Business Interruption Coverage – A Quick Refresher
Dec 6, 2001
As the dust settles at the World Trade Center, businesses are picking up the pieces and trying to follow President Bush's admonition to get back to normal, get back to work. This might well be the battle cry of the insurance industry, which is faced with the potential for hundreds, if not thousands, of business interruption claims from companies both near the disaster area and those across the country. Insurers will have to decide whether to pay business interruption claims, which will range from claims made by small businesses surrounding the World Trade Center that had to close temporarily, to larger companies such as Federal Express, American Airlines, and United Airlines, that lost millions of dollars when planes were grounded. Just as the number of claims from the World Trade Center becomes finite, a new group of business interruption claims based on anthrax exposure, or perceived exposure, is developing.
Issues likely to arise in evaluating these claims include documentation of losses, disputes over cash value versus replacement value, filing of claims in a timely fashion and whether policies cover "any" disaster or only enumerated perils. Many insurers, including AIG, Chubb Corp., Ace, Ltd., and the Hartford Financial Services Group, have already given assurances that they will not rely on the acts-of-war exclusion to avoid paying claims arising from the terrorist acts on the World Trade Center; however, no similar assurances have been made with regard to the anthrax cases. With this in mind, a quick review of the elements and damages relating to business interruption insurance is in order. Business interruption insurance may be purchased as a separate policy or as an endorsement to a property policy. The coverage is designed to protect the earnings which the insured business would have enjoyed had there been no interruption of the business. There is typically coverage for loss of actual earnings, payroll, rent, utility bills, taxes, and sometimes even insurance premiums.
For the claim to be viable, the standard ISO policy language usually requires a "necessary suspension" of the insured's operations. Unfortunately, "necessary suspension" is an undefined term in the policy. The majority of cases construing such policy language hold that a mere work slowdown or decrease in business volume will not satisfy the "suspension" requirement. Rather, a total cessation is required. See, e.g., Quality Oilfield Products, Inc. v. Michigan Mut. Ins. Co., 971 S.W.2d 635, 638 (Tex. App. — Houston [14th Dist.] 1998, no writ)(reduction in insured's operational capacity after a theft did not qualify as a cessation or suspension of the business); Ramada Inn Ramogreen, Inc. v. Travelers Indemnity Co. of Am., 835 F.2d 812 (11th Cir. 1988) (hotel's decrease in room occupancy due to fire loss of its restaurant did not qualify as a "necessary interruption" of the insured's business). There are cases, however, finding coverage for reduced business volume under slightly different policy language. In American Medical Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F.2d 690 (3d Cir. 1991), the insured experienced a brief cessation of its business operations following a fire, followed by a period of reduced business volume while it operated at a temporary facility. The court found that such facts fell within the insuring agreement for loss of earnings resulting from the "necessary or potential suspension" of operations. Id. at 693.
Another important requirement for coverage is "direct physical loss" to covered property. Most cases equate "direct physical loss" to some type of physical damage to the property. In situations involving documented anthrax contamination of business premises, there may be an issue whether a "direct physical loss" has occurred. However, one would be hard-pressed to argue that any physical damage occurs where a building is simply evacuated due to a bioterrorism hoax.
Even without a direct physical loss, there may be coverage for a forced closure. The ISO form provides limited coverage for loss of business income caused by the action of a civil authority that prohibits access to the insured premises due to direct physical loss or damage to property other than the actual premises itself. Damages recoverable may include lost business income, often expressed in terms of lost profits or gross earnings less non-continuing expense. While lost income is typically proven through sales and production records, market trends may also be considered in light of the recent economic downturn. A company that was not profitable at the time of the attack might receive no compensation whatsoever for lost business income on the theory that the providing coverage would amount to betterment. Continental Ins. Co. v. DNE Corp., 834 S.W.2d 930, 934 (Tenn. 1992).
Policies typically limit recovery to the actual loss for the period of time it would take to repair or replace the building in which the business is conducted, or if no physical damage is present, the length of the required and necessary closure of the business. The covered time period would also include delays attributable to the insurer's failure to perform its duties under the policy. Insureds also have duties, including providing prompt notice of how and where the damage occurred. The insured must take reasonable steps to protect the property from further damage and allow examination of physically damaged property. Businesses typically must also permit the insurer access to financial books and records. If the records have been destroyed, a reasonable reconstruction should be provided. If the insured intends to go forward with the business, it must resume all of its other operations as quickly as possible.