JULY 2005
Insurance Coverage/Homeland Security
Disaster Preparedness Insurance Coverage Considerations
Relating to the National Standard on Disaster/Emergency
Management and Business Continuity Programs recently
recognized by Congress, endorsed by the Department of
Homeland Security, and promoted by the 9/11 Commission.
INTRODUCTION
Recent events, including the 9/11 tragedy, the Indian
Ocean tsunami, the blackout of the Northeast,
tornadoes throughout the Midwest, and hurricanes in
the Southeast underscore the importance of disaster
preparedness. In addition to the tragic loss of life,
these occurrences have all involved substantial
economic damage.
Realizing the significant impact of such disasters on
both the public sector and private businesses, and
noting that 85% of the critical infrastructure is
controlled by the private sector, the 9/11 Commission
requested the American National Standards Institute
(“ANSI”) to develop a consensus on a national
preparedness standard for the private sector. The 9/11
Commission’s initiative resulted in the adoption of a
voluntary National Preparedness Standard on
Disaster/Emergency Management and Business
Continuity Programs (“NFPA 1600”), which was also
endorsed by the Department of Homeland Security
(“DHS”). Additionally, Congress recently embraced
the NFPA 1600 in the Intelligence Reform and
Terrorism Prevention Act of 2004, stating that, “It is
the sense of Congress that the Secretary of Homeland
Security should promote, where appropriate, the
adoption of voluntary preparedness standards such as
the private sector preparedness standard developed by
the American National Standards Institute and based
on the National Fire Protection Association 1600
Standard on Disaster/Emergency Management and
Business Continuity Programs.” Although the NFPA
1600 cannot guarantee that losses will not arise from a
disaster, it is hoped that compliance with the National
Preparedness Standard could help reduce the impact of
any such occurrence. Although many businesses
already have in place viable disaster preparedness
plans, for those that do not, the NFPA 1600 provides
certain standards that could help minimize the
potentially devastating economic impact of a single
disaster on any business enterprise.
While endorsing the NFPA 1600, the Department of
Homeland Security recognized that it is impossible to
prevent disasters altogether. Accordingly, among the
preparedness measures it lists on its disaster website
for businesses are guidelines for obtaining appropriate
insurance coverage. http://www.ready.gov/business/
index.html. An essential aspect of disaster
preparedness for the private sector is the availability of
adequate insurance funds. Year after year businesses
expend millions of dollars for first-party property
insurance policies, which often include coverage for
business interruption in addition to property damage.
While the insurance industry has not yet stated its
position on the Standard’s impact for policyholders,
compliance with the NFPA 1600 could help establish
the policyholders’ good faith efforts to mitigate the
impact of a disaster should an event occur that triggers
coverage, and could also result in decreased insurance
premiums.
I. THE NATIONAL PREPAREDNESS STANDARD
(NFPA 1600)
NFPA 1600 provides broad-based, generally
applicable guidelines designed to address a wide array
of natural and man-made disasters including floods,
tornadoes, hurricanes, and disasters from a biological,
chemical, nuclear, or radiological attack. The standard
specifically notes that the list is only illustrative, and
is not limited to the specific hazards identified. It
addresses activities all organizations should undertake
in the private sector to prepare for, mitigate damages
from, respond to and recover from emergencies and
disasters.
The Standard is universally applicable to all
industries, and includes three main program elements:
(1) a plan of evacuation; (2) adequate
communications capability; and (3) a business
continuity plan. For example, it suggests that
organizations have a data backup system, which
would facilitate the expeditious re-emergence of a
business in the event of an actual disaster. However, in
line with the goal of being generally applicable to all
businesses, the standard does not expound upon what
such a back-up system should entail. While guided by
the general preparedness principles, businesses will
ultimately develop and implement a plan of
preparedness to fit their particular business
characteristics, taking into consideration the specific
nature of the industry, the relative costs, practicality,
and the need for such measures. In addition to
decreasing the potentially severe negative economic
impact a single disaster could have on any business,
compliance with the Standard could have several
benefits from an insurance coverage perspective.
II. INSURANCE COVERAGE
First-party property insurance policies protect against
losses to the policyholder’s physical assets, and often
include business interruption and related types of
coverage. Business interruption provisions provide
coverage for an entity’s loss of earnings or revenue
resulting from property damage caused by an insured
peril, including disasters. First-party property
insurance policies may also provide: coverage for
extra expenses incurred in connection with an insured
event, civil authority coverage for losses arising from
governmental orders interfering with normal business
operations, ingress/egress coverage for access to a
2 JULY 2005
blocked business premises, service interruption
coverage for electricity/power supply interruptions,
and claim preparation coverage for costs associated
with presenting a claim.
After 9/11, it was nearly impossible to obtain
insurance policies that provided coverage for damage
or loss arising from acts of terrorism. In response,
Congress enacted the Terrorism Risk Insurance Act
(“TRIA”), which facilitated the issuance of such
policies by placing ceilings on insurer liability and
providing for government-subsidized reimbursements
for insurance companies. TRIA temporarily instilled
some degree of confidence in the private sector.
However, with TRIA scheduled to lapse at the end of
the year and significant congressional opposition to
its renewal, there is much concern in the private sector
regarding whether businesses will be able to obtain
the coverage they need going forward.
The fear is that if TRIA lapses without any
replacement, or at least guidance for the industry,
insurance companies will refuse to sell policies
covering losses arising from terrorist acts. After 9/11,
and before the enactment of TRIA, terrorism
exclusions were prevalent. In addition to providing for
an expansive definition of terrorism, the terrorism
exclusion filed by the Insurance Services Office after
9/11 stated that, “We [insurance companies] will not
pay for loss or damage caused directly or indirectly by
terrorism, including action in hindering or defending
against an actual or expected incident of terrorism.
Such loss or damage is excluded regardless of any
other cause or event that contributes concurrently or
in any sequence to the loss….” Insurance companies
could similarly attempt to introduce exclusionary
language for any risk that might be especially
pertinent to a particular business. For example, in the
future, insurance companies might seek to exclude or
restrict coverage for property damage arising from a
variety of disaster scenarios, including loss resulting
from events such as the recent Indian Ocean tsunami
or Hurricane Dennis. Compliance with the NFPA 1600
could provide businesses with some basis to present
themselves to insurers as a more desirable risk. In
addition, compliance could help illustrate a
policyholder’s good faith attempt to mitigate any
damages in the unfortunate event that such coverage
is triggered.
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
Most importantly, compliance with the NFPA 1600
has the potential to result in lower premiums. The 9/11
Commission has encouraged insurance companies
and credit rating agencies to look closely at whether a
company has complied with the Standard when
assessing the insurability and creditworthiness of a
company. In recognition of the important need for
private sector disaster preparedness and incentives to
support it, the Department of Homeland Security
recently funded the International Center for Enterprise
Preparedness (“INTERCEP”), the world’s first
academic center dedicated to private sector crisis
management and business continuity, at New York
University. INTERCEP defines one of its primary
goals as “identifying and communicating key
elements of emergency management and business
continuity through existent and emerging best
practices and guidelines, especially as embodied in
the Voluntary Emergency Preparedness Standard
(NFPA 1600).” INTERCEP has been working with the
insurance industry and others to facilitate the
development of new incentives for private sector
preparedness, including among others, insurance
benefits.
ability of a business to obtain coverage for terrorist
acts, increase the chance that claims made will
actually be covered, and result in lower premiums for
policyholders. Although compliance with the
Standard does not guarantee coverage for terrorist acts
or lower premiums, businesses that comply with the
NFPA 1600 may be in a better position to survive the
severe impact of a disaster.
Kirkpatrick & Lockhart Nicholson Graham’s Insurance
Coverage and Homeland Security practice groups
provide clients with interdisciplinary advice regarding
compliance with the recently promulgated voluntary
National Preparedness Standards and disaster
coverage. Should you have any questions regarding
the preparedness standard or disaster coverage, please
do not hesitate to contact us.
John A. Azzarello
jazzarello@klng.com
973.848.4126
Donald W. Kiel
dkiel@klng.com
973.848.4064
CONCLUSION
In light of the looming expiration of TRIA, and
congressional opposition to its renewal, businesses
should consider compliance with the voluntary
National Preparedness Standard. In addition to
decreasing the potentially severe negative impact a
single disaster could have on any business,
compliance with the Standard could enhance the
3 JULY 2005
Anthony P. La Rocco
arocco@klng.com
973.848.4014
Faisal M. Zubairi
fzubairi@klng.com
973.848.4091
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
If you have questions or would like more information about K&LNG’s Insurance Coverage Practice,
please contact one of our lawyers listed below:
International Contact
Boston
Dallas
Harrisburg
London
Los Angeles
Miami
Newark
New York
Pittsburgh
San Francisco
Washington
Peter J. Kalis
John M. Edwards
Robert Everett Wolin
Carleton O. Strouss
John Magnin
David P. Schack
Daniel A. Casey
Anthony P. La Rocco
Peter J. Kalis
James R. Segerdahl
Edward P. Sangster
Matthew L. Jacobs
pkalis@klng.com
jedwards@klng.com
rwolin@klng.com
cstrouss@klng.com
jmagnin@klng.com
dschack@klng.com
dcasey@klng.com
alarocco@klng.com
pkalis@klng.com
jsegerdahl@klng.com
esangster@klng.com
mjacobs@klng.com
+1.412.355.6562
+1.617.261.3123
+1.214.939.4909
+1.717.231.4503
+44 (0) 20 7648 8168
+1.310.552.5061
+1.305.539.3324
+1.973.848.4014
+1.212.536.4828
+1.412.355.6784
+1.415.249.1028
+1.202.778.9393
Fax
Fax
Fax
Fax
Fax
Fax
Fax
Fax
Fax
Fax
Fax
Fax
+1.412.355.6501
+1.617.261.3175
+1.214.939.4949
+1.717.231.4501
+44 (0) 20 7648 9001
+1.310.552.5001
+1.305.358.7095
+1.973.848.4001
+1.212.536.3901
+1.412.355.6501
+1.415.249.1001
+1.202.778.9100
If you have questions or would like more information about K&LNG’s Homeland Security Practice,
please contact one of our lawyers listed below:
International Contact Robert J. Sherry
Boston
James P. O’Hare
Los Angeles
David P. Schack
Newark
John A. Azzarello
New York
Peter J. Kalis
Washington
Jeffrey B. Ritter
rsherry@klng.com
johare@klng.com
dschack@klng.com
jazzarello@klng.com
pkalis@klng.com
jritter@klng.com
+1.214.939.4945
+1.617.261.3219
+1.310.552.5061
+1.973.848.4126
+1.212.536.4828
+1.202.778.9396
Fax
Fax
Fax
Fax
Fax
Fax
+1.214.939.4949
+1.617.261.3175
+1.310.552.5001
+1.973.848.4001
+1.212.536.3901
+1.202.778.9100
www
w.. k l n g . c o m
BOSTON DALLAS HARRISBURG LONDON LOS ANGELES MIAMI NEWARK NEW YORK PALO ALTO PITTSBURGH SAN FRANCISCO WASHINGTON
■
■
■
■
■
■
■
■
■
■
■
Kirkpatrick & Lockhart Nicholson Graham LLP (K&LNG) has approximately 950 lawyers and represents entrepreneurs, growth and middle market
companies, capital markets participants, and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally.
K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware, U.S.A.
and practicing from offices in Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Palo Alto, Pittsburgh, San Francisco and Washington and
one incorporated in England practicing from the London office.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied
upon in regard to any particular facts or circumstances without first consulting a lawyer.
Data Protection Act 1988 - We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our
regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please e-mail cgregory@klng.com if you would
prefer not to receive this information.
© 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.