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.
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.
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.
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.
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 email 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.
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. Expert Commentary articles and other IRMI Online content do 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.