Superstorm Sandy could trigger business interruption insurance losses: Fitch

Post-tropical storm Sandy, which made landfall in New Jersey Monday night, has the potential to trigger large insurance claims under business interruption policies, according to ratings agency Fitch Inc., which notes many firms do not purchase contingent business interruption insurance and losses have been underestimated in previous disasters.

“While many lines of insurance will be affected, including property and auto, there is the potential for significant business interruption and contingent business interruption (CBI) losses related to the flooding as the affected areas work to restore power and resume operations following the storm,” Fitch stated in a press release Oct 30. The agency noted that a wide variety of firms are being affected in the eastern U.S., including retail, transportation, manufacturing, energy plants and corporate offices.

Hurricane Sandy was designated a post-tropical storm. After it made landfall, it flooded parts of the New York City subway while strong wind gusts resulted in multiple power failures as far northwest as Toronto.

In the release, Fitch noted there were extensive CBI and BI losses in 2011 as a result of floods in Thailand and the earthquake and resulting tsunami in March in Japan.

“Fitch also notes that these events demonstrated the extent to which BI and CBI losses have been underestimated in the modeling and underwriting of risks,” the firm said.

In order to claim losses under BI policies, a firm would have to suffer a loss of income from suspension of operations. BI policies normally have a 72-hour waiting period and can be claimed if the interruption is due to a physical loss or damage to its own property as a result of a covered cause of loss, Fitch stated. It can also result from a work location that is inaccessible because civil authorities have ordered people to stay out.

The majority of companies to not purchase CBI policies, Fitch noted, which cover loss of income when the client’s operations are disrupted by a supplier and covers the same perils as the main policy of the client.

Images: Flooding in New York City following Hurricane Sandy. (Credit: Metropolitan Transportation Authority of the State of New York)