The New Zealand Herald noted an example:

Louisa Cullen, of Beale and Cullen Dentists, said there had been pressure on her business to get up and running again before her insurance policy payments ran out. After the September [2010] earthquake, the business claimed a week of interruption insurance but realised that if it had been forced out of action for longer, it would not have been able to survive. The business' cover was increased three-fold before the February earthquake, which Cullen said enabled it to retain all its staff while its doors were shut for 10 months. Cullen had to find new premises for her business and said she was conscious of the February deadline.

"The builder's timeline initially had it finished in February but we said it had to be done before Christmas, come hell or high water," Cullen said.

The dentists are now operating again and the government is providing marketing assistance to rebuild its customer base, but not all Canterbury businesses have been as successful.

Canterbury’s Governor, Alan Bollard, addressed the Canterbury Board of Employers on the issue of delays recently and stated, “[w]ith the risk of ongoing damage from aftershocks and still high levels of uncertainty, insurers are not currently increasing their overall exposure to Canterbury and some insurance holders are having difficulties getting cover for new risks or increased limits”

A spokesperson for Vero Insurance stated that the company had paid out over NZ $800 million across their group towards claims in Christchurch, Canterbury, but the reality is that, unlike the dentists, many businesses did not have adequate insurance. The earthquake killed 181 people, and it has been estimated to be the world’s third costliest earthquake ($20 billion dollars).

Brett Solvander, of the Insurance Council of New Zealand, said the quake highlighted the fact that a lot of businesses did not have adequate insurance.

We know, anecdotally, that some small- to medium-sized businesses did not have sufficient business cover when the first earthquake happened in September 2010 ... The big February 2011 earthquake compounded the issue.

Notwithstanding the panoply of pressures, Christchurch policyholders should not cave to the insurance and reinsurance market. In fact, the U.S. has had numerous experiences with catastrophic claims handling and, under similar contruactual agreements, policyholders have been successful in extending the period of restoration beyond the theoretical period of coverage, which is calculated by insurers and rarely considers real world circumstances like aftershock delays. Christchurch policyholders can also benefit from the newest business interruption claims handling trends, where some courts have agreed that post-loss market conditions (i.e., recessions and downturns) should benefit policyholders. For a brief outlook on these issues, readers can follow this blog at Can "Real World Circumstances" Be Considered To Establish a Theoretical Period of Restoration? - Understanding Business Interruption Claims, Part 26 and To Consider the Economy, or Not To? 'That is the Question' -- Understanding Business Interruption Claims, Part 9.

The insurer tendered policy proceeds to repair the damage caused by the fire to the common areas and the Elkins’ units. QBE declined payment for the Elkins’ loss of rental income after the fire, asserting that the Elkins’ were not “named insureds” under the policy and that the contract did not cover loss of rent or income for individual unit owners.

The Elkins argued that the rental loss provision was not limited to “named insureds” under the policy and that it afforded coverage for “loss of community income,” which encompassed loss of rents by individual unit owners.

The Declarations Page provided that the Named Insured was “Harbour Commons, A Condominium” and there were no other additional insureds listed on the declarations page. The coverage provision at issue stated:

II. PROPERTY CONSEQUENTIAL COVERAGES SECTION

Unless specified otherwise, coverages apply as a
consequence of direct physical loss or damage to
"covered property" caused by or resulting from a
COVERED CAUSE OF LOSS for which a limit of
insurance is shown for such "covered property" in the
"Declarations." The coverages in this section are only
provided when limits of insurance are shown in the
"Declarations."

B. COMMUNITY INCOME

We will pay for the loss of community income,
including loss of rent or loss of lease payments,
due to the suspension of your operations during
the "period of restoration." Community income
does not include maintenance fees and
assessments.

The United States District Court found that:

The State of Washington requires condominium associations to maintain certain insurance coverage for condominiums. RCW 64.34.352 states that a condominium association shall maintain, to the extent reasonably available:

(a) Property insurance on the condominium, which may, but need not, include equipment, improvements, and betterments in a unit installed by the declarant or the unit owners, insuring against all risks of direct physical loss commonly insured
against. * * *

(b) Liability insurance, including medical payments insurance, in an amount determined by the board of directors….

The statute further provides that each unit owner is an insured person under the policy with respect to liability arising out of the owner’s interest in the common elements of the association. RCW 64.34.352(3)(a). There is no statutory requirement that an association provide coverage for the personal interests of unit owners. In fact, RCW 64.34.352(5) provides that a unit owner is entitled to obtain insurance for the owner’s own benefit.”

The Harbour Commons Condominium Association’s bylaws filed with the Washington Secretary of State required the association to maintain property insurance on the common areas and units of the condominium. The Elkins argued that under this obligation and the policy in question, their loss of rents should be considered “community income.”

The Court disagreed with the Elkins and granted summary judgment in favor of the insurer:

The term “community property” as defined in the Property Direct Coverages Section is confined to property that is owned or controlled by the named insured. The provisions providing coverage for “Community Personal Property” limit coverage to the named insured (i.e. indoor and outdoor furnishings, appliances, machinery, temporary structures, etc). Dkt. 14-4 pp. 5-6. The provisions for coverage for “Special Community Property” are limited to items that might be considered part of common areas (i.e. structural glass, bridges, docks, retaining wall, satellite dishes, newly constructed buildings), or items specifically owned by the Asscociation (i.e. money, securities, computer and media equipment, papers, receivables, records, etc.) Dkt. 14-4 pp. Thus, other than the mandate to cover the repair of the units of the condominium, other direct coverages applicable to the community property are confined to the named insured.

The same is true under the Property Consequential Coverages Section. The coverage of maintenance fees and assessments, accounts receivable expenses, and extra expenses incurred to continue normal operations during restoration, are all limited to the named insured. Dkt. 14-4 pp. 8. Even more telling is the provision entitled “Increased Period of Restoration Coverage.0020Dkt. 14-4 pp. 9. This provision provides for an extension of coverage for loss of “community income,” including loss of rent, “to include the amount of actual and necessary loss you sustain during the increased period of restoration of normal community operations.” Dkt. 14-4 pp. 9. As previously noted, the term “you” is defined as to refer to the named insured, Harbour Commons Condominiums Association. Only the named insured is entitled to extended coverage for loss of rent.

The policy provides coverage for loss of community income, including loss of rent or loss of lease payments, due to the suspension of Harbour Commons Condominiums Association’s operations during the period of restoration. Community income is that income attributable to Harbour Commons Condominiums Association. The policy does not provide insurance for loss of rent to the individual unit owners.

It is important to note that many commercial condominium policies list their lessees and unit owners as “additional named insureds.” In those cases, the individual owners may not suffer the same fate as the Elkins, as the loss of rent or income provision could also inure to the benefit of any additional named insured.

It is true that under Illinois law, which the parties assume controls this diversity action, the plaintiff bears the burden of providing its damages by a preponderance of the evidence. However, "[i]n virtually every type of case involving proof of damages, whether based upon negligence or upon the provisions of a policy, the assessment of damages claimed by the plaintiff is primarily a question of fact within the discretion of the jury." In the instant case, the [policyholder's] witnesses claim that all of the inventory in the store was damaged by the fire, but that only some of it was so destroyed as to be unfit for sale. The remainder was either partially damaged or cosmetically altered such that it could not be sold at full price…[T]here is at least some non-speculative, non-conjecture based testimony supporting the [policyholder's] claim of damage. Thus, viewing this eyewitness testimony of [the policyholder] and [the public adjuster] in a light most favorable to [the policyholder], we cannot conclude as a matter of law that the remainder of [the policyholder's] inventory was completely undamaged. Although [the policyholder's] failure to keep detailed records of its "2 for 1" sales, and its decision to move undamaged goods into the store from another location, certainly hampers its ability to prove its damages, we do not believe that it so undermines the [policyholder's] case as to warrant a grant of summary judgment.

A good reputation is more valuable than money. A broken reputation may possibly be repaired, but the world will always keep their eyes on the spot where the crack was. One scandal can destroy an empire and short of inventing a time travel machine, there’s not much that can be done to change the public’s perception. Take for example, the recent Penn State child sexual abuse allegations. The entire nation spent weeks, judging the institution’s incident reporting practices and procedures. The damage? A decrease in student recruitment, alumni donations and, perhaps, federal funding.

Moody's Investors Services Inc. weighed the reputational damage in its review of Penn State's bond rating.

In 2011, Penn State's major sources of revenue supporting its $4.5 billion in operations were derived from student tuition, housing and auxiliary fees, and health care operations. Private donations totaled $235 million—among the highest of all U.S. public universities, Moody's said in a statement.

Sources of Penn State's credit risk include the cost of litigation and potential settlements, loss of federal and state funding for research and other programs, weakened student demand, and diminished philanthropic support, among others, Moody's said.

Higher education risk managers can mitigate potential reputational risks using insurance and risk management techniques, which often start with making sure that allegations of misconduct are avoided, experts say.

The standard ISO Business Income Coverage Form CP 00 10 does not provide coverage for reputational or consequential damages. Educational risk managers, and those involved in protecting well-established brands or institution should be concerned. Reputational damage is difficult to quantify and the risk of loss is as predictable as a two-year old.

Further, most reputational risk insurance products provide only crisis management services (a.k.a public relation firms) and do not indemnify loss of revenue tied to potential reputational damage.

Many higher education institutions rely on Enterprise Risk Management (ERM) programs (offered by large risk managing firms), where teams perform routine due diligence reviews to maintain university community awareness of their responsibilities and obligations and the rules and procedures in place to deal with potential misconduct. Another best practice is to have a business continuity plan that provides faculty and administrators with updates on the various reporting laws and institutional procedures.

ERM programs and business continuity awareness plans are transferrable tools that could help any business that derives income from its public image. However, it is important to note that these tools do not provide coverage for the millions of dollars lost as a result of a scandal that tarnishes a business’ reputation.

The article also reports that efforts to develop business income loss coverage for reputational damage are already under way.

Lockton Cos. L.L.C. is working with insurers to develop business interruption insurance coverage resulting from the reputational damage suffered by universities or colleges, said Teena Hostovich, executive vp at Lockton Insurance Brokers L.L.C. in Los Angeles.

“Reputational damage has several different forms,” Ms. Hostovich said, noting that a decrease in student recruitment stemming from reputational damage is a business interruption loss that is very difficult to quantify.

“Most business interruption coverage currently is tied to specific types of losses that are much (easier) to quantify,” she said. “We're working on some language now that might address this type of thing."

Reputable brand name enterprises should consider these products and best management practices. The days of sweeping mishaps under the rug are over and the court of media and public opinion can trash a hundred years of hard work, judging the conduct of a single moment.

The New York Times asked business and risk experts to weigh in:

Ken Barnett, chief executive of MARS Advertising, a marketing agency based in Southfield, Mich., that lost everything in its 50,000-square-foot headquarters to a 2004 fire: “The karma may be great along the river, the space may be perfect, but the fact is there are enough things in business that you cannot plan for. Why burden yourself with the uncertainty, lying in bed on a stormy night, that your business may not survive?”

Donna Childs, author of a book about disaster preparedness: “The answer to the question of should they move to a new location is to be found in the mission of the business, providing stress-reducing yoga to aid fertility. Disruptions are stressful.”

John Glenn, Enterprise Risk Management (Miami) says: “Even the best business continuity plan won't save an organization teetering on failure before an event."

The verdict: the yogis decided to stay down the hall from the clinic. Here’s an excerpt of their interview.

Q: Did you survey your customers and employees to learn their feelings on being dislocated and inconvenienced by your floods?

Ms. Quinn: We did an informal survey at checkout when we were in our temporary location. We asked: How did you find the experience and location? What we should have done is like a SurveyMonkey, something a little more anonymous, because I’d say 80 percent of our patients put a very nice smile on their face and said, “Oh, you guys are so nice here.” A sort of attaboy pat on the back. I’m not certain we got many straight answers. I do remember a couple of clients saying the temporary location didn’t work, that it was noisy and felt incomplete. So I do think we lost some clients, but I also think those who stayed were committed to us on a lot of different levels.

Q: It sounds like there continues to be some uncertainty.

Ms. Quinn: There is some uncertainty. When Beth and I tried to renew our insurance, we were denied. Our insurance was dropped. Our insurance broker said this had nothing to do with our two losses but because we were becoming more like a bona fide medical facility because we were going into areas like nutritional supplementation, which is a field that scares some insurers, I guess.

Q: Do you have liability insurance and flood insurance at the moment?

Ms. Quinn: We do, but we had to put our entire account up for review and go to the open market. And we’re paying more than twice as much now, up from around $10,000 a year to about $24,000 a year.

Q: You’re insured, but there’s no guarantee, of course, that you won’t have another flood next July.

Ms. Heller: Believe me, Tami and I are going to have our toes, fingers and eyes crossed for the entire rainy season in Chicago. Honestly, Tami, every time it rains don’t you think, Oh, dear God, what’s happening at the river?

Q: Even with the advantages of being down the hall from the fertility doctors, is the karma really right at this site for an enterprise built upon such healing arts as yoga and massage?

Ms. Quinn: Because our mission is to integrate holistic medicine with traditional Western medicine, we don’t want to be separated. So we’re willing to take the risk of another flood to accomplish that mission, of having a Western medical doctor on one end of the hall and a holistic practitioner on the other end of the hall who talk to each other, and patients who treat all aspects of their person — mind, body and spirit.

Q: So if you suffer another flood, you would suck it up and stay where you are?

Ms. Quinn: If we ever had to temporarily relocate again, we would break our lease and say sayonara. I think if it happened a third time, and the doctors didn’t want to move, we’d have to go on our own because at that point we’d just be stupid.

The yogis made a business decision to stay. It appears that they are already experiencing insurability issues and a hike in premiums, but their business model is dependent on the location and they have decided to hedge the odds of another loss.

Chip Merlin noted in his blog post, Anticipating Manmade and Natural Disaster Trends That Impact Businesses, that:

Disasters are occurring with greater frequency with widespread financial impact; this is inevitable as the world’s population has increased and global trade is more frequent. Even when disasters occur far away or last for a relatively short period of time, we live in a globally interdependent society and are likely affected.

Buying adequate insurance coverage is a fundamental step in ensuring the success of a business enterprise, but insurance is never a substitute for a risk management plan that will help businesses maintain daily operations after a catastrophic event. As attorneys and consultants, we urge our clients to invest in understanding the ebb and flow of their operations and develop a resilient catastrophe plan that will jump start right away.

At a glance, it appears that the yogis did not have a resilient Business Continuity Plan as they relied on the landlord’s emergency response plan, which was frustratingly sluggish. We all wish the yogis the best of luck, but we all also hope they learned some valuable lessons on risk management and business interruption claims. The yogis should also consider purchasing adequate Contingent Business Income coverage, since they are dependent on the fertility clinic and another catastrophic loss could likely damage and interrupt the clinic as well.

Pulling Down the Moon provides holistic services to women undergoing fertility treatments like yoga, acupuncture and nutritional counseling. I have to disagree with John Keynes, women from Venus have been hard wired to get what we want, when we want it, no matter what. Women drive the US economy and if you give us more money, we will save the world’s financial crisis one card swipe at a time. Pulling Down the Moon understands this paradigm and runs three successful locations with 35 employees and earns $1.3 million in annual revenue catering to women that want babies now, not when the economy recovers.

In 2010, heavy rains brought about an inch of water into Pulling Down the Moon’s main location in Chicago, which is conveniently nestled next to one of the country’s biggest fertility clinics. The yogis were at the ready with their mops and aromatherapy, but the building’s drains and sewers failed, bringing in a deluge of Chicago River water into the studio. The yogis’ landlord (the major fertility clinic) did not have a good disaster response plan and the restoration work took months as the yogis struggled to service their determined customers at a different locale. The yogis rebuilt and resumed operations at their original location 4 months after the flood. A business-interruption rider paid for the move to temporary quarters and reimbursed the ailing company month by month for lost revenue as patient visits dropped by as much as 30 percent.

Happy ending? No. Seven months later, another downpour flooded the yogis studio, but didn’t cause as much damage so they were able to resume operations quickly. Should the yogis stay? Should they go? The results of the NY Times’ case study will be posted this week as we all ponder the issue.

Some experts have weighed in:

Ken Barnett, chief executive of MARS Advertising, a marketing agency based in Southfield, Mich., that lost everything in its 50,000-square-foot headquarters to a 2004 fire: “The karma may be great along the river, the space may be perfect, but the fact is there are enough things in business that you cannot plan for. Why burden yourself with the uncertainty, lying in bed on a stormy night, that your business may not survive?”

Donna Childs, author of a book about disaster preparedness: “The answer to the question of should they move to a new location is to be found in the mission of the business, providing stress-reducing yoga to aid fertility. Disruptions are stressful.”

John Glenn, Enterprise Risk Management (Miami) says : “Even the best business continuity plan won't save an organization teetering on failure before an event.

Should the yogis move? Should they keep relying on poor landlord response and spend hard earned cash while they wait for insurance to pay every time it rains hard and they lose market advantage? We’ll see what the yogis decide next week.

• The earthquakes and tsunami experienced in Japan and New Zealand this year, affected 20 percent of responding organizations, which were headquartered in 18 different countries.
• Cyber attacks became a top three source of disruption in the financial services sector.
• Supply chain incidents led to a loss of productivity for almost half of businesses along with increased cost of working—38 percent of respondents—and loss of revenue—32 percent of respondents.
• Longer term consequences of disruption in the supply chain included shareholder concern, 19 percent of respondents, damage to reputation—17 percent—and expected increases in regulatory scrutiny—11 percent.
• For 17 percent of respondents the financial costs of the largest single incident totaled a million or more Euros. This figure almost doubles to 32 percent where less resilient supply chains are evident in the research.
• Loss of talent or skills rose from 14th place in 2010 survey to 6th place in 2011. This represents a warning that lay-offs among supply chain partners is leading to increased disruption, the report says.
• Seventy-four percent of respondents either strongly agreed or somewhat agreed with the proposition that outsourcing and just-in-time/lean strategies were making their organizations more vulnerable to supply chain disruption.

In essence, globalization trends of outsourcing and “just-in-time efficiencies” are making supply chain relationships more vulnerable to disruption. Many global enterprises are profiting from outsourcing services and lean manufacturing costs in countries with lax regulatory requirements, which have been catastrophe prone this year. As global economies of scale become more and more attractive, it is important for businesses to understand their critical supply chain risks and exposures. Businesses should also obtain adequate insurance and establish reliable business continuity plans that rely less on insurance protection and more on resilient response planning.

In my blog post, Understanding Supply Chain Exposures – Understanding Business Interruption Claims, Part 76, I noted that risk managers should not stop at acquiring the best coverage available for a dependent businesses or service. They should also have a good back up plan to keep the supply chain running through a first party coverage claim. Risk managers must also understand the bottlenecks and supply chain problems that will likely occur in the midst of a catastrophe and have a plan that will keep the chain moving. While many feel that risk management is an unnecessary expense, it is actually an investment on market competitive advantage that guarantees higher profits, even in a futuristic dystopian world.

Many forensic accountants have noted that the Generally Accepted Accounting Principles (“GAPP”) focus on business valuation formulas that are more suited for commercial transactions than for determining the amount of business income loss. Businesses also have different styles of bookkeeping, which can create challenges in finding the necessary data to support a claim.

In Bemo USA Corp. v. Jake's Crane, Rigging & Transp. Int'l, Inc., 10-16663, 2011 WL 5438584 (9th Cir. Nov. 10, 2011), the trial court relied on the opinions of the plaintiff’s three experts, including one forensic accountant, in granting summary judgment in favor of Bemo USA for property damage, business income losses and extra expenses in the amount of $2,996,611.00.

Bemo is an Arizona corporation in the business of manufacturing taper mills, which are portable machines used to install metal roofs. Taper mills are approximately 40 feet long and weigh approximately 48,000 pounds. Jake’s Crane is in the business of rigging and heavy transportation. Bemo hired Jake’s Crane to mount a taper mill on a structure, but on September 7, 2005, the crane operator dropped the taper mill and destroyed the sophisticated machine.

Bemo ordered a replacement taper mill on an expedited basis to mitigate its losses, but it takes 12-15 months to manufacture and deliver. As a result, Bemo sustained more losses than Jake’s Crane was willing to pay and litigation ensued.

During the lawsuit, Jake’s Crane admitted liability. In support of its Motion for Summary Judgment, Bemo presented the Affidavit of Martha Zehnder, CPA. The trial court entertained written and oral arguments from both sides and ruled in favor of Bemo. Jake’s Crane appealed, alleging that the trial court abused its discretion when it accepted Marthan Zehnder’s Affidavit to support the summary judgment ruling.

Without entertaining oral arguments, the Ninth Circuit Court of Appeals affirmed the lower court’s ruling and stated in an unpublished opinion:

The contention that the district court erred because the report failed to affirm explicitly that it was based on generally accepted accounting principles (“GAAP”) fails for at least two reasons. First, the district court could reasonably conclude from the phrasing of Zehnder’s disclaimer that she did use GAAP except to the extent that she capped damages according to the requirements of the insurance policy. See Fed.R.Evid. 104(a). Second, there was no evidence that GAAP even addresses the question how damages for business interruption should be computed, much less that Ms. Zehnder failed to adhere to GAAP.

While the opinion does not have any precedential value, it certainly should give forensic accountants courage to test the parameters calculating business interruption losses.

Disasters are occurring with greater frequency with widespread financial impact; this is inevitable as the world’s population has increased and global trade is more frequent. Even when disasters occur far away or last for a relatively short period of time, we live in a globally interdependent society and are likely affected.

Wikipedia defines business continuity planning (BCP) as "the creation and validation of a practiced logistical plan for how an organization will recover and restore partially or completely interrupted critical (urgent) functions within a predetermined time after a disaster or extended disruption."

Note the following scenario posted on the Business Insurance website:

Many Japanese companies moved production to Thailand or found alternative component suppliers in Thailand after March's devastating earthquake and tsunami, RPC said Wednesday in a statement.

The move helped many companies mitigate their losses in the Japan disaster, but many face further losses as a result of flooding in Thailand this fall, RPC noted.

“The problem for insurers who provide business interruption cover to Japanese manufacturers is that they have to cover the losses stemming from the Thai flooding because so many businesses moved some or all of their supply chain there,” said Daniel Saville, legal director in the reinsurance and corporate insurance department of RPC.

“Moving production from Japan to Thailand was ‘Plan B.' The question now is whether those businesses have a ‘Plan C,'” he said in a statement.

“An additional factor in business interruption claims, especially those arising from electronics manufacturers, is that production may have been scaled up to deliver goods to the Christmas market,” said Victoria Sherratt, a partner at RPC. “Losses in those cases could be even higher,” she noted.

Are businesses required to also have a Plan C? Maybe. Certainly insurance companies will modify their products to draw the line somewhere and those who have too much to lose will likely keep going down the alphabet.

Russell Hunter, who owns Pfau’s Hardware in West Hartford, said that after a bizarre fall snowstorm knocked out power to nearly one million people in his state and millions more throughout the Northeast last weekend, his store was cleaned out of all storm-related supplies. They went at about five times the normal rate of sale, with everything from batteries to oil lamps to gas grills flying out the door as fast as he could order them.

While Mr. Hunter may have increased sales as a result of the snowstorm, not many other businesses are enjoying the same luck. Retail and service related enterprises are probably bleeding to death as they wait for the slow recovery.

Power outages are common following major weather events. Loss of income and other damage may be caused by off-site damage, similar to the power outage experienced by the businesses in Connecticut. For such situations, it is important to have off-site power outage coverage endorsed to the policy. When there is no direct damage to covered property, but damage to property of others results in a loss of power, most commercial property insurance policies will not provide for loss of income and other losses by definition. Off-premises damage resulting in loss of power is generally added as an endorsement.

For example, Utility Service Interruption Coverage generally provides:

We will pay for loss of or damage to Covered Property described in the Schedule, caused by an interruption in utility service to the described premises. The interruption in utility service must result from direct physical loss or damage by a Covered Cause of Loss (as indicated in the Schedule) to the property described in Paragraph C. if such property is indicated by an ‘‘X’’ in the Schedule and is located off the described premises.

The loss still needs to be caused by a covered peril, but this endorsement adds coverage otherwise excluded. Some business interruption forms are more restrictive and eliminate coverage for income losses if the failure occurs ‘‘outside of a covered building,’’ rather than loss of power on premises.

Restaurants, food stores and food brokers should also purchase Spoilage Coverage. This provides for losses caused by power outages on or off premises with the following language:

Power Outage, meaning change in temperature or humidity resulting from complete or partial interruption of electrical power, either on or off the described premises, due to conditions beyond your control.

Power outage is a common and significant threat to businesses. Prudent risk management requires power back-up systems as well as proper insurance coverage for these disasters. Otherwise, a second financial disaster will likely occur.

The loss in question was a burglary where the perpetrators vandalized the insured’s office and stole several items. The insured reopened for business shortly after the burglary. The insured, however, spent three or four days seeking bids to have the office repainted. Repainting took most of a week, and it took several days to install carpet in the office, several hours to compile the list of damaged and stolen items, 16 and 24 hours contacting, or trying to contact, the insurance adjuster, and at least three days shopping to replace the computer and other electronic equipment.

The carrier adjusted the loss and paid $2,871.94 for damage to the building, $2,733.20 to repair and replace the business property that was damaged or stolen inside the office. Six months after the loss and after a series of carrier delays, the carrier offered $2,231 for the business income claim. The insured did not dispute the adjustment of the property claim, but it disagreed with the adjustment of the business income loss. After the insured objected, the carrier doubled its offer to $4,462, but the insured refused and filed a suit. The carrier filed a motion for summary judgment, arguing that $4,462 was more than enough to meet its contractual obligation under the policy.

The insurance policy contained a business recovery expense endorsement which obligated the carrier to pay “the extra expenses and reduction of business income” as a result of a covered loss. The policy stated that the carrier would pay those expenses “for as long as it reasonably takes to restore the damaged or destroyed building or contents, and to resume operations with the same quality of service which existed immediately before [the burglary], regardless of the expiration date of this policy.”

The only evidence relating to the adequacy of the lost business income was a letter from the business’ accountant describing a year-to-year reduction in gross income figures for the indicated six month period. That letter stated that the insured’s gross was $121,360.79 less than its gross income during the same six month period the year prior to the loss. The letter, however, made no effort to address the insured’s net income during the period of restoration, and failed to rebut or contradict the carrier’s contention that it had adequately adjusted the business income claim.

Given the lack of evidence presented by the insured, the court ruled in favor of the carrier and stated:

The letter offers no support for plaintiffs’ assertion that the reduction during this six month period was attributable to the burglary. Plaintiffs’ submissions are insufficient to show a justiciable question as to the contract claim. The $2,231 originally offered by Universal was based on J&K’s total sales for May, 2009—the month of the burglary. See Def. Fact 16. It calculated J&K’s average daily sales by assuming that all its May sales were generated before the burglary and then used that average to calculate estimated lost income for the remaining eleven days of the month.

Because J&K was open for business and in fact had sales in May after the burglary, that calculation plainly overstated the daily loss to J&K. Further, the calculation was based on gross profit (i.e. gross sales less cost of goods sold) rather than net profit, the standard under the policy provision, and therefore overstated the loss on that basis. For those reasons, defendant reduced the calculation by half to reach the $2,231 figure. Plaintiff offers no evidence or argument which undercuts defendant calculation of the daily loss or the loss figure based on that. Moreover, defendant’s doubling of the amount to $4,432 eliminates any conceivable question as to accuracy of the loss calculation unless some basis is shown for concluding J&K was entitled to be paid for more than the liberally calculated losses estimated for roughly two weeks of operation.

Without more details about the claim or the policyholder attorney’s decision to submit a three (3) page response that relied solely on a letter from an accountant, I cannot disagree with the outcome in this case.

In a previous blog entry – The Speculative Card - Understanding Business Interruption Claims, Part 68, I discussed the fine line that practitioners must walk to avoid this type of situation.

As a matter of Florida law, business interruption losses should be determined in a practical way, having regard for nature of business and methods employed in its operation, in order to give practical effect to intentions of parties and purpose of insurance as evidenced by terms, conditions, and provisions of policy. See, Travelers Indem. Co. v. Kassner, 322 So.2d 80 (Fla. 3rd DCA 1975).

The holding in Travelers does not mean that “anything goes” in business interruption claims. A speculative claim will never be covered by a policy and it is always the insured’s burden to provide competent proof of an actual monetary loss as a result of the suspensions of its operations.

It is always prudent to consider retaining forensic accountants to help a business review its financial statements and prepare reports in support of its claim, especially if the claim is on the way to litigation.

2. Extra Expense

a. Extra Expense Coverage is provided at the premises described in the Declarations only if the Declarations show that Business Income Coverage applies at that premises.

b. Extra Expense means necessary expenses you incur during the "period of restoration" that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.

We will pay Extra Expense (other than the expense to repair or replace property) to:

(1) Avoid or minimize the "suspension" of business and to continue operations at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.

(2) Minimize the "suspension" of business if you cannot continue "operations."

We will also pay Extra Expense to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form.

Clearly, when an expense is incurred is just as important as the fact that it is incurred at all. The provision expressly states that extra expenses are limited to those actually incurred during a period of restoration. Most policies do not define the term “incur,” and parties often find themselves in court asking for favorable interpretations.

“Incur” is ordinarily defined as “to become liable or subject to through one's own action; [to] bring or take upon oneself.” Random House Webster's Unabridged Dictionary (1998).

This definition will typically exclude gratuitous or voluntary obligations (i.e., not otherwise helpful in reducing or minimizing the loss), which would not have been “necessary” and therefore not recoverable even though “incurred”

In Business Interruption-Coverage, Claims and Recovery, Daniel Torpey elaborates on the issue of paid vs. incurred expenses:

When a policyholder buys goods or services in connection with restoring its assets, it will likely do so under some type of financing arrangement. That expense is incurred at the time the goods or services are purchased, but it may be paid over a period of time. The expense is accrued for payment-as accounts payable-under accrual accounting at the time the obligation is incurred. When the actual payment is made, the payable balance is reduced, as is the company’s cash. Most disputes do not typically revolve around these concepts. Insurance companies generally recognize accounts payable and other accrued expenses as legitimate expenses in their loss calculations, although they often require proof of payment of those items before settling the loss.

The issue becomes significantly more complex and contentious when the dollar obligations are large and extend for a significant period beyond the time required for restoration or replacement of the damaged property.

Consider the situation of many major financial institutions after September 11, 2001. While most institutions had backup facilities for vital operations, thousands of employees were displaced by the damage or destruction of the buildings. Assuming that there would be a high demand for office space, some companies took unusual measures-from occupying entire hotels to entering in five or ten-year leases-to assure that they had sufficient temporary space to accommodate employees as quickly as possible and to minimize their business interruption losses during the reconstruction or relocation periods. As it turned out, more space was available than expected in the New York real estate market, and most institutions were able to relocate their work forces to permanent spaces fairly expeditiously. Unfortunately, these institutions then had unneeded space under long-term leases they were obligated to pay. And the soft, post 9/11 real estate market made subleasing virtually impossible.

The obligation for these leases was generally incurred during the period of indemnity for these companies, with the payment of these obligations set to occur over time. These specific issues still have no clear resolution, although most companies asserted claims for the present value of the tail on the residual lease obligations. Disagreements regarding the responsibility for paying these types of incurred, but not paid, obligations continue to be included in the ultimate negotiation of insurance and reinsurance claims. A very strong case can be made, based on insurance policies and simple logic, to support the validity of these claims. As a practical matter, the leases could be terminated – and the expense of doing so rightfully claimed-within the indemnity period.

I could not find a published court opinion that dealt specifically with long-term temporary losses incurred during the period of restoration, but the payment of which fell outside of the period. I believe that a policyholder’s efforts and money spent to resume operations swiftly and which reduce or eliminate a business income loss should be fully compensated, even if the time of actual payment for those efforts falls outside the period of restoration. Public policy should prevent an insurance company from denying coverage for legitimate and documented expenses incurred in accordance with a policyholder’s contractual obligation to mitigate its business income loss.

2. Understand your client: Not all businesses are alike. Understanding your clients’ business models, their projections, and how they maintain their books is critical. A successful and expedited business interruption claim will depend on how well the accounting data tells the story.

3. Give notice: Almost every policy requires that an insured give notice of the loss “promptly,” “as soon as practicable,” “immediately,” “within a reasonable time,” or within some other time period specified under the policy. Failure to comply with this policy condition may result in a denied claim.

4. Telling the story: In general, a policyholder bears the burden of measuring, documenting, and establishing his/her claim. Most businesses have internal accounting programs that capture and categorize the ingress/egress budget flows. Setting up a claim expense category in the accounting program (“claim schedule”) and keeping track of the expenses and invoices in real time is the best practice to document and measure the extent of the business income loss and incurred extra expenses. Producing massive reports alone is not compelling or persuasive. Modern computer programs have interesting features that will create custom accounting reports and summaries that present the hard data in a manner that tells a holistic story of loss from summary to detail (pyramid style). Organized reports presented with summaries and links to underlying hard data are extremely attractive and greatly appreciated by the carrier’s loss recovery team. These reports should be generated and submitted without delay.

5. The Meeting: Inform the carrier’s adjuster of your perception of the loss adjustment process in a small meeting. Be specific and mention areas that you find challenging. Suggest ways to overcome these obstacles, and ask the adjuster for advice on how to resolve the hurdles. If the harder issues are addressed at the beginning of the claim, the likelihood of success is almost guaranteed.

6. Cooperation: If you have followed suggested techniques 1 - 5, there should not be much left to get the claim resolved. If you have not been able to present an organized and supported claim, the policyholder will likely receive a lengthy letter requesting all sorts of information to assist the insurer in its investigation. This will inevitably cause significant delay in the adjustment process, and many business owners will not appreciate the intrusiveness of the request. Rightfully so, the information requested may infringe on trade secrets or information that fuels the business’ competitive advantages. If this is a concern, an insured should consider retaining an attorney, not only to openly discuss these concerns without fear of publicity, but also to consider the possibility of drafting and entering into a confidentiality agreement with the insurer. Most of the time, the insurer merely seeks to quantify a claim and will not oppose such an agreement.

7. Mitigation: Many policies cover only those losses that could not be avoided through reasonable post-loss mitigation efforts. With respect to business interruption coverage, an insured is often required to exercise due diligence to repair covered property damage and resume operations. Therefore, after a loss, an insured should quickly evaluate whether there are reasonable steps it can take to avoid additional business or property losses. To the extent possible, an insured may want to consider informing its insurer of its mitigation efforts to provide an opportunity for input and to avoid dilemmas after the fact. These mitigation expenses could also be covered as “extra expenses” under the policy, so following suggested technique 4 is also important for this type of coverage.

8. Document everything: Many business owners and managers already engage in the practice of documenting every relevant meeting and development in a claim, but in times of distress and anxiety after a loss, many forget to maintain this important practice. I always say, there is nothing more powerful than those green certified mail receipt cards at the post office; this practice simply makes life easier.

Manpower, Inc., leased office space in a building located in Paris, France. The building sustained a collapse loss and the collapse caused an interruption in Manpower’s business. Manpower filed a claim for business interruption coverage with its insurer, but the insurer denied the claim and Manpower filed a lawsuit. During the lawsuit, the court decided that Manpower was entitled to business interruption coverage and the only issue before the jury was the amount of the business interruption claim.

Before the trial, the insurer moved to strike Manpower’s accountant under Federal Rule of Evidence 702 (aka Daubert Challenge), claiming that his opinions and formulations were unreliable and therefore inadmissible for trial purposes. The court agreed with the insurer and did not allow Manpower’s expert to testify. The insurer then claimed that without an expert, Manpower could not prevail and that the case should therefore be summarily adjudged.

Manpower’s attorneys advised the court that they would use the insurer’s experts to prove the amount of the loss, a move not recommended for those with heart conditions. To complicate matters, Manpower was not able to compel one of the insurer’s experts to trial so the court had to decide the issue by looking at the deposition transcripts and expert reports.

In reviewing the reports the court found that the insurer “recommends” that the carrier pay no more than €399,821 to Manpower in connection with the claim. Manpower intended to offer this recommendation at trial as to the amount of the business-interruption loss.

The court, however, did not accept the recommendation as a reliable and admissible expert opinion that could have been presented to the jury to support Manpower’s claim.

A fundamental problem for Manpower is that Lewis's “recommendation” is not an opinion that would allow a jury to reasonably determine the amount of Manpower's loss. In the report, Lewis makes clear that he does not have enough information to express an opinion as to the amount of the loss and that therefore he can do no more than critique the calculations performed by Herr Experts and Sullivan. His “recommendation” is merely that—a recommendation to ISOP about how much to pay in connection with the claim in light of the limited information then available. Although this recommendation is an opinion, it is not an opinion that meets the requirements of Federal Rule of Evidence 702, and ISOP never intended that it serve as one. Indeed, Lewis explicitly states at various points in the report that he does not have sufficient facts or data to render an opinion as to the amount of the loss. Moreover, during his deposition, Lewis repeatedly states that he does not have an opinion as to the amount of the loss.

Manpower points to an excerpt from the deposition in which Lewis is asked about his “determination” of the amount of the business-interruption loss based on certain assumptions. Manpower argues that in this excerpt, Lewis is offering an opinion as to the amount of the loss. However, even if he were, that opinion would be inadmissible under Rule 702 because it is merely the “recommendation” discussed in the previous paragraph, which was not based on sufficient facts or data. Moreover, the cited excerpt appears after Lewis testified that he had no opinion as to the amount of the loss, and thus the full context of the deposition makes clear that Lewis was simply discussing the conclusions he drew from the limited data, not changing his earlier testimony and offering an opinion as to the amount of the loss.

Experts involved in the determination or calculation of a business income claim should be precise in their calculations and be able to support their conclusions with reliable and readily acceptable facts. An opinion without a factual basis is unreliable and inadmissible for trial purposes and worthless in the time of need. 

a.) The total anticipated rental income from tenant occupancy of the premises described in the Declarations as furnished and equipped by you, and

b.) Amount of all charges which are the legal obligation of the tenant(s) and which would otherwise be your obligations, and

c) Fair rental value of any portion of the described premises which is occupied by you.

If the adjustment of a rental income claim is part of a business income calculation and the insured had no real prospects for its rental, it is not reasonable to anticipate rental income. If, however, the building had been rented consistently prior to the loss, and had only recently been vacated, or if the insured has verifiable prospects for a speedy re-rental, then it is appropriate to anticipate rental income.

If this is not the case, the Loss of Use provision in some commercial property forms may provide alternate coverage.

DePhelps v. Safeco Ins. Co. of America, 65 P.3d 1234, 1239-40 (Wash. Ct. App. 2003) is instructive. Thomas and Karen DePhelps owned a residence zoned general commercial and had five bedrooms, three full baths, four half baths, one great hall, and two kitchens - one of which was industrial. The DePhelpses rented rooms on a bed and breakfast basis. They also rented the great hall occasionally for weddings and similar events. Safeco Insurance Company sold them a homeowners' policy.

Heavy accumulations of snow and ice shifted and loosened part of the metal roof. Safeco covered the property damage loss, but the building and zoning department deemed the property to be a hotel and required commercial upgrades before approving repairs. Safeco refused coverage for the upgrades, arguing that it only expected to cover upgrades for homeowner purposes and not for commercial uses. Safeco also declined payment for the loss of rental income of the bed and breakfast operations.

The court disagreed with Safeco on both issues and granted coverage for both the code upgrades and loss of use for the bed and breakfast operations. With respect to the loss of use claim, the court stated:

[T]he policy contains separate loss of use provisions: one for the loss of the insureds' own housing and another for lost rental income. Again, as we read these provisions, the DePhelpses may recover the rental value of the home as a single family rental. Or they can recover the reasonable cost of equivalent housing for themselves (as reduced by the rental activity) plus an estimate of the amount they would have earned from the rented portions.

In other words, when a commercial lessor is found without proof of an “actual loss” of rental income, the lessor may find some measure of recovery for the theoretical loss of a rental period that it would have enjoyed, but for the loss to the property (limited to an actual period of restoration or when the repairs are completed).

Businesses develop and thrive on symbiotic relationships, in which the entities rely on the continued operational viability of each other (or even exclusively beneficial relationships). Few businesses, however, consider the risk and exposure of losing that relationship due to an unexpected calamity.

Contingent business coverage is a type of business interruption coverage which will protect the “dependent business” from an external business income exposure. There are four (4) types of dependent business ISO endorsements:

1. Contributing Premises, such as the businesses that deliver materials to the insured;
2. Recipient Premises, such as the businesses that receive the insured’s products;
3. Manufacturing Premises (businesses that make products for delivery to the insured, and
4. Leader Premises, such as businesses that bring the customers to the insured.

Extra Expense Coverage pays for necessary additional expenses a business incurs that it would not have incurred if there had been no direct physical loss or damage to property at the described premises (or contingent premises if adequately endorsed)

A good example of how distant businesses can be affected by catastrophes and yet recover under their own commercial policies is found in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004).

ADM processes and markets a variety of agricultural commodities such as corn, wheat, and soybeans. ADM uses corn to make such products as high-fructose corn syrup (“HFCS”) and ethanol. It relies heavily on corn producing operations and government transportation ways along the Mississippi and Illinois Rivers to conduct its operations. ADM insured its operations for $100 million under a difference-in-conditions program with several layers of insurance.

In 1993, severe floods devastated the Midwestern corn crops. The flood also obstructed the waterways and hampered the ability to navigate and move products by barge on the river. ADM claimed the flood caused it to incur extra expenses to procure sufficient quantities of corn for its processing and that the prolonged closures of parts of the Mississippi and Illinois Rivers caused it to incur additional expenses in alternative transportation. ADM ultimately submitted claims to its insurers for losses from the flood totaling more than $166 million in extra expenses and contingent business income losses.

ADM filed suit against all its insurers and settled with all, except for the hardiest $50 million layer with Hartford. The district court found that Hartford's policy insured only against direct physical damage to ADM's insured property, and that Hartford was not responsible for any contingent business or extra expense losses. ADM filed suit against its broker, Aon Risk Services, seeking $50 million in damages for Aon's failure to secure contingent business interruption and extra expense coverages in the Hartford policy. The broker alleged that ADM could not seek to recover Hartford’s excess layer because it had not exhausted the underlying layers. The court denied Aon’s motion and allowed ADM to proceed against its broker, holding that ADM had exhausted the lower layers by agreeing to settle with the underlying insurers for a partial sum and absorbing the balance.

Aon then argued that even if it had procured contingent business and extra expense coverage under Hartford’s policy, ADM could not have recovered because its operations were not interrupted. Aon also argued that ADM’s expert was not offsetting the amounts that the manufacturing giant was hedging in the commodities futures market or the increased costs that it passed down to its buyers.

The jury returned a verdict of $16.5 million against Aon and the court awarded $3.6 million in pre-judgment interest. Aon appealed.

In affirming the verdict and interest award, the court of appeals stated:

The phrase “interruption of business,” as used in section 13Q of the DIC policy, does not require ADM to show that its corn processing plants stopped or slowed production. An interruption of business means some harm to the insured's business, including the payment of extra expense, that would not have been incurred but for damage that an insured peril has caused to the property of any supplier.
***
Section 10B specifically excludes from the definition any “extra expense in excess of that necessary to continue as nearly as practicable the normal conduct of the insured's business.” Because the definition of extra expense contained in Section 10B applies wherever the term is used in the DIC policy, it applies to the extra expense coverage provided by Section 13Q.
***
As defined in Section 10B, extra expense clearly includes those expenses necessary to carry on business operations. Section 10B would not make any sense if the DIC policy were interpreted as covering only the extra expense incurred as a result of a complete cessation of business. Accordingly, Aon's argument that the policy only covers extra expense if business operations were stopped is inconsistent with the terms of the policy.
***
The cases cited by both parties demonstrate that parties to an insurance contract can require a slowdown or cessation of business before extra expense coverage applies. The DIC policy, however, does not include such a requirement with respect to the extra expense coverage and we are not at liberty to rewrite the policy to include one.

Notwithstanding these general principles, every policy must be read carefully to determine if this general rule applies to a particular claim. Feel free to call if you have questions.

The National Underwriter reported: “Irene: No Large Commercial Losses, but Justification for Recent NE Rate Increases,” stating:

Irene will not be enough to create a hard market turn because capacity remains available, but the pricing impact will most likely come to property and business interruption insurance coverage.

“This is a market that we already see in transition,” says Ellis. “There is ample capacity, but what will we pay for it?”

For the Northeast region, he says it also proves some modelers’ assertions that the area is susceptible to hurricane and tropical storm activity, justifying underwriting increases for those types events for commercial accounts.

“This is not a big enough loss to change the market, but the definition of catastrophe just got a little broader,” notes Ellis.

For wind exposures, risk managers can now expect to see higher rates on the risks they pay for, he says.

In fairness, National Underwriter recognizes that loss estimates will continue to rise in the flood claims arena, but they are not predicting business interruption to play a big role in CAT adjustment because this was not an event of “widespread devastation” with destroyed buildings or points of entry. The article also downplays the role of business interruption coverage, stating that:

Ports aren’t destroyed, trains and airlines are up—so there will probably be less of a business continuity aspect to losses,” he explains. “The average loss will be for short-term clean-up and spoilage.

I am still feeling the human impact and captivated by the devastation. Millions of businesses will suffer beyond actuary imagination. I anticipate a fierce battle in the adjustment and accounting methods in business interruption claims. The state of our economy will certainly have an impact in business income claims; the question will be “how do we account for it” -- in favor of or against the insured? For those keeping score of this trend in business income claims, I urge you to study this issue. A good place to start are my previous posts,

• To Consider the Economy or Not to? - That is the Question;

• Post Loss Market Earnings Ignored in Mississippi, and

• What’s Good for the Goose is Good for the Gander – Post Loss Market Conduct Ignored in Louisiana

If you have questions or comments on this issue, feel free to contact me or post a comment to engage in an open discussion.

A typical ingress/egress provision will provide coverage for economic losses sustained when access to the insured property is impaired. The language found in most commercial policies reads as follows:

Loss of Ingress or Egress: This policy covers loss sustained during the period of time when, as a direct result of a peril not excluded, ingress to or egress from real and personal property not excluded hereunder, is thereby prevented.

Under most policies, the insured property does not need to sustain direct physical loss or damage for the insured to recover income losses which were the proximate result of inaccessibility to the insured premises.

Fountain Powerboat v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D. N.C. 2000), illustrates of the value of this type of coverage. Fountain manufactured, distributed and sold boats and boating equipment out of a facility in Washington, N.C. In 1999, Hurricane Floyd dumped record-setting rain fall over the eastern part of North Carolina. After the storm passed, the only roads leading to the Fountain facility were closed for seven days. For three days, Fountain used large trucks to pick up workers from various “pick-up points” and transport them to the facility. As a result of displacement caused by the floods, production at the Fountain facility fell to 33 percent of full capacity.

Reliance paid nearly $1,000,000 for certain claims but partially denied the claim for ingress/egress coverage, asserting that without property damage the insured could not recover under this provision despite their extraordinary efforts to resume operations, because there was no “actual impairment” to access as they were able to drive over the flooded and eroded roads for three days.

The Reliance policy had a standard ingress/egress provision, and the court rejected the insured’s “actual impairment” requirement.

The plain meaning of this language indicates an agreement between the parties that the contract for insurance cover any business interruption caused by loss by any peril not excluded. A “loss” is not predicated on physical damage but is one category of recovery along with damage and destruction as indicated by the use of the alternative coordinating conjunction “or.” Flooding due to Hurricane Floyd is exactly the type of peril this business interruption loss was drafted to insure against.

Furthermore, Reliance was aware of the location of the Fountain facility and was aware that the facility had a limited access. The court can only conclude that the parties intended that the policy would provide coverage not only when the property itself was inaccessible, but also when the only route to the Facility caused the property to be inaccessible. The court's conclusion that no physical loss is required to trigger business interruption coverage is further bolstered by the parties' inclusion of the following provision:

5. Interruption by Civil or Military Authority: This policy is extended to cover the loss sustained during the period of time when, as a direct result of a peril not excluded, access to real or personal property is prohibited by order of civil or military authority.

This provision immediately precedes the loss of ingress/egress provision. Neither provision requires physical loss, but merely covers loss sustained due to lack of access to the property. Therefore, the court finds that no requirement for physical loss to the property is required under the contract of insurance in order to trigger business interruption coverage under the ingress/egress clause.

Interestingly, the court found that the length of time for which loss of ingress/egress could be claimed was the length of time it took to restore Fountain's business to the condition that would have existed had no loss of ingress/egress occurred.

Not all ingress/egress provisions are as expansive as the one interpreted in Fountain Powerboat. Most forms will limit the period of recovery to a few weeks. I strongly urge all claims professionals to carefully read the applicable provisions to determine if ingress/egress coverage dovetails into a commercial property insurance claim.

For example, in A Power Outage Saga Comes To An End – Understanding Business Interruption Claims – Part 61, I wrote about a case that interpreted a Service Interruption provision in favor of the insured after a power grid failure caused multimillion dollar loses in food spoilage at a supermarket chain.

The Extension provided that:

A. We will pay for consequential loss or damage resulting from interruption of:
(1) Power;
. . . .
B. We will pay only if the interruption results:
(1) From physical damage by a peril insured against;
(2) Away from a covered location; and,
(3) To the following types of property, if marked with an "X":
(X) Any powerhouse, generating plant, substation, power switching station, gas compressor station, transformer, telephone exchange;
. . . .
(X) Transmission lines, connections or supply pipes which furnish electricity . . . to a covered location.
The term "physical damage", however, was not defined in the Extension or in the underlying policy. The carrier insisted that the power grid did not sustain physical damage from a covered peril, but rather that the outage was caused because the grid internally failed. The court ruled in favor of the policyholder as follows:
We conclude that the undefined term "physical damage" was ambiguous and that the trial court construed the term too narrowly, in a manner favoring the insurer and inconsistent with the reasonable expectations of the insured. In the context of this case, the electrical grid was "physically damaged" because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity. There is also undisputed evidence that the grid is an interconnected system and that, at least in some areas, the power could not be turned back on until assorted individual pieces of damaged equipment were replaced. However, we do not rest our decision on that evidence. Rather, we look at the larger picture concerning the loss of function of the system as a whole.

It is important to note that Service Interruption provisions may have a time element requirement (i.e., only triggered after a certain number of days or hours have passed). I urge all agents, adjusters and risk managers to carefully read all applicable provisions before making a claim or a coverage determination. As the damages are assessed, I will highlight important coverage considerations that may assist claims professionals in recovery efforts.

Vehicles, Aircraft, and Watercraft—We do not cover vehicles or self-propelled machines (including aircraft or watercraft and their motors, equipment, and accessories) that are:

a. required to be licensed for use on public roads; or
b. operated principally away from the described premises.

We do cover vehicles or self-propelled machines you manufacture, process, warehouse, or hold for sale. However, this does not include autos you hold for sale. We also cover rowboats or canoes out of water at the described premises.

The FC&S publication confirms this enigmatic issue.

Q&A

If there is a business interruption due to windstorm damage to vehicles parked on the insured's premises, does the phrase "to property at premises described" encompass any kind of property, like vehicles? Would such a loss be covered under business income coverage?

Puerto Rico Subscriber

While the commercial property form lists vehicles as property not covered, there is no such limitation on the business income form CP 00 30 04 02. In addition, CP 00 30 is not tied to the commercial property form; it can be written as a stand-alone coverage. Based on this, vehicles may be considered property in context of the business income insuring agreement, which requires that business income losses arise from a "suspension" of business that is caused by direct physical loss of or damage to property at described premises.

However, two other requirements must be considered when determining whether business income coverage is triggered.

1. The damage to or loss of vehicles parked at the premises must cause a "suspension" of business—that is, either a slowdown or cessation of business—that leads to a loss of income.
2. The second factor is that business income payments are available only during the "period of restoration," which is defined as beginning seventy-two hours after the direct physical damage and ending on the date when the property at the described premises "should be repaired, rebuilt or replaced with reasonable speed and similar quality."

The insured would have to prove that the damage to the vehicles led directly to a suspension of business and loss of income.

If requirement number one were met, recovery would be limited to the loss of business income beginning three days (seventy-two hours) after the direct damage and ending when the vehicles can be replaced "with reasonable speed and similar quality." Unless these are customized autos, it seems that it would be possible to replace them fairly quickly. The insured may have to rent autos if permanent replacements cannot be found within three days, which should be recoverable under extra expense if the insured carries that coverage.

There is nothing in the business income form that specifically excludes coverage for the situation you mention. However, the insured would have to prove that requirements one and two were met before coverage is triggered.

Policyholders should always consult with coverage counsel if they are ever in this enigmatic position and need help convincing their insurance company not to exclude an otherwise covered claim.