Hurricane Katrina and the Evolution of Risk Management

Nearly 10 years ago, wind and storm surges as a result of Hurricane Katrina caused $41 billion in insured losses and $108 billion in total economic losses in the United States. Many of the lawsuits filed as a result of the fifth hurricane of 2005 have only recently been decided.

During a recent webcast by insurance broker Marsh, “Lessons Learned From Hurricane Katrina: Looking Back, Planning Ahead,” experts and a New Orleans restauranteur discussed the storm experience and its impact risk management.

James Labode, head of Marsh’s New Orleans office, recalled the storm, which hit on Aug. 29, 2005, had a major impact on communications. But what stood out most to him was how people embraced the common goal of recovery and rebuilding.

Brennen & Co.

Steve Pettus, managing partner of Dickie Brennen & Co., which runs four high-end restaurants in New Orleans’ French Quarter, said the scale of the storm was unbelievable.

“We never evacuate. But this time we did,” said Pettus. Recounting his personal story, he said he left the day after Katrina hit New Orleans, on Sunday.

“It took about seven hours to drive 70 miles,” said Pettus.

He said that the normal practice during these types of evacuations was to pack just a few things since most evacuations only lasted a few days. However, this was not what happened after Katrina. Pettus stayed with his business partner’s family for a night and then was taken in by a family he had never met before.

Due to the mandatory evacuation of New Orleans, residents needed a pass to get back into the city. Pettus acquired one about six days after the storm but that was not the only hurdle to overcome.

“The challenge was that all of the resources were being consumed,” Pettus said of trying to get his restaurants back up and running.

Pettus put a priority on getting the payroll system running so that his employees could be paid during the five week period the restaurants remained closed. The restaurant group also paid its purveyors, a move he said fostered incredible loyalty among its vendors that remains today.

Pettus shared what he does now to prepare for disasters:

• Build healthy cash reserves;
• Direct pay for staff;
• Carry smaller inventories, even more if a storm is forecast;
• Review insurance coverages;
• Review an emergency preparedness manual each year, and identify and secure extra housing for employees;
• Have generators and redundant systems on hand, and have VOIP office phones and offsite computer services;
• Secure access passes each year from the mayor’s office;

When it came to rebuilding after the hurricane, Pettus said some of his key concerns at the time were:

• Staff – personal issues, housing, communications, meetings, ads, phone trees;
• Physical properties – assess disaster and construction needs;
• Customers and suppliers – order equipment; and Contractors.

10 Commercial Property Tripwires

At the onset, Hurricane Katrina didn’t initially appear significant, according to Duncan Ellis, Marsh’s U.S. Property Practice leader. Once the levies broke, that changed.

While most people don’t read their insurance policy until after a loss, Ellis stressed the importance of businesses knowing what’s covered ahead of time. As an example, he said many businesses were surprised to find out they were not covered for storm surge losses, the main coverage issue resulting from the storm.

Ellis and Paul McVey, Marsh’s U.S. Property Claims Practice leader, developed a list of the top 10 tripwires in a property policy arising as a result of a major loss.

Business Interruption – “Probably the most misunderstood coverage,” Ellis said, with most questions relating to whether business interruption was covered and how it was calculated. He added that it’s important to note that business interruption coverage does not replace revenues, but rather it replaces profits that are lost. According to McVey, another area of confusion is the indemnity period, the time frame to reinstate and repair a property to its pre-loss condition.

Sublimits – McVey said this usually applies to flood coverage and includes such things as pure extra expense, expediting expense and time sublimits for civil authority.

Deductible Applications – Ellis said many commonly asked questions have to do with whether a deductible is applied by occurrence or location. Separate deductibles can also apply to time element loss, by unit of insurance and even by percentages.

Service Interruption – McVey said businesses should be educated as to the scope of the coverage, and understand causation and the indemnity period. A service interruption must be caused by a peril it is insured against. Distance limitations and qualifying or waiting periods may apply to each location. He emphasized there is no coverage for cutting off service voluntarily.

Contingent Business Interruption – Ellis said businesses need to understand which suppliers or customers – direct or indirect – are covered. McVey recommended reviewing what constitutes a direct supplier and the contractual relationship that exists between the company and its supplier. Coverage purchased for perils at a firm’s locations will apply to suppliers but if a peril isn’t insured against, suppliers won’t have coverage.

Wide Area Impact or Idle Period – Allianz Global Corporate & Specialty identified the top three causes of global property losses during 2009-2013 as fire, earthquake and machinery breakdown. These remain the main causes of wide area impact and idle periods.

Civil Authority, Ingress/Egress – It’s important to know how this can trigger coverage, Ellis said, noting that there is typically a limitation around the number of days covered.

Named Windstorm or Flood – Determine if it includes or excludes storm surge, McVey said.

Definition of Special High Hazard Flood Zone – Ellis explained that a special hazard flood area (SHFA) and a 100-year flood zone/plain are the same things. He pointed out there will likely be an internal sublimit for flood with a further sublimit for SHFA.

Loss Management Planning and Communication Protocol – Pre- and post-loss management planning, as well as a communication protocol is critical, said McVey. Businesses should consider such things as alternate vendors, partial payments, public relations, etc.