Following a commercial property loss, insureds, brokers, and insurers are
often confused by the extent to which business interruption insurance will respond
to their loss. Generally, there are three types of business interruption insurance
- "Business interruption" insurance is intended to compensate the insured
for the income lost during the period of restoration or the time necessary
to repair or restore the physical damage to the covered property.
- "Extended business interruption" provides coverage, typically limited
by a period of time, for the income lost after the property is repaired
but before the income returns to its pre-loss level.
- "Contingent business interruption" provides coverage for the insured's
loss of income resulting from physical damage, not to its property, but
to the property of providers or suppliers on the one hand or consumers of
its product or services on the other.
The latter two coverages are typically offered as extensions of the business
interruption coverage, subject to additional premium for each.
The principles governing adjustment and, if necessary, adjudication of a
business interruption loss are scattered among numerous decisions by a variety
of courts around the country. The decision of Dictiomatic
v USF&G, 958 F Supp 594 (SD Fla
1997), however, brought together virtually all of the principles applicable
to such claims and provides a concise primer on these principles.
In Dictiomatic, the insured had experienced
some degree of success manufacturing and marketing two generations of hand-held
electronic translators that cross-translated up to six languages. Unlike the
first two versions, its third generation translator was to be a talking translator
and, also unlike the earlier versions, was not a technical success. The sound
quality of the speaker was poor, and its pronunciation was not clearly discernable.
In addition, its vocabulary capacity, 2,700 words, was insufficient for educational
purposes. Potential distributors were not happy with it, and by mid-1992, Dictiomatic
had approximately 17,000 units stored in a warehouse in Singapore. However,
Dictiomatic had prepared an aggressive marketing plan to be implemented in the
later half of 1992 in order to move its product.
As of August 23, 1992, Dictiomatic:
was a company in debt with de minimus business income, with an overstocked inventory of undesirable products located
in Singapore, attempting to posture to sell these products through a speculative
marketing scheme that had never proven to be successful selling electronic
products. [958 F Supp at 598.]
On August 24, 1992, Hurricane Andrew damaged the office complex in South
Miami where Dictiomatic maintained its office. Dictiomatic was denied access
to its fourth-floor office, including its phones, fax machine, and a computer,
from August 24 to September 2. The firm was "up and running" on September 14.
None of the manufacturing, inventory, etc., was affected as these were all located
In October 1992 Dictiomatic submitted a written claim to USF&G for $1,360,747
for alleged business interruption and continuing expenses incurred from August
1992 through December 31, 1992. Later, it supplemented its claim to seek alleged
loss of business income through June 1993 when it went out of business.
In dismissing the case following 2 weeks of trial, in response to motion
by USF&G, the court stated:
Dictiomatic is only entitled to recover its actual loss of business income
during the period of time necessary to restore the business operation....
Therefore, Dictiomatic is only entitled to its loss of business income for
the period of time beginning on the date of the occurrence of the physical
damage to its property (August 24, 1992) and ending on the date when the
business was back in operation (no later than September 14, 1992).
[However, if it could show a loss, the policy provided coverage for extended
business interruption for up to 30 days following the loss.]
* * *
To recover under the business interruption policy in this case, Dictiomatic
must prove that it sustained damage to property that is covered under the
policy and that the damage was caused by a covered cause of loss, that there
was an interruption to the business ("suspension of operations") which was
caused by the property damage, and that there was an actual loss of business
income during the period of time necessary to restore the business and that
the loss of income was caused by the interruption of the business and not
by some other factor or factors.
* * *
If Dictiomatic either did not suffer a loss of business income during
the period of interruption or if the loss was due to some other reason other
than the interruption, USF&G is not liable for business interruption proceeds
under the insurance policy because its duty to pay never arose.
* * *
It is Dictiomatic's burden to prove Dictiomatic's entitlement to business
interruption insurance proceeds under the policy and the amount of such
entitlement.... Dictiomatic can recover only to the extent that it actually
lost sales or business during the periods when the business premises and
business property were not functioning.
* * *
Business interruption insurance is intended to return to the insured's
business the amount of profit it would have earned had there been no interruption
of the business.
* * *
Business interruption insurance may not be used to put Dictiomatic in
a better position than it would have occupied without the interruption.
* * *
Because Dictiomatic's business interruption insurance claim is speculative,
Dictiomatic cannot recover business interruption proceeds under the insurance
policy.... The general rule [in Florida] is that the anticipated profits
of a business are too speculative and dependent upon changing circumstances
to warrant a judgment for their loss.... [A] satisfactory analysis of lost
profits cannot use figures which result in too many variables.
* * *
Analysis of lost profits must be based on sufficiently similar business
operations and comparable markets.... In order to recover lost profits,
there must be an ongoing business with an established sales record and proven
ability to realize profits at the established rate.... Proof of actual profits
for a reasonable time prior to the breach is required to establish lost
profits. [958 F Supp at 602-4 (The numerous citations of authority supporting
these statements have been omitted.)]
In light of all of the foregoing, the court concluded:
USF&G's duty to pay Dictiomatic's business interruption claim never arose
because Dictiomatic never established the amount of such claim with credible,
reliable or consistent testimony or documentation.
Subsequently, the court also awarded USF&G its attorney fees and costs as
a sanction against both the insured and its attorneys, jointly and severally,
for bringing and persisting in seeking to litigate this action.
These principles of business interruption insurance will ground the adjustment
of any business interruption loss and will be well known to the insurer, its
accountants, and its attorneys. Obviously, in addition to a working familiarity
with these points on the part of the insured, the assistance of an accountant
conversant with these principles is essential for proper assembly and presentation
of such a claim.