Business Interruption—What Does “Suspension” Mean?
November 2002
Doug Berry examines the conflicting court
opinions regarding the meaning of "suspension" when a claim for business interruption
based on a partial closing is denied.
by Doug
Berry
Butler Pappas
When physical damage occurs to property insured under a commercial property
insurance policy providing business interruption coverage, the question often
arises, “must the suspension due to the physical damage be total, or will a
partial suspension suffice to trigger coverage for the lost income?” A commonly
encountered form provides:
We will pay for the actual loss of Business Income you sustain due to
the necessary suspension of your “operations”
during the period of restoration. The suspension must be caused by direct physical loss of or damage to property … described
in the Declarations and for which a Business Income Limit of Insurance is
shown in the Declarations. [CP 00 30 06 95 (emphasis added)]
Commonly, dictionaries define “suspension” as temporary stoppage. For example, Black’s Law Dictionary (7th ed. 1999),
defines “suspension” as “the act of temporarily delaying, interrupting, or terminating
something.” Thus, a literal reading would require that the insured’s business
operations cease completely.
Such a literal interpretation does not fulfill the intent of business interruption
insurance according to Robert M. Morrison, Alan G. Miller, and Stephen J. Paris
as discussed in their book, Business Interruption
Insurance: Its Theory and Practice (1987). They believe:
A more reasonable interpretation would be to include in the meaning of
“suspension” the inability of any part of the described property to carry
on the function to which it had been dedicated by the Insured. Such an interpretation
would consider the shutting down of a single department in a department
store as a suspension under the terms of the contract. [p. 331]
Some courts have, indeed, accepted the premise that the suspension need not
be total or complete. For example, in American Medical
Imaging Corp. v St. Paul Fire & Marine Ins. Co., 949 F2d 690 (3rd Cir
1991), smoke and water damage from a fire at the insured’s headquarters caused
the insured’s scheduling, marketing, billing, and clerical functions to be disrupted
until an alternative site was opened the following afternoon. It was 6 weeks,
however, before the insured could reoccupy its damaged building.
The court held that a partial suspension activated coverage under the business
interruption coverage because, to hold otherwise, would conflict with the insured’s
duty to mitigate its damages. Further, the fact that the policy provided business
interruption coverage would continue until the resumption of “normal business
operations” implied coverage for less than “normal” operations. See also Accord, Datalab, Inc. v St. Paul Fire & Marine Ins.
Co., 347 F Supp 36 (SD NY 1972); Maher v Continental
Cas. Co., 76 F3d 535, n 1 (4th Cir 1996).
Another federal court, however, has stated that under “the vast majority
of cases,” business interruption insurance “does not provide coverage for a
slowdown or reduction in operations, rather it requires a ‘necessary suspension’
of operations.” Since the insured’s operations continued throughout the period
that computer difficulties existed, “albeit at a reduced level of efficiency,”
there was no coverage. See also Home Indemnity Co. v
Hyplains Beef, 893 F Supp 987, 991-2 (D Kan 1995), aff’d, 89 F3d 850
(10th Cir 1996).
Two such decisions dealt with reduced occupancy in motels following a loss.
In Ketch v Mutual of Enumclaw Ins. Co., 831 P2d
784 (Wash App 1992), volcanic ash from the eruption of Mount St. Helens buried
the insured motel to a depth of six inches but the motel remained open. Even
after the initial covering of ash was cleaned up, wind continued to blow ash
onto and into the motel premises for many months. The court, however, noted
that the same number of rooms were available after the loss as were available
before the loss and reversed the trial court’s finding of coverage for lost
business income. Similarly, in Hotel Properties, Ltd.
v Heritage Ins. Co. of America, 456 S2d 1249 (Fla 3rd DCA 1984), reduced
occupancy of motel rooms following a fire which closed an adjoining restaurant
was not covered.
Other decisions requiring a complete cessation of operations include Howard Stores Corp. v Foremost Ins. Co., 82 AD2d
398, 401 (NY App 1981) (no business interruption where “no actual suspension
of business operations, but rather an alleged adverse effect of continuing sales”); Royal Indemnity Ins. Co. v Mikob Properties, Inc.,
940 F Supp 155, 160 (SD Tex 1996) (“if the insured premises are still operating,
the business interruption clause does not cover a decrease in income”); Quality Oilfield Products, Inc. v Michigan Mutual Ins.
Co., 971 SW2d 635 (Tex App 1998) (the term “interruption of business”
was not ambiguous). See also “Business Interruption Insurance,” 37 ALR5th 41,
at § 2b (2001) (“there can be no recovery under a business interruption policy
where the covered peril merely causes the volume of the insured’s business to
diminish, rather than [causing] an actual business suspension”).
Thus, while some authority exists for the proposition that a partial shut
down of operations is sufficient to trigger coverage, the greater weight of
authority would suggest the contrary. When confronted with a claim for business
interruption based upon a partial closing, one should consult the policy language,
consult the case law in the jurisdiction, and examine the facts of the loss.
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