The ripple effect of storm Sandy
"We never expected the Hudson River to come up this far..." That has been the lament of hundreds of residents and business owners on the east coast of the US, struck by the chaos of cyclone Sandy.
It is such understandable lack of foresight that is leading to an insurance superstorm, for the greatest insured monetary loss from this distressing episode is likely to be not from physical damage but from interruption to businesses.
After all, risk can be defined as what you do not expect, as well as what you do expect.
Total insured losses from Sandy could be up to $25bn, making it the second-costliest storm on record after hurricane Katrina, which battered Louisiana in 2005.
The reason that a big slug of this new cost will take the form of claims arising from business interruption is that infrastructure was plunged into disorder across a wide area by Sandy's extensive trail. Such major enterprises as the Port of New York-New Jersey, Baltimore, Philadelphia and others were forced to suspend operations for several days.
Port managers can limit the impact of storms by securing cargo and equipment, but it is tougher to prevent power outages as trees topple on to transmission lines – loss of electricity even for a short period causes operational paralysis, stymying everything from electronic communicatons to cranes to water pumps.
Catastrophe modelling consultancy RMS has said that Sandy caused more power outages than any hurricane in history, impacting nearly 8.5m homes and business across 15 states at its peak. That was not to mention the earlier devastation across Jamaica, Cuba and the Bahamas. Substations and power lines can take a long time to repair as emergency teams struggle to mobilise.
On top of all this, contingent business interruption – which is caused by more arms-length factors than immediate damage to the insured’s facilities – comes into play in circumstances where the authorities order evacuations and cordon off access routes to, for instance, port hinterlands.
It comes as little surprise to learn that the Chartered Institute of Loss Adjusters has spent three years collaborating with the Insurance Institute of London on research into policy wordings for business interruption clauses.
Traditional wordings can be unclear, and have failed to keep up with business practice. The authors of the resulting study, CILA Fellows Damian Glynn and Harry Roberts, have said that whether a claim is paid may come down to the insurer’s interpretation of the language rather than what was intended at policy inception. Similar claims can end up with quite different outcomes.
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