Wisconsin
Lawyer
Vol. 81, No. 8, August
2008
Practice Tips
Insuring Your Law Office against Disaster
Some lawyers were dismayed to learn
that damage caused by the spring floods was not covered by insurance. If
you have a standard property insurance policy, it might
not cover damage to your law office caused by some perils. You need to
understand policy limitations and the options available to fully protect
your business.
by Gordon Davenport III, Connor Sabatino &
Krista Sterken
Sidebar:
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.
Gordon
(Chip) Davenport III, U.W. 1983, practices insurance litigation
with Foley & Lardner LLP, Madison. He thanks summer interns
Connor Sabatino,
U.W. 2009, and
Krista Sterken, Columbia 2010,
for their contributions to the article.
Wisconsin
Lawyer