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Mary Gallagher, manager of risk and insurance for the Southern California healthcare provider ScrippsHealth, talked quickly as politely possible. She must have been doing six other things while on the phone. Yet she was able to get her story across, her company's experiences in the harrowing week of the October California wildfires.

Gallagher knocked on wood. "Overall, we've been very lucky."

None of the company's five hospital campuses had to be evacuated; two had been on standby.

More than 3,000 of its 11,000 employees, meanwhile, had been subject to forced evacuation, and were at the time living still in shelters or hotel rooms (provided by the company).

All of this must have created at least distraction, if not outright interruption, in the healthcare provider's operations. Gallagher did say that, for the clinics closed, the company does have civil authority triggers for business-interruption coverage, as well as ingress/egress if needed. "And we're looking at those now," she said.

Ingress/Egress is another provision to trigger business interruption, whereby traffic to a company's site or store is either entirely prohibited or impaired.

Another call, placed to fast-food restaurant Jack in the Box's risk manager on Thursday, Oct. 25, got no farther than a recorded message on the corporation's main line saying that the corporate support and innovation centers were closed through Monday, Oct. 29. (A subsequent call made it through to a person but was not returned.)

David Dolnick, risk manager for construction firm Brady Cos., reported that all his construction sites were shut down from Monday the 22nd through Wednesday. But at the moment (Thursday, Nov. 2), he didn't foresee filing a business-interruption claim (though he could). The time could be made up, he said, and site owners and other contractors were also affected by the same fires.

These three instances of San Diego businesses provide telling examples of what sort of commercial claims could be coming out of the wildfires, according to claims experts. Not direct property damage, in other words.

Sure, on the residential side, the event was a heartbreaking tribulation for many. The fires razed 1,575 residences, charred at least 480,000 acres and killed 7 people, according to the news reports.

At first glace from a commercial loss standpoint, however, the fires appear to be not all that atypical.

Both modelers AIR Worldwide Corp. and Risk Management Solutions Inc. agree that historically about 5 percent or less of total insurance loss in wildfires is commercial. And that seems to be the case with this one--commercial losses look to be about 2 percent to 5 percent of total losses, according to Tomas Girnius, an AIR research scientist.

In such typical wildfires, business interruption does not play a large role in commercial losses. "Historically, it is a very low percentage as well," said Girnius.

And the modelers foresee the same small part for business interruption in these fires. Albeit, this assumption was formed less than a week out after the fires, and the modelers, as modelers do, will continue to assess the situation.

"We're thinking about the aspects of whether or not there might be a larger role," said Don Windeler, director of model management at RMS.

Listen to claims pros, other insurance experts and businesses in the area, just one week out, and they'll tell you they already are thinking that business interruption could be one of the biggest commercial claims generators out of the October 2007 blazes.

Typically, direct property damage triggers business-interruption coverage. In the case of these fires, though, the civil authority clause in policies could be the trigger because of the mandatory evacuations called by government officials that moved 500,000 people out of their neighborhoods around San Diego alone.

"Business-interruption coverage doesn't change, it's just the trigger that changes," said Gary Brown, senior vice president of McLarens Young International.

Brown foresees possibly some of the biggest business interruption hits taken by the hospitality industry, whose conference, events and guests' plans must have been cancelled amidst all heat, smoke and soot.

Such civil authority clauses are part of most commercial insureds' property policies.

"Generally, we've got it," said Randy Wallace, field property line manager for the catastrophe response team for the Western region for Travelers, which is third in marketshare for commercial cover in the state, according to A.M. Best. "That's the one thing we're looking at closely," he said. "It's the biggest concern for our customers."

Wallace attributes this in part to the scale, both in geography and populations affected by the mandatory evacuations, as well as the duration of many of the evacuations. In California, there is a timeframe element to a civil authority trigger--typically 24 hours. In some parts of California, the evacuation order hadn't been lifted until trick or treating was about to commence. Wallace adds, nevertheless, that one cannot estimate the extent of BI from simply by looking at the numbers.

"I don't think there's a good measuring stick right now," he said.

One reason is that commercial property policies are not all the same. "There so many different versions of the wording out there," said Brown.

Another reason: some of these possible business-interruption claims might not actually turn out to be claims, after insurers and adjusters pull out their contracts, magnifying glasses and fine-tooth combs.

First and foremost, the peril behind the mandatory evacuation--in this case, the fire--must be covered against in the property policy. And another factor that could affect a business-interruption claim is that the business owner in many cases must have the actual notice--the piece of paper--from the public officials declaring the evacuation, said Brown.

Rich Lewis, partner at the New York office of law firm Anderson Kill & Olick, said that "one of the bigger issues" that could affect an insured's business-interruption claim could be that, typically, the civil authority clause requires the evacuation order to be issued on the basis of existing property damage.

In the case of these California fires, he said, carriers might argue that these orders in October were issued for fear of future property damage.

Insurers could also take the position of a "wider advantage of the loss," according to Lewis. Carriers argued this after Sept. 11, 2001, Lewis said, whereby some carriers told some insureds that no one at all could have gotten to their property or used their services even if the insured had been open. The scope of the disaster was just too large. So they did not lose income because there wasn't any to be made.

Again, every policy is different. But what is clear and near universal, from talking with Brown, Lewis and other experts, is that employers in California won't be able to collect on business interruption if they sent their employees home with their safety and families in mind--without that mandatory evacuation order affecting their area. Or, say, an employer wasn't located in an evacuation area but their employees were and, thus, they were unable to come to work because of it.

"Hard to see how there would be any coverage on that," said Lewis.

Contingent business interruption could also come into play for policyholders whose direct suppliers or customers were located in the wildfire area. Brown provided a hypothetical. A woolen yarn manufacturer in San Diego has their facility torched. Its customer, a sweater maker in Santa Fe, could take a loss because it isn't able to make its orders because it's no longer receiving yarn from its primary supplier.

But contingent-business-interruption policyholders might run into an interesting and frustrating twist if their direct customer or provider did not suffer direct physical damage from the fires but "merely" had to shut down because of the mandatory evacuation.

Contingent BI, said Lewis, is typically worded to be triggered by physical damage to that supplier or customer's property. There usually isn't a civil authorities trigger. So without property damage, he said, "you might just be out of luck."

And some people might be out in the cold without their sweaters.

Insurers Chubb and AIG, No. 9 and No. 1 in California commercial marketshare, respectively, according to Best figures, declined to talk about the nature of possible commercial property claims coming out of the fires.

MATTHEW BRODSKY is Web Editor/Senior Editor of Risk & Insurance®.

December 1, 2007

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