Storm Warning: Disaster-Proof Your Practice for Hurricane and Winter Season, Part II

Our last post discussed risk management measures that a law firm should implement to avoid a shutdown if its office becomes inaccessible due to damage from a hurricane, fire, or other disaster. Good risk management measures like these are a law firm’s first line of defense against a not only a property loss, but a malpractice claim, data breach, etc. Its last line of defense is good insurance, which the topic of today’s post.

I. Property Insurance: If you rent your office, then you should buy a commercial property insurance policy that complies with the requirements of your lease, and covers what your landlord’s policy doesn’t cover. In most cases, your landlord will buy insurance for the building, so you should buy a policy that covers your office contents: furniture, supplies, equipment (i.e., computers and  copiers), etc.; in other words, you essentially need business renters insurance. However, don’t assume that your landlord will insure the building: be sure to review your lease to determine what type(s) of insurance you’re required to obtain. If your own your office premises, then buy a policy that covers both your building and its contents (if you have a mortgage, it will likely require you to insure the building). 

Be careful when buying property insurance: property policies vary widely in what they cover and the amount of coverage they provide. Further, there are gaps in the commercial property policy that may leave you exposed to major expenses if you incur a loss. Some of these gaps can be filled by buying an endorsement (optional coverage) that either restores coverage for property that is otherwise excluded, or extends the coverage provided by the basic policy. Here are three important ones:

A. The Additional Covered Property endorsement covers damage to a building’s foundation and other real property that is otherwise not covered. The cost to remove and replace a foundation damaged by fire other loss can be prohibitive. Premises owners and tenants who are required to provide insurance for their building need this endorsement.

B. The Additional Building Property endorsement property classifies all property that can be considered either building or personal property as “building”. This is important, because some types of property, i.e., semi-permanently installed equipment, can be considered either, which can lead to a dispute with your insurance company if that property is damaged and you file a claim. This endorsement eliminates that possibility, and thus a possible delay in adjusting your claim until any coverage dispute is resolved, reduces your risk of incurring a coinsurance penalty, and often pays for itself, because the rate to insure a building is lower than the rate to insure personal property. Premises owners, tenants who are required to provide insurance for their building, and tenants who aren’t, but have made improvements to their premises will benefit from this endorsement.

C. Ordinance or Law coverage covers the cost of upgrading a building to comply with current building codes and ordinances after a loss, if required by law, i.e., if more than 50% of a building is destroyed. Having replacement cost coverage is insufficient, because that only covers the building as it exists, not any required upgrades. Further, property insurance covers only actual damage caused by a covered loss to a building; it doesn’t cover the cost to demolish and replace an undamaged portion of a building that must be torn down and rebuilt because of a local ordinance.

If your firm has a property loss that triggers a building code upgrade, it could be financially ruinous without Ordinance or Law coverage, which we recommend to premises owners and tenants who are required to provide insurance for their building.

II. Business Income and Extra Expense Coverage – if your law firm suffers a fire or other propertyloss that impairs its business, this coverage will pay lost profits for up to 12 months while your office is being repaired, and extra expenses that your firm incurs so that it can operate during the repair period, i.e., rental of temporary office space. Business Income and Extra Expense Coverage can be purchased individually or together when you buy Commercial Property insurance.

The basic business income policy applies only if a firm’s economic loss is caused by a hurricane, fire, or other direct physical loss covered by its commercial property policy. As a result, endorsements may be needed to cover business income losses resulting from utility service interruptions, blocked ingress or egress to a particular location, and government-ordered roadblocks or evacuations, i.e., in the event of an approaching hurricane. Law firms may avoid the need for this coverage by following the measures recommended in our last post.

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