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Compounding Problems

Why businesses and claims professionals need to prepare for and protect against compound disasters

August 10, 2020 Photo

As the COVID-19 pandemic continues to impact and disrupt businesses, and as North America heads into its hurricane and wildfire seasons, it has become increasingly important to anticipate the potential of a compound disaster.

A compound disaster refers to two or more disaster events creating additional—and increasingly complex—response and recovery challenges, as each disaster amplifies the effect of the other. Unfortunately, natural disasters and human-caused crises are unlikely to decrease in frequency during the current pandemic. Instead, claims professionals must get out ahead and prepare.

While hail, hurricane, tornado, and fire policies are common purchases for businesses in vulnerable areas, most do not have coverage that would cover a virus outbreak. This will further complicate the claims process, especially those businesses that may believe they have a valid claim but, in fact, lack the necessary coverage.

The claims world learned a lot from Hurricanes Katrina, Harvey, and Irma. Businesses that didn’t have the proper coverage were forced to either close or rebuild with their own balance sheets. The following year, those businesses still standing made sure to secure coverage.

The COVID-19 pandemic—and the possibility it creates for compound disasters—will teach a similar lesson to the claims industry. While standalone coverage for virus outbreaks will be extremely limited and very costly—and certainly a line-item exclusion in general policies—there is a good chance that the demand for compound disaster coverage, which includes a pandemic, will create a new class of policies down the road. While this isn’t likely to happen in 2020 due to significant losses across all market sectors, it could happen in 2021 or beyond.

Preparing for Compound Disasters

In the meantime, in midst of this new normal, it is important for claims professionals to anticipate how to respond to the inevitable compound events during 2020. Remote, decentralized workforces; financial constraints; and supply-chain disruptions are just a few important variables to consider. The following issues will complicate compound disaster scenarios from a claim’s perspective: 

Overwhelmed disaster management support. Familiar state, federal, and provincial government responses will be limited due to lack of availability or resources during a compound disaster. Government agencies, emergency service providers, and health care systems already struggling to keep up with the global pandemic will be further strained and, therefore, response times could be unusually high. Natural disaster response efforts require a large mobilization and coordination of teams of people and volunteers, which will include new and difficult challenges for a response in a compound disaster environment. An added challenge will be protecting first responders and those affected by the disaster from COVID-19.

COVID-19’s impact remediation partners. A compound disaster will affect vendors that typically conduct restorative claims work in the aftermath of a disaster. They may have pivoted at the onset of COVID-19 to offer other services, or their availability for disaster response could be limited due to working with smaller crews if workers are ill or caring for their families. Claims departments should verify that roofing contractors, painters, general contractors, and others are still able to respond to losses, or can extend their hours if needed. This will significantly expedite claims post-disaster.

Evacuation and temporary shelter challenges. During large-scale natural disaster evacuations, temporary shelters can be the only option for many people. However, options that may have been available previously may no longer be viable due to social distancing requirements and COVID-19 risk. Businesses will need to review and amend their evacuation and continuity plans accordingly and consider any possible options for establishing a new meeting place. Consider how a compound disaster will affect supply chains and transportation, as well.

Technology-related challenges. Many organizations have rapidly transitioned their employees from office-based to home-based. Having a decentralized workforce will have both positives and negatives in the event of a natural disaster. While the likelihood of a business’ entire remote staff being impacted by a single, localized event may be lower, utility outages could disconnect critical staff for an extended period of time should their homes lose power. A decentralized staff leaves business networks more vulnerable, leading to an increase in successful cyberattacks. In these scenarios, the hacker provides a new number for an established wire transfer or asks for cash or re-routing under the auspices of an existing client, co-worker, or otherwise recognized email address. Both of these scenarios could lead to significant, and multiple business interruption and cyber-related claims.

Communicate coverage parameters before disaster strikes—twice. Communication between brokers and businesses about policy parameters and limits ahead of a compound disaster will be critical. Businesses should know what their policies say, what the limits are, and what it doesn’t cover (i.e. virus outbreaks). Send a notice to brokers and clients letting them know that they should reach out and file disaster claims right away, just as they would any other year. Know what potential gaps in coverage they might have, and what exactly their business interruption policy will cover and what it won’t. Because a compound disaster can include a cyberbreach—such as a hurricane and hacker simultaneously occurring—businesses should be encouraged to consider cyber insurance in the same way they’re considering weather-related coverages.

As we are already well into this year’s hurricane and wildfire seasons, it’s important to consider the potential challenges of a compound disaster now. This will be critical for businesses that retain coverage and for claims professionals that assess and respond to them.

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About The Authors
David Chmiel

David Chmiel is senior vice president and national director of claims for global insurance brokerage Hub International. 

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