When Does Business Interruption Insurance Coverage Stop?
June 2008
Most commercial property insurance policies
provide for both property damage and time-element coverage. In return for the
premium, the insurer agrees to pay not only the cost to repair or replace covered
property damaged or destroyed by a covered peril, but also agrees to pay for
loss of business income for a period of time, usually from the date of the loss
until the time the property damage can be repaired with due diligence and dispatch.
by Jay M.
Levin
Reed Smith
Some policies also include extended business interruption coverage, which
provides indemnity for additional losses that may occur after the property damage
is repaired while the business is still regaining its customers. Depending on
the language of the particular policy, business interruption coverage can be
triggered by either a total suspension of operations or a partial suspension
of operations.
This article will address increasing attempts by insurers whose policies
provide business interruption coverage to terminate that coverage once a business
is back up and running, even if the property damage has not been repaired, and
the business has not achieved pre-loss income.
How Is Business Interruption Defined?
A typical business interruption policy provides that the insurer "will pay
the actual loss of business income the insured sustains during the necessary
suspension of its operations during the period of restoration." A typical definition
of "period of restoration" is the period of time that begins immediately after
the direct physical loss and ends on the earlier of the date when the property
should be repaired, rebuilt, or replaced with reasonable speed and similar quality,
or the date when business is resumed at a new permanent location.
The typical business interruption adjustment calculates the compensable loss
during the period of time from the date of loss until the property damage is,
or should be, repaired. In most cases, insurance companies understand that partial
operations may resume and do not terminate coverage simply because the insured
is able to resume business at some lesser level than what it had before the
loss. However, some insurers are now taking the position that, even if there
was a total suspension of operations for some period of time, the "suspension"
of operations to which coverage applies ends as soon as the insured is able
to reopen—no matter the level—thereby terminating coverage.
The Insured's Efforts To Mitigate Loss Terminate Coverage
One case where the insurer was successful in limiting the scope of the business
income (BI) coverage is Broad Street, L.L.C. v. Gulf
Ins. Co., 2006 WL 3593049 (N.Y.A.D. 1st Dept.). There, the policyholder
owned 25 Broad Street, which was located approximately three blocks from the
World Trade Center. The building was completely closed from September 11, 2001,
until September 18, 2001, at which point the tenants were permitted back into
their units.
During that week, the policyholder had the common areas and apartments cleaned
and the HVAC air filters replaced. The tenants claimed that they were entitled
to a significant reduction in rent because the building was not in the same
condition as before the 9/11 attacks, although they cited in support primarily
issues relating to changes in the surrounding area. The insured ultimately gave
the tenants significant rent concessions and sought to recover the money from
Gulf, which provided business income insurance.
Gulf argued that, because the insured's operations were not "suspended" after
September 18, 2001, no business income coverage was available. The court held
that business income coverage was available only when there was a total interruption
or cessation of operations. Because the policyholder was able to resume operations
on September 18, business interruption coverage was not available for any time
thereafter, even if operations were not up to the level they were before the
loss. The court held that the period of restoration was only as long as necessary
for plaintiff to resume operations, not, as set forth in the policy itself,
the period ending "on the date when the property at the described premises should
be repaired, rebuilt or replaced with a reasonable speed and similar quality."
The insured had pointed out that the policy provided for a credit to the
insurer whenever the insured is able to mitigate loss by resuming partial operations.
The insured argued that this proved that mere resumption of operations did not
terminate the coverage. Instead, coverage should continue through the end of
the period of restoration. The court rejected this argument, holding that coverage
is limited to the period during which there was a complete suspension of operations.
Broad Street was wrongly decided. The policy
specifically contemplated, as do most business interruption policies, that business
interruption coverage is available for the entire period of restoration, which
is tied to the time necessary to repair or replace the covered property which
suffers physical loss or damage as a result of a covered peril. As in
Broad Street, most policies specifically provide
that business interruption loss is reduced to the extent the insured is available
to resume operations in whole or in part. They do not provide that business
interruption terminates upon the resumption of partial operations.
The position advocated by Gulf makes no sense and discourages insureds from
resuming operations. This is because, under this insurance company position,
as soon as an insured resumes even a minimum level of business, its BI coverage
ceases. It also makes no sense because many businesses can resume partial operations,
but still suffer a very real loss of revenue as a result of covered damage.
An easily understood example is a catering business which suffers a fire
in the kitchen and hall portions of the building so that it can no longer host
events, but is able to resume kitchen operations a week after the fire. It has
resumed partial operations, i.e., off-site catering, but will still suffer a
revenue loss because it has lost the ability to rent its hall. To say that it
is not entitled to any business interruption coverage while the hall is being
repaired is simply wrong.
"Necessary Suspension" Includes Awaiting Equipment Repair
This same issue was raised very recently in federal court in Pennsylvania.
In iCue Corp. v. USF&G, Civil Action No. 07–1871
(E.D. Pa.), iCue was in the business of broadcasting mass e-mail and facsimile
business communications using highly specialized, proprietary computer equipment.
iCue would send communications only to recipients who consented in advance to
receiving them, as opposed to broadcasting spam. A covered power surge and ensuing
power outage struck iCue's offices, causing more than $200,000 in covered damage
to the computer equipment.
USF&G determined that the power outage lasted approximately 7 1/2 days. When
power was restored, iCue was able to limp along at a significantly reduced capacity
while waiting for USF&G to adjust and pay for the loss to the equipment. USF&G
ultimately paid for the physical loss or damage, but took the position that
BI coverage was available only for the 7 1/2 days power was out and that BI
coverage terminated as soon as iCue resumed any
operations.
The parties filed cross-motions for summary judgment on the meaning of "suspension"
of operations. The court granted iCue's motion and denied USF&G's motion in
a 3-page order. In the footnotes to the order, the court held that "necessary
suspension" should not be construed to require a total cessation of business
operations. Instead, the court held that the policyholder need show only a necessary
reduction of its operations. The court, therefore, granted summary judgment
that "necessary suspension" included the time when iCue was limping along while
awaiting repair and replacement of its equipment.
Conclusion
The lesson for risk managers is that some policies specifically provide coverage
for partial suspension of operations and, given positions being advocated by
at least some insurers, a risk manager would be well advised to try to obtain
coverage, including an express definition of "suspension" that covers both total
and partial cessation of operations. If the policy does not contain specific
coverage for partial suspensions, the risk manager should ask what position
the insurer will take in the event of a covered loss. If the insurer will take
the position that BI coverage terminates as soon as the insured resumes partial
operations, either an endorsement should be obtained or a new insurer sought.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.