Wisconsin Lawyer
Vol. 81, No. 8, August 2008

Practice Tips

Insuring Your Law Office against Disaster

by Gordon Davenport III, Connor Sabatino & Krista Sterken

Sidebar:

• Is a Lawyer Responsible for Safeguarding Client Files?
• State Bar of Wisconsin & other resources on flood assistance

The severe storms that struck southern and central Wisconsin in early June left hundreds of businesses, homes, and roads under several feet of water. The misery was compounded when many business and home owners found themselves without insurance coverage for their losses. Standard property insurance policies cover damage to property caused by such things as fires, tornados, wind, lightning, and hail, but they generally do not cover damage caused by floods and certain other perils. It is important for lawyers to be aware of this limitation and to know what options are available for fully protecting their law offices and their clients' businesses.

Standard Property Insurance

Standard property insurance policies generally do not cover damage caused by floods, sewer backups, or earthquakes. They also do not cover losses and expenses that result from interruption of the business unless that coverage is specifically purchased, usually at an additional charge. And even when business interruption coverage is purchased as part of a standard policy, it will not apply to interruptions caused by excluded perils such as floods.

Yet floods are a real risk in many parts of Wisconsin, as we have seen this year. What options are available to law offices and other businesses to protect their property and business operations against this risk?

National Flood Insurance Program

The federal government offers flood protection through the National Flood Insurance Program (NFIP), but not all property is eligible for coverage. To qualify, the property must be in a designated flood plain, and the community in which the property is located must opt in to the NFIP and comply with FEMA standards for flood control measures. Further, NFIP rates and terms are set by the government and cannot be customized to meet individual needs. The amount of protection is capped at $500,000 for commercial property, with an optional "contents" add-on, also capped at $500,000. The contents add-on covers actual cash value, not replacement costs. Therefore, some law offices might find that NFIP coverage, even if they qualify for it, is not adequate to meet their needs. In such situations, private coverage might be an option.

Additional Coverage Through Standard Property Insurance Policies

Many law offices purchase business interruption coverage as an addition to their property policies. Some insurers also offer flood and earthquake add-ons. Flood coverage often is written as excess coverage in addition to the NFIP and sometimes can be written in lieu of the NFIP program. "For high-risk flood zones, private insurers may only be willing to provide flood coverage in excess of the $500,000 NFIP limit, and not in lieu of the NFIP," says Kellye Golden of Mortenson, Matzelle & Meldrum, a Wisconsin insurance broker. "Once businesses in high-risk flood zones secure the NFIP coverage, they can obtain coverage in excess of the $500,000 from a private insurer if the NFIP limit is insufficient."

If a law office has purchased business interruption coverage, adding flood coverage should extend the business interruption coverage to include interruptions caused by flood. But it is important to double-check the language of the policy. It also is possible to purchase coverage for business interruptions caused by loss of utility services. This coverage may come in handy if the office space escapes actual flood damage but cannot be used because of problems with utilities.

Difference in Conditions Policies

Large law offices might find the coverages available as add-ons to standard property policies to be inadequate. If so, a separate policy may be available. One type of policy commonly used for nonstandard coverage is a difference in conditions (DIC) policy.

DIC policies are not standardized, and they are given different names by different insurance companies. But generally they fall into three categories: 1) DIC property coverage, 2) DIC business interruption coverage, and 3) DIC loss-of-utilities coverage. These policies provide coverages that are analogous to those that can be added to standard property policies, but on a larger scale.

DIC property policies are written much like a standard property insurance policy, except that they specifically cover losses caused by perils, such as floods or earthquakes, excluded under standard policies. Similarly, DIC business interruption policies cover losses of business income resulting from perils typically excluded. Coverage can be purchased for up to a maximum dollar amount and for up to a maximum period of time. Businesses usually must submit information about their revenues and profits to determine the amount of coverage available.

DIC loss-of-utilities policies cover losses that result from a lack of incoming utilities. These policies are sometimes referred to as "off premise power coverage." Although standard property policies may cover a loss of power that occurs because trees downed during a thunderstorm knock down power lines, they typically do not cover losses of utility services resulting from an excluded peril such as a flood or an earthquake.

Every DIC policy is a customized policy. This allows for flexibility in crafting coverages but requires the buyer to very carefully review the policy language to make sure the desired coverage is included.

Determining Coverages that Are Right for You

The cost for DIC policies typically starts at about $10,000 per year. This may be appropriate for large law offices. For smaller offices, purchasing additional coverages as add-ons to a standard property policy may be a better solution. All law offices should evaluate their need for these kinds of coverages. Even law offices located in upper floors of large buildings may need coverage if, for example, it is anticipated that a flood could occur and prevent access to the building or knock out power.

Offices that face no risk of flooding still may benefit from coverage for loss of utilities. However, "business interruption and loss of utilities endorsements can vary widely as to what coverages are provided," warns Christopher Fill, vice president of AON Risk Services Central Inc. "It is important that the policy specifically defines whether coverage is limited to gas, water, and electric or if it is extended to telephone and Internet."

Electronic Data Storage

It is important to keep in mind that insurance only covers financial losses and cannot actually replace unique files, documents, or evidence that may be kept in a law office. As computer technologies increase and their costs decrease, it is becoming easier to use imaging technology to store documents electronically. Once files and documents are in electronic form, off-site data storage and backup services can be used to further protect crucial materials.

Finally, it is important for law offices to ensure that their policies contain coverage for electronic data protection. Even partially destroyed computers can sometimes have their hard drives restored, but this process can be costly and is sometimes not covered by standard property policies.

Wisconsin Lawyer