&L Gates LLP. All Rights Reserved.

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.

Copyright 2013 Marsh Inc. All rights reserved.MA13-12601