June 2020 |  Volume 32, Number 6

If we did not have enough to worry about already, with the coronavirus pandemic still upon us, June 1st is the start of the Atlantic hurricane season.^[1] For the past six years, there have been named hurricanes that have developed prior to the official June 1st start of hurricane season. Many of the weather and hurricane experts are predicting that this year's Atlantic hurricane season may be a very active one. Already this year, in mid-May, hurricane Arthur developed in the Atlantic and, thankfully, headed out to sea without making landfall. Over the years we have seen insurance agencies and brokerages react to these types of storms and change certain aspects of how they conduct their business in order to help protect their customers and also help prevent a potential E&O claim or lawsuit. In this issue of The E&O Report, we will discuss a few things that every insurance agency or brokerage should be doing in preparation for another potential catastrophic event.  No matter whether your agency or brokerage is located on the coast or inland, it is important that you think about the issues discussed below.

It has been estimated that less than a quarter of the properties that were damaged several years ago in Texas and Florida from flooding as a result of hurricanes Harvey and Irma were covered by flood insurance. After Irene and Sandy many of the storm related E&O claims and lawsuits that we saw were been brought by customers who had suffered a flood loss but did not have flood insurance in effect at the time of the storm. Although Vermont is not on, or even near the coast, it suffered severe flooding as a result of Hurricane Irene after the storm headed inland.^[2]  Some Vermont towns were completely washed away and numerous lives were lost as a result of the flooding.

Due to these types of events, many insurance agencies and brokerages have adopted a procedure where they offer every customer the option of purchasing flood insurance regardless of where the Insured's property is located. Since most customers will usually opt not to purchase flood coverage unless they are located directly on a body of water, it is a good practice for the agency or brokerage to document the customer's rejection of that coverage. One of the best ways to document the acceptance or, more likely, the rejection of coverage is to use the ACORD 60 Flood Acceptance/Rejection form. The ACORD 60 form should be completed by the customer indicating that the coverage is either accepted or rejected. Then it should also be signed and dated by the customer. The executed form should be retained in the customer file.

An added benefit of using the ACORD 60 Flood form is that it specifically states that once it is signed it will apply to all future policy renewals.  By adopting an agency-wide practice where the option of purchasing flood coverage is offered to each customer, and the ACORD 60 is then completed by every customer, insurance agencies and brokerages will help protect themselves from potential E&O claims or lawsuits if a customer sustains a loss due to an uncovered flood claim.

Another thing that many insurance agencies and brokerages learned from these various storms, is only as a result of the storm did some customers discover that they had insufficient coverage, inadequate limits of coverage, or they did not fully understand how their coverages or deductibles applied. Many insurance agencies and brokerages now use these types of storms as learning tools for their customers to think about the coverages that they may need. For instance, when discussing insurance coverage with a customer, a good practice is to walk the customer through what their insurance coverage, limits of coverage, and what the applicable deductibles would be in the event a catastrophic event occurred. This is a good practice for any agency or brokerage to follow whether it is a hurricane, ice storm, blizzard, fire, or any other type of catastrophic event.  Agents and brokers that follow this practice when discussing coverages and potential losses with their customers have told us that it is a good way to help customers identify possible changes in the coverage that may need to be made in order to have the customer adequately insured.

One thing that the coronavirus pandemic has shown us is how very fragile businesses' supply chains are.  Accordingly, businesses that depend on other businesses for supplies, purchases or to attract customers should consider purchasing one of ISO's Business Income From Dependent Properties.  These endorsements are as follows: 

• Broad Form (CP 15 08 10)
• Limited Form (CP 15 09 10 12)
• Limited International Coverage (CP 15 01 10 12)
• Extra Expense from Dependent Properties—Limited International Coverage (CP 15 02 10 12)

 
The IRMI Commercial Property Insurance manual states that these endorsements insure against income loss or extra expense suffered by the insured as a result of damage to the property of another business on which the insured depends to supply its products (contributing or manufacturing locations), to purchase its product (recipient locations), or to attract customers (leader locations).  In order for coverage to apply, the income loss must result from damage the dependent property from a covered cause of loss.  Because of this requirement, it would be best to couple these endorsements with flood coverage, so that a storm that flood a supplier would be covered.   

Additionally, various storms have taught us all over the years that every insurance agency or brokerage, no matter how large or small, should have a disaster plan in effect for their own office that is known and understood by all employees. The first aspect of any disaster plan should be what each employee should do if a catastrophic event occurs. A key element of the plan should be how the agency or brokerage can remotely access its data in the event its offices are not accessible, or they are not fully functioning.  When developing such a plan, an agency or brokerage should make certain that they are complying with the Cybersecurity Regulation 500.^[3] The agency or brokerage should also have the ability to forward their phone lines and the email access so that communications with customers can continue.  Based upon what has taken place recently with the coronavirus pandemic it appears that most insurance agencies and brokerages now have such a plan in effect and are able to operate remotely. Having this ability enables the agency or brokerage to continue to operate and assist customers in the crucial time immediately following a catastrophic event.   

The prudent insurance agency or brokerage is the one that thinks well in advance of a catastrophic event, and also has its customers do so too, so that both are prepared when a catastrophe occurs.  By doing so, the agency or brokerage will not only help protect itself from a potential E&O claim or lawsuit, but it will also help provide better service to its customers, and in the process will very often sell more insurance.

Submitted by:
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP

[1] The Atlantic hurricane season runs from June 1st through November 30th each year.  The peak of the season is usually from mid-August to late October.  However, deadly hurricanes can occur anytime during hurricane season.
[2]  Irene dumped as much as a 11 inches of rain on parts of Vermont and caused $733 million in damages in the state.
[3] Section 500.2 of Title 23 of the Codes, Rules, and Regulations of the State of New York states: 

• (a) Cybersecurity Program. Each (non-governmental entity operating under a license under the Insurance Law) shall maintain a cybersecurity program designed to protect the confidentiality, integrity and availability of the Covered Entity's Information Systems.
• (b) The cybersecurity program shall be based on the Covered Entity's Risk Assessment and designed to perform the following core cybersecurity functions: …
         (2) use defensive infrastructure and the implementation of policies and procedures to protect the Covered Entity's Information Systems, and the Nonpublic Information stored on those Information Systems, from unauthorized access, use or other malicious acts;