Insurance Coverage for Hurricane Victims (or any Weather Related Disaster)

Your property casualty policies should indemnify you for your property losses – and possibly even the loss in business revenue.  Your carrier won’t tell you, but your property policy likely comes with a business interruption (“BI”) rider that may indemnify you for lost practice income.  We say “may” because most BI insurance requires not just that you had a business interruption, but that the interruption was the result of physical damage to property.  Review your policy with your agent.  It may not be quite so restrictive.  For example, you may not have suffered physical damage, but you had a business interruption because you lost electricity or were under a city evacuation order.  The policy may reimburse your lost business revenue.

If you do not qualify for BI coverage, but you experienced a slowdown because a supplier or lab was affected by the hurricane, then you may be eligible for reimbursement of lost revenue under the policy’s “contingent” BI insurance provision.

Some readers may also be eligible for “extra expense” insurance coverage.  This will reimburse you for the costs in excess of normal operating expenses, such as additional office rent (if moving to a temporary new location), the relocation expenses, paying staff overtime, etc.

Finally, know the requirements for submitting a claim.  The details depend on the policy, but in general, the claim must be submitted as soon as practicable, and a proof of loss must be submitted within 60-90 days of the loss.  You should engage your CPA’s help to complete any forms and determine your estimated loss of income.  The CPA fees you incur may be reimbursable as well, so don’t forget to request this.

Casualty Losses:  A casualty loss is a loss in value resulting from a sudden, unexpected (i.e., not gradual) event that is not reimbursed by insurance.  Technically, the size of the deduction equals the decline in the value of the property (or your adjusted basis if it is less than the decline).  So, you will need to know the value of the property both before and after the hurricane and your adjusted basis.  The cost of repairs may be a good indicator of the loss in value, but it may be too high or too low.  It will be too low if you choose not to repair or replace certain things.

Also, the law now requires that if the property is covered by insurance, you must first submit an insurance claim.  Why might you not?  The deductible may be too high, or perhaps too many claims could result in cancellation of a policy.  If you voluntarily forego filing a claim, you cannot deduct a casualty loss.

Standard homeowner policies do not cover flooding.  If you live in a high risk flood area and buy or build a home with federal assistance (i.e., an FHA mortgage), you must buy a separate flood insurance policy from the U.S. government (see www.floodsmart.gov).  In Florida, there are 1.7M such policies.  But, this covers only 19% of homes in the state, so many homeowners will be uninsured for their flood damage.  By claiming a casualty loss, they can at least recover part of their losses through tax deductions.

The casualty loss rules are harsher for residential versus business property.  The loss on business property is fully deductible.  The loss on residential property is subject to two limitations.  First, the loss arising from each casualty is reduced by $100.  Second (and much more painful), all casualty losses are then subject to a 10% of AGI limitation.  In areas that qualify as federal disaster areas, you can elect to claim your casualty loss on your 2017 return or your 2016 return and not wait until next year’s filing.  You would file an amended 2016 return and claim an immediate tax refund.  This makes sense either for people who need the money, or for those who were in a higher bracket last year.