Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Ideally, commercial interruption claims should be handled by both, the insured and the insurer, in swift and skilled manner. The expediency in which a commercial interruption claim is handled could make or break a business right after a loss. In last week’s blog, Chip noted that:

My experience is that many insurance company adjusters lack the thorough understanding of finance, business management, and accounting required to properly adjust commercial business income and extra expense claims. Most commercial adjusters never do, and lack the skill to do, the income and extra expense calculations themselves. Instead, usually after a delay, the business income claim is referred to insurance accounting firms that provide the analysis only of the numbers, without also having the business operational skills needed to properly determine the amounts owed.

While there may be many talented commercial insurance adjusters out there with the necessary skills and experience who can avoid this situation and, like I, can accomplish anything they want in life, the reality is that some commercial interruption claims are delayed because of carrier mishandling. This can, in turn, lead to a long and protracted legal battle.

For example, in Omaha Paper Stock Co., Inc. v. Harbor Ins. Co., 445 F.Supp. 179 (D.C. Neb. 1978), the court held that:

Where attorney for insured under business interruption policy wrote to adjusters requesting that they advise insured by letter as to any matter which would expedite resumption of operations, but adjusters never responded to the letter nor verbally accepted responsibility to inform insured of any failure by insured to perform as required under the contract, insured could not rely on silence as an acceptance of its attempt to shift the burden of responsibility under the due diligence clause of the contract, and insurer was not estopped from contending that any delay in resuming operations was attributable to lack of due diligence by the insured.

Further, in Hampton Foods, Inc. v. Aetna Casualty, 787 F.2d 349 (8th Cir. 1986), the insured was forced to vacate its building due to an imminent danger of collapse. Coverage was denied, but the trial court ruled in favor of the insured. However, the parties still quarreled over the business interruption calculation. The carrier argued that the period of restoration should be the amount of time it would have taken Hampton to reenter business, had it received payment from Aetna initially. The appellate court disagreed with the carrier and, relying on Omaha, held that the theoretical period of restoration should be reasonably extended because the delay in recovery was due to actions of the insurance company.

One of my mantras in commercial interruption claims is that policyholders should always consider retaining experts to present their claim to avoid the common dilatory pitfalls in this area of the law. Glad to be back. Stay tuned for more.

What generally "happens," is the insurance company limits the period of restoration to the time that the business decision is made not to re-open or the business is sold. I then get a phone call asking if the insurer can do this. As usual, the best place to start such an analysis is to read the relevant policy language and then check an authoritative source. In this case, I will use IRMI.com, which everybody who claims to be a "professional" in insurance coverage and claims should subscribed to, along with the FC&S Bulletins.

The form CP 00 30 reads:

c. Resumption Of Operations

We will reduce the amount of your:

(1) Business Income loss, other than Extra Expense, to the extent you can resume your "operations," in whole or in part, by using damaged or undamaged property (including merchandise or stock) at the described premises or elsewhere.

(2) Extra Expense loss to the extent you can return "operations" to normal and discontinue such Extra Expense.

d. If you do not resume "operations," or do not resume "operations" as quickly as possible, we will pay based on the length of time it would have taken to resume "operations" as quickly as possible.

Demonstrating its value and proving why it should be subscribed to, the IRMI.com has a specific discussion of both issues:

Election Not To Resume Operations. Note that the resumption of operations provision does not require the insured to resume normal operations as soon as possible. Instead, it establishes that the insured's business income or extra expense loss will be calculated based on the amount of loss that would have been suffered if the insured had resumed normal operations as soon as possible. Thus, an insured who elects not to resume operations at all is entitled to a recovery for the business income that would have been earned or the necessary extra expenses incurred during the time it should reasonably have taken to resume normal operations. The same is true of an insured who does not resume operations as quickly as possible.

Sale of Property during Period of Restoration. In BA Props., Inc. v. Aetna Cas. & Sur. Co., 273 F. Supp. 2d 673 (D.V.I. 2003), Hurricane Marilyn damaged the insured's hotel in the U.S. Virgin Islands. While the hotel was undergoing repairs, the insured sold the facility. The insurer argued that the sale of the hotel during the period of restoration terminated the insured's right to receive further business income coverage. The court disagreed. The court held that the amount of the insured's business income loss was fixed as of the time of the hurricane to the amount of lost profits that would have been earned during the period of restoration. The court noted that the business income policy did not expressly require that the insured actually recommence business activities at the hotel as a prerequisite for coverage. If the insured decided to shut the hotel for good after the hurricane, the insurer would still have been obligated to pay the entire business income loss through the entire time it would have hypothetically taken to rebuild and reopen the hotel. Selling the hotel midway through the period of restoration was no different than belatedly deciding to shut it down. In either situation, the insurer was still obligated to pay out the rest of the business income loss. (emphasis added)

Sometimes, a catastrophe is the perfect time to close or sell a business. Commercial policyholders that make such difficult business decisions can still obtain significant business income benefits which many insurance adjusters may otherwise deny.

My experience is that many insurance company adjusters lack the thorough understanding of finance, business management, and accounting required to properly adjust commercial business income and extra expense claims. Most commercial adjusters never do, and lack the skill to do, the income and extra expense calculations themselves. Instead, usually after a delay, the business income claim is referred to insurance accounting firms that provide the analysis only of the numbers, without also having the business operational skills needed to properly determine the amounts owed.

I suggest that unless the commercial claims representative immediately explains the broad benefits potentially available and shows a willingness to fully pay for them, most commercial policyholders need to promptly retain professional help. Often, an insurance agent or broker has a much more thorough understanding of how the insurance product, through business income and extra expense benefits, can potentially save a business from closure. Still, at this most crucial time following a loss, many commercial policyholders have to wait months to get agreement or payment of these benefits. Closures as a result of these delays can be prevented by insurance companies understanding their products and getting money, the lifeblood of any business, back into the business as soon as possible.

In an article published in the July/August 2009 issue of Coverage titled “Measuring Business Interruption Loss in Wide-Impact Catastrophes: Insurance Against Catastrophes or Only Against Insured Damage from Catastrophes?” the authors, Richard Chattman and Gregory Miller, compare diverging views on how courts calculate the measure of business interruption recovery and explore a refreshing, yet sound, perspective on business interruption claims.

Unlike an ordinary loss causing damage to only a single location, a wide-impact catastrophe, whether natural (hurricane, earthquake, flood) or man made (e.g., 9/11 terrorist attack), typically causes widespread damage which often results insignificant economic changes to the impacted area or beyond. A catastrophe can cause major shifts in population and changes in markets or supply and demand, as experienced by certain areas of the Gulf after Hurricane Katrina, or depress an entire industry, as exemplified by the significant decrease in demand for travel and related services following the September 11th terrorist attack.

According to the authors, there are two lines of cases that address the measure of business interruption loss from a wide-impact catastrophe, which they grouped as “Economy Ignored” and “Economy Considered” cases.

The “Economy Ignored” cases stick to the more traditional coverage analysis where courts measure the business interruption loss by comparing the actual past business experience against the probable experience during the period of restoration had the peril not occurred. This type of analysis, however, does not consider the impact a catastrophic peril had on the economy, market or demand for the insured’s goods or services.

American Automobile Insurance Co. v. Fisherman’s Paradise Boats, 1994 WL 1720238, 1994 U.S. Dist. Lexis 21068 (S.D. Fla. October 1, 1994) is usually cited when courts want to use the economy ignored approach. In Paradise Boats, the insured was unable to engage demand for boats in its boat sales operations after Hurricane Andrew severely damaged one of its stores. Apparently, there was a great demand for boats and marine accessories after Andrew, and the insured presented evidence to show that its sales would have increased by 192 percent if the store had not been damaged and if it was positioned to reap the economic benefits of a post-hurricane demand for the goods it supplied.

In denying the insured’s argument the Court held that the policy only allows recovery for net income projection that are not itself created by the peril and that the insured was not entitled to windfall profits for earning sources that would not have come into being had the storm not occurred.

Conversely, under the “Economy Considered” line of cases, courts use a different approach to place the business in the position it would have occupied had it been operating in the actual, post-catastrophe environment, but only allowing losses that directly flow from the insured damages.

In Consolidated Companies, Inc. (Conco) v. Lexington Ins. Co., No. 06-4700, 2009 WL 211751 (E.D. La. January 23, 2009), a Louisiana jury awarded a verdict in favor of a food distribution facility of $19.5 million for business interruption loss. Lexington challenged the verdict, arguing that the jury should have taken into account the depressed economy in Louisiana in the aftermath of Katrina to reduce the amount of the loss since the likely future performance was bleak, at best. The court accepted the carrier’s legal position that the post-Katrina economic environment should be considered in the measure of damages, but in this case, it concluded that the award was supported by sufficient proof that established how the business performed in the altered post-hurricane economy had the business not suffered physical damage. It is important to note that the Conco court focused its analysis on what the business would have earned had it not suffered physical loss or damage, rather than what the business would have earned had the storm not occurred, which circumvents the “windfall” concerns that the “economy ignored” advocates fear most.

After carefully considering the pros and cons of both approaches, it appears that while easier, the “economy ignored” analysis provides less coverage than the basic requirements otherwise permitted when the insured performs better post-catastrophe, but more coverage that the basic requirements when the insured performs worse after the catastrophic loss. The “economy considered” analysis, however, may serve as a more accurate “measuring stick,” since the formula considers the changes in the post-catastrophe economy without regard to whether the insured would have performed better or worse after the catastrophe, and it only covers loss earnings directly flowing from the physical damage.

After a calamity or insured event, category one (1) and two (2) above are typically not the subject of much quandary, insofar as overhead is considered a necessary cost during the Period of Restoration.

Category three (3), however, could give some insurance claims professionals an ulcer, especially in non-manufacturing-business claims, where the overhead cannot be easily tied to a specific production activity. One should expect and prepare for hours and hours of meetings and telephone conversations and debates over the accounting method used to allocate overhead expenses of to the individual business units of a larger corporation, if the calamity is sustained at an individual business unit or operating entity.

As a practice pointer, the insured should always be “at the ready” to argue and prove how the sales (or production) of an operating unit contributes to the general corporate overhead of the organization. Once this is established, the issue is not whether the insured is entitled to recover its fixed overhead expenses, but rather how much should be attributed to the unit or operations affected by the loss. If the company’s accounting and allocation methods directly tie overhead costs to the operating units, the calculator should take care of the amount to be written on the check. However, if the overhead calculation included in a business interruption claim deviates from the normal overhead allocations of the corporation for the affected units, the ulcers will start bleeding until the accounting methods are explained and supported. For this I say, thank God for accountants!

Every day, businesses develop and thrive on symbiotic relationships, where 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. Businesses that are dependent on a non-related entity’s operations should talk to their agents about attaching “dependent business interruption” endorsements to avoid suffering the dairy famers’ fate.

Contingent business coverage is a type of business interruption coverage will protect the “dependent business” from the 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. In lay terms, 1) suppliers, 2) buyers, 3) providers, and 4) drivers.

Depending on the relationship the dairy famers had with Saputo Cheese, the dairy farmers could have purchased coverage to pay for the loss of income resulting from Saputo Cheese’s suspension of operation until its closure, since most endorsements provide coverage until the dependent business resumes operations or alternate sources are found.

I agree. Some mom and pop stores and small businesses may not be able to generate fancy projected earning and expense reports with pretty graphs, etc. However, as a matter of law, a carrier cannot deny a claim for a small business’ inability produce or generate these documents.

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.

In order to avoid this evidentiary pitfall, small businesses should consider retaining forensic accountants to help them review their financial statements and general business objectives and prepare reports in support of their claim.
 

Specifically, the extent of the loss recoverable can be, and usually is, established by earnings projections prepared by the insured, especially where they were formulated in the regular course of business prior to the loss.

In American Medical Imaging, Corp. v. St. Paul Fire and Marine Ins. Co., 949 F.2d 690 (3rd Cir. 1991), the lower court, sua sponte (on its own) granted summary judgment in favor or the carrier holding that rent for the Plaintiff’s alternative space, extra compensation for overtime work, and excess telephone charges were “too speculative” to prove damages or to support a recovery for lost earnings and extra expenses. The appellate court, however, reversed the lower court’s ruling in favor of the carrier and held that:

“Inherent in the concept of business interruption insurance is the necessity of insureds making claims for lost earnings based in large part on estimates of things that have not happened, i.e., on estimates of what would have happened had there been no fire or other covered cause of loss. Moreover, throughout the world of business, such estimates are invariably based on the results of past performance projected and adjusted on the basis of present business conditions.”

It is important to note that the appellate court did not weigh the sufficiency of the evidence for purposes of recovery, but rather stated that the insured’s evidence should have precluded summary judgment and the issue should have gone before a jury.

In Florida, it has been held that the mere diminution in hotel occupancy as a result of a fire in a restaurant that it leased, as opposed to the actual closing and suspension of business, does not constitute an interruption of the insured's business within the meaning of a policy. Hotel Properties, Ltd. v. Heritage Ins. of America, 456 So.2d 1249 (Fla. 3rd DCA 1984).

In Ramada Inn Ramogreen, Inc. v. Travelers Indemnity of America, 835 F.2d 812 (11th Cir., 1988), the Plaintiff-hotel sustained an identical loss as in Hotel Properties, except that the Ramada owned the restaurant, rather than leasing it like the hotel in Hotel Properties. Ramada argued that the restaurant was vital part of the hotel operation, that each operation was “mutually dependent” on the other and that the diminution in occupancy was a direct result of the fire in the restaurant. In Ramada, the insurer won in trial court and the hotel appealed.

In Ramada, the Eleventh Circuit Court of Appeals affirmed the lower court and rejected Ramada’s “mutual dependency” argument, relying on Studley Box and Lumber Co. v. National Fire Insurance Co., 85 N.H. 96, 154 A. 337 (1931). In Studley, a fire in a stable burned some of the horses which were used in the operation of the lumber plant. Without the horses, the plant was unable to continue its operations and the insured was entitled to partial business income benefits.

Ramada's argument misconstrues the nature of the business interruption policy and the concept of mutual dependency. In Studley, the court said the purpose of the policy is to “insure against consequential loss to the insured's business carried on in the property destroyed or damaged by fire.” This definition is restated in an insurance treatise which says that the purpose of a business interruption policy is to indemnify the insured “for loss caused by the interruption of a going business consequent upon the destruction of the building, plant, or parts thereof.... This type of insurance is usually called use and occupancy insurance.” 1 G. Couch, Couch on Insurance, § 1:28 (2d ed. 1984). Use and occupancy insurance is defined as indemnification for “any loss sustained by the insured because of his inability to continue to use specified premises or his inability to keep the premises occupied by a tenant.” Id. at 1:113.

These definitions indicate that recovery is intended when the loss is due to inability to use the premises where the damage occurs. They are consistent with the court's determination of mutual dependency in Studley as well. Without the horses, the lumber plant was forced to suspend a portion of its operation. This is not the situation in the instant case where the hotel operation was able to accommodate the same number of patrons, albeit their actual number of customers may have been reduced.

The concept of mutual dependency is more appropriately applied to four hotel buildings, which together comprise a single unit. If any one of them were sufficiently damaged, a portion of the hotel operation would be suspended. The insurance policy clearly provides for this situation by allotting an aggregate sum which encompasses damage to any one of the four buildings.

Ramada, at 814. 

In Ramada, however, the restaurant was listed separately in the insurance policy and the court found that evidenced the parties’ intent to treat the restaurant as a separate entity. Ramada also made no attempt to rebuild the restaurant, which also weighed against its argument of mutual dependency--that the fire in one building caused an actual cessation of operations in another building. Instead, the fire in the restaurant caused a loss of business in the hotel, but in Florida, pursuant to Hotel Properties, this type of loss is not covered by a business interruption policy.

The concept of mutual dependency as a measure of business interruption recovery will depend greatly on the facts. It is clear that in the scenario presented, recovery will depend on the evidence pertaining to the relationship between the swanky entities and on the projections for future income that would support the business interruption claim.

In National Union Fire Insurance Company v. Texpak Group, N.V., 906 So.2d 300 (Fla. 3rd DCA 2005), the policyholder, a paper mill company, sued its property insurance carrier to recover more than eight million dollars in business interruption coverage. The loss occurred when a felt belt snapped in one of the machines, which destroyed the entire paper operation. The carrier alleged that the felt belt snapped as a result of the manufacturer’s faulty design. The policyholder prevailed in lower court, arguing that the “all-risk” policy had an “ensuing loss” exception that allowed recovery despite the faulty design exclusion. The carrier appealed.

The policy at issue in National Union read as follows:

Business Interruption

(1) Loss resulting from necessary interruption of business ... caused by loss ... covered herein ... to real and personal property ....

PERILS EXCLUDED

This policy does not insure:

* * *
D. against the cost of making good defective design or specifications.... however, this exclusion shall not apply to loss or damage resulting from such defective design or specifications....

The Third District Court of Appeals, following the Florida Supreme Court’s ruling in Swire Pac. Holdings, Inc., v. Zurich Ins. Co., 845 So.2d 161 (Fla. 2003), held that ensuing loss exception is not applicable if the ensuing loss is directly related to the original excluded risk. The Court further stated that holding otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion. It is important to note that it was proven at trial that the broken machine was poorly designed and that the felt-belt did not break accidentally.

If we are to learn something from this paper mill’s coverage nightmare, it is that in business interruption claims causation is crucial and that recovery will not possible if the business interruption damages do not directly flow from an underlying covered peril.

Normally, after a policyholder notifies a claim, the carrier will request a proof of loss. Most policies allow 60 days from the day the insurance company provides the form to complete and return the proof of loss to the carrier (except for policies written under the NFIP). Once the property insurer receives proof of the loss, most policy provisions allow the insurer up to 30 days to review the information and decide whether all the necessary proof is present to accept or reject the proof of loss, or continue investigating a claim. Further, depending on the language of certain loss payment provisions, it could take up to an additional 60 days for payments to be issued.

We have all been there. The loss adjustment process is a painful and arduous period of time, especially when you are working on behalf of the policyholder and catastrophe has impacted their lives to the point of insomnia.

While simple property losses are adjusted in a relatively quick fashion, the more complex losses, particularly business interruption claims, will probably devour at least 90 days following the loss to complete the loss adjustment process, determine coverage and receive undisputed payments.

As discussed last week, the Period of Restoration in a business interruption claim is a period of time that is calculated by estimating the maximum coinsurance percentage, the estimated loss of income and subject to the limits of purchased. The Period of Restoration is then fixed on each individual policy based on a worst case scenario and this target will fluctuate depending on the amount of property damage, the time of the year and many other factors at the time of the loss. The Period of Restoration usually begins right after a loss and will end according to the carrier’s calculation of when the repairs should be reasonably completed and to achieve operational capability.

The question is then, is the gruesome loss adjustment process factored in the Period of Restoration? Typically, no. The time necessary to adjust the physical damage on a building and to make coverage determinations is not considered in the business income loss time-formula. Should we all start taking sleeping pills to endure this process? No. Knowing the timing and intricacies of the loss adjustment process and keeping good lines of communications will most likely expedite the process and ease the insured’s anxiety during this period of time.
The question of whether repairs should have “reasonably” been completed in a business interruption claim is a question for a jury to decide. However, on questions of when the Period of Restoration begins and ends, courts found that delays attributed to the insured do not extend the Period of Restoration, but delays attributed to the insurer will impact when the Period of Restoration ends.

In United Land Investors, Inc. v. Northern Ins. Co., 476 So.2d 432 (La App 2d Cir, 1985), the plaintiff’s restaurant was damaged by fire in November 1981. Similar to more modern policies, the business interruption endorsement limited the insurer's liability to "such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair or replace … ., commencing with the date of such damage or destruction." It was shown that the defendant insurer paid $10,000 for lost earnings in December 1981, but that repairs did not commence until March 5, 1982, when the insurer tendered the full sum necessary to make the repairs, which were completed 12 weeks thereafter. The Court affirmed the award to the insured of the full $60,000 policy limit, subject to a $10,000 credit for the insurer's December 1981 payment, based on the trial court's determination that the 12-week period in which the insured was required to make repairs did not begin to run until March 5, 1982. The court rejected the insurer's contention that the loss period should have been found to commence in November 1981, the date of the loss. It was said that until the insurer and the insured arrived at an amount to be paid, the insured was in no position to contract for or begin repairs to the building, and thus the insured should recover its business interruption losses from the date of the loss until the repairs were completed 12 weeks after March 5, 1982.

Business owners should further rejoice on Hampton Foods, Inc. v Aetna Casualty & Surety Co., 843 F.2d 1140 (8th Cir, 1988), where the Court held under a similar business interruption endorsement, a restoration delay occasioned by the insured's need to negotiate property damage claims under policies with separate insurers, represented by the same adjustment company which represented the business interruption insurer, was within the reasonable anticipation of the business interruption insurer and thus extended the loss period.

Business interruption claims are somewhat more sophisticated than the day to day claim. However, as with everything else in life, a clear understanding of all the factors and elements of this type of claim should make the process a breeze. Stay tuned for more weekly blogs on business interruption issues.

Christopher Boggs has written a down to earth book regarding business income insurance, "Business Income Insurance Demystified: The Simplified Guide to Time Element Coverages." Buy it if you adjust property insurance claims and want to do a better job adjusting business income claims. If you are an insurance company defense attorney, don't buy it--I will use what he has written against your client and I do not need you more educated than you are. Risk managers need to buy it to explain to your CFO's and CEO's why this coverage is so important. Agents should buy the work to sell more business income coverage.

Do any insurance companies have their own adjusters determine the amount of business income or extra expense coverage is owed? Virtually all hire outside consultants and accountants to make the determination. Most adjusters wait weeks or months following a disaster to have these consultants and accountants do the work of evaluating the income and expenses of a business following a disaster. As a result, most business income and extra expense benefits are delayed at the most crucial time following a disaster. Months, rather than days, are the normal sequence for evaluation and payment of time element losses.

Most insurance agents do not understand how to address the importance of business income coverage. "Fear" is a great motivator in life and maybe agents and risk managers should consider the statistics of failure for commercial enterprises following disaster.

Boggs notes:

The insurance industry has long stated that 25 percent of the businesses that suffer a catastrophic loss (one causing a complete shutdown of more than 30 days) never reopen. The percentage could actually be much higher.

Not included in that often-quoted statistic is the number or percentage of the businesses that do reopen but ultimately close within three to five years after the catastrophic loss, with such failure being directly traceable to the loss. Considering those two classifications of catastrophe- induced business closures, the failure rate of a business due directly to major direct property losses could approach 45 or 50 percent...

The point of this post is two-fold. First, businesses need more and better time element coverage. Second, adjustments of these losses need to be much more prompt.

My suggestion to those commercial policyholders suffering a significant loss with downtime is to immediately ask for payment of income coverages and how extra expense dollars can be used to mitigate the loss and prepare for the ongoing operations after the restoration is complete.

Boggs argues in his book that the business income coverages are the most important coverages available to commercial policyholders, more so than other property coverages. I am not so certain about that. Yet, I agree that they are just as important because commercial enterprises rely upon revenue to exist. Money is blood to a business.

I also suggest all property insurance practitioners add Boggs' work to their library.

The case involved an insurance agent who sold insurance to a private school for 16 years before Hurricane Katrina struck in 2005. At issue, was the relatively limited amount of business interruption coverage. The form sold had a limit of $350,000, inclusive of both business income and extra expenses. Apparently, the coverage limit was raised once during the sixteen years from $250,000 to $350,000, based on an explanation by the agent of what the coverage provided. The agent allegedly told the school's business managers at that time that the coverage protected the school against the risk that it would incur extra expenses while it was fixing physical damage.

Following Hurricane Katrina, the school was closed for several months. The school lost significant income as a result of lost tuition. The school sued the agent for error and omissions of failing to advise school personnel that business income/extra expense coverage included tuition loss. Allegedly, the requested limits would have been much higher had the full explanation of coverage benefits been provided.

The matter went to a trial court which found that the insurance agent breached the standard of reasonable care by failing to fully inform the school of the full nature of the coverage and the need to select higher limits in consideration of the school's one source of revenue--tuition. The damages were found to be $3,166,606.

That is not the end of the story or lesson of this case, however. As is often the situation in agent negligence cases, there is usually the issue of comparative negligence. I once tried a case before a jury where both the agent and my client said the agent failed to purchase theft coverage under a commercial policy. While some may wonder why a trial was necessary when the agent admits such a failure, most states place a duty on the policyholder to read the policy. In that case, my client had the policy for two years. Had he read the policy, he would have learned of the mistake. Thus, the jury had to consider the issue of my client’s failure to read the policy in comparison to the agent's blunder.

Similarly, in the Louisiana case, the school's business managers could have done a number of things to obtain the full understanding of coverage--including simply reading the policy. The court found the school 70% comparatively negligent, and reduced the total award by that percentage.

The lessons from the case are clear for agents and policyholders:

1. Policyholder Must Communicate Needs;
2. Agents Should Communicate Coverages Available--Usually Followed up With Written Information so Policyholders Do Not Get the Wrong Impression;
3. Agents Should Investigate Needs of Clients--Use Checklists Which are Copied for Verification to Policyholders.

Insurance agents perform a vital function in the insurance marketplace and especially with businesses. I am not a fan of internet marketing and placement of insurance because agents can provide much better and detailed explanations of various coverages needed by different businesses.

For instance, our law firm carries an extraordinary amount of coverage for valuable papers and data restoration, which might not be important to a butcher shop. Yet, a butcher shop may need a utility services endorsement, spoilage coverage, and equipment breakdown coverage to properly protect its large investment in refrigerated meat. Insurance agents are trained to investigate those needs and make policyholders aware of those coverages which prevent economic calamity.

My advice is for policyholders to listen to insurance agents about the products that are available. Agents need to spend more time with clients and establish a relationship where insurance is looked upon as a necessary hedge against unthinkable consequences.

Brian Kingman, managing director for Gallagher Entertainment, a division of Arthur J. Gallagher & Co., said coverage for Mr. Jackson’s shows may not have been too difficult to secure, as the market is fairly soft for nonappearance contingency risks.

Mr. Kingman has previously served as a broker for Mr. Jackson as well as for Madonna on one of her tours.

In the case of Mr. Jackson’s tour, Mr. Kingman said he believes the risk was placed in London, and depending on how the policy was written will ultimately decide whether loss is covered. Every concert or series of concerts can be structured differently, he noted, and factors such as how much money is at risk, who could be out of money, and who is willing to insure the risk and under what circumstances are just a few considerations for events like Mr. Jackson’s tour.

The health of the performer also comes into play, Mr. Kingman said. It is typical, he explained, for a sickness to be covered only if the performer undergoes a medical examination before a tour. In the May Reuters story, Mr. Phillips said Mr. Jackson passed a physical “with flying colors.”

Mr. Kingman said he is uncertain of the terms of coverage placed for Mr. Jackson’s tour, or how much was, in fact, covered, although he said he has heard placement was somewhere around $20 million.

Outside the jet setting world of celebrity entertainment, many more mundane events are covered by this type of insurance. One such event that ended up in litigation was the annual “Defeat the Beat Battle of the Bands.” See Defeat The Beat, Inc. v. Underwriters At Lloyd's London, 669 S.E. 2d 48, (N.C. App. 2008). The facts are cited at length from the policyholder’s brief. They show a typical situation where many policyholders are given inaccurate information about the policy by their agents, they do not review the policy before the loss, and claims are delayed far beyond any reasonable time frame:

Defeat the Beat was established by Karen Blackmon…Its purpose was to host an annual “Battle of the Bands” competition that would bring together marching bands from historically black colleges and universities throughout the southeast. In 2003, Defeat the Beat hosted its first competition at Memorial Stadium in Charlotte, North Carolina. The event was a success, with approximately 22,000 people in attendance.

Following this successful debut, Ms. Blackmon …began planning a second competition …Ms. Blackmon contacted Stacy Fields, an insurance agent …about the possibility of obtaining insurance coverage for the 2004 Event. Ms. Blackmon communicated to Mr. Fields that she desired to obtain a policy that would protect her investment and eliminate the possibility of Defeat the Beat losing money on the Event.
…
…Ms. Blackmon…she inquired about the additional premium for the adverse weather coverage. After seeking clarification from Defendant Petersen, Mr. Fields informed her that the only difference between the adverse weather policy and the policy that she was purchasing was one of control. With the adverse weather coverage, Mr. Fields told Ms. Blackmon, she would be the person in charge of deciding if and when to stop the Event due to poor weather; without paying for that extra coverage, that choice would be made by the manager of the stadium where the Event was held. Based upon these representations, Ms. Blackmon elected to pay the Basic Premium of $8,805….

On August 21, 2004, the second “Defeat the Beat: Battle of the Bands” competition took place at Memorial Stadium in Charlotte. The local weather stations were predicting rain for the day, as the Hurricane Ivan storm system was traveling through the area. At 5:30 p.m., half an hour before the start of the Event, the officers of Defeat the Beat (CEO Karen Blackmon, Chief Operations Officer Duncan Gray, and Stadium Operations Director Robbie Nixon) met with Greg Clemmor, the manager of Charlotte Memorial Stadium, to discuss the weather. It was determined that the Event would continue as scheduled despite the forecasted rain.
…
At 6:30 p.m., thunder and lightning began. …At 6:40 p.m., the thunder and lightning became more pronounced, and those in charge became concerned for the safety of the spectators and participants. It was at that time, upon the recommendation of stadium manager Clemmor, that the decision was made to place the Event on hold until the lightning subsided. …At this announcement, many of the spectators returned to their cars, while others took shelter in various corridors and tunnels beneath the concrete steps of the stadium.

After making this announcement, Defeat the Beat's officers noticed that a number of fans who had departed the stadium were leaving permanently; they also became aware that many of the patrons who were waiting in line to purchase tickets were leaving as a result of those people coming out of the stadium who were saying that the event had been cancelled. Accordingly, at 6:45 p.m., Ms. Blackmon made an announcement over the public address system in which she stated: “The event will resume in a few moments per weather conditions. The event is not cancelled.”

At approximately 7:15 to 7:30 p.m., the lightning subsided and the Event resumed. The competition continued through to completion, ending around 11:00 p.m.

As a result of the bad weather and the interruption of the Event, the 2004 Battle of the Bands competition was considerably less successful than its predecessor in 2003…

Several days after the Event, Ms. Blackmon contacted Stacy Fields to discuss submitting a claim under the Policy. At that point, it was discovered that neither Blackmon nor Fields had a copy of the insurance policy. Accordingly, Stacy Fields contacted Defendant Petersen and received a copy of the Policy, executed September 2, 2004, sometime in early September 2004...

After receiving Plaintiff's claim, Defendant Underwriters assigned it to Michael Tocicki of Crawford Technical Services to be adjusted. …

On November 21, 2004, Mr. Tocicki came to Charlotte to inspect the stadium...During this meeting, multiple witnesses report that Mr. Tocicki said that the Plaintiff's claim was a valid one and that he was recommending to Defendant Underwriters that they pay Plaintiff's claim. In response to a question from Ms. Blackmon regarding how long it would take to receive payment of the claim, Mr. Tocicki stated that he would be submitting a request for payment to Defendant Underwriters following the Thanksgiving holiday, and that Ms. Blackmon would receive payment within two to three weeks following that submission.

On December 8, 2004, Mr. Tocicki submitted a Preliminary Report …Tocicki concluded that although the Plaintiff had elected not to purchase adverse weather coverage, Plaintiff nonetheless had a valid claim for a least a portion of its losses due to an “interruption” pursuant to Clauses 1.1 and 2.8 of the Policy.…Tocicki suggested setting aside a precautionary reserve of up to $124,000 to cover Plaintiff's loss.

…E-mail records show that Defendant Underwriters decided to deny Plaintiff's claim as early as December 16, 2004; however, there is no evidence that this decision was ever communicated to the Plaintiff at that time. Instead, still believing that it would receive the full amount of its claim, Plaintiff continued to work with adjuster Tocicki in his efforts to determine the amount of loss caused by the interruption of the event, providing Tocicki with the supporting documentation that he requested as it became available to the Plaintiff.

On February 2, 2005, by letter to Plaintiff's counsel, Defendants' counsel advised that Defendant Underwriters had decided to honor the Policy as written and to provide coverage for losses due to the interruption of the Event

On May 3, 2006, Plaintiff's counsel received a letter from Defendants' counsel stating that Underwriters had completed its adjustment of Plaintiff's claim and was prepared to settle the undisputed portion. The letter stated: “Underwriters have determined that the event interruption resulted in a covered loss of $37,135.20.” The letter further stated that “acceptance of this payment will in no way prejudice [Plaintiff's] right to pursue a claim for the disputed amount of coverage.”

Plaintiff received a check for $37,135.20 on May 30, 2006…Plaintiff instituted this suit for breach of contract, bad faith, and unfair or deceptive trade practices. 

There should be a good basis for a bad faith claim based upon claim delay, if nothing else. However, one never knows for certain how others view a fact pattern. The Appellate Court noted the policy language:

1.1 This insurance is to indemnify the Assured for their Ascertained Net Loss (as defined herein), should the insured Event(s) described in the Schedule, be necessarily Cancelled, Abandoned, Postponed, Interrupted or Relocated, in whole or in part, which necessary Cancellation, Abandonment, Postponement, Interruption or Relocation is the sole and direct result of any cause beyond the control of the Assured and the participants therein (except as hereinafter excluded), subject always to the terms, conditions and exclusions contained herein or endorsed hereon.

* * * *

2.1 Ascertained Net Loss means such sums as represent:-(a) Expenses which have been irrevocably expended in connection with the insured Event(s), less any savings the Assured is able to effect to mitigate such loss, and (b) Profit (where insured and stated in the Schedule) which the Assured can satisfactorily prove would have been earned had the insured Event(s) taken place.

* * * *

2.4 Profit (where insured) means Gross Revenue less Expenses.

(Emphasis added.)

The schedule of benefits attached to the policy provides in part:

Limit of Indemnity Excluding Profit:     US$540,000
Limit of Indemnity Including Profit:
(Profit insured only if this section completed) N/A

* * * *

Exclusion: TERRORISM COVERAGE

The Court found the issue of whether the weather was covered or excluded was moot because the insurer paid for the event being postponed in part by weather:

It is clear from the record that plaintiff purchased the basic coverage, rather than the adverse weather coverage; however, because only terrorism and not adverse weather is listed as an exclusion on the schedule of benefits, it is not clear whether adverse weather was an exclusion under the policy. We resolve this ambiguity in favor of the non-moving party and assume that any ascertained net loss which resulted from the adverse weather is insured under Section 1.1 of the Policy. Nonetheless, plaintiffs have produced no evidence demonstrating that the adverse weather resulted in an ascertained net loss, as defined and insured under the terms of the policy.

This is a key point I raise in many cases involving business interruption and lost revenue. Policyholders must provide evidence of the lost revenues. The best method is through accountants and economists along with testimony from the policyholder about expectations of business operations. In this case, the policyholder was in an impossible situation because the right type and full amount of coverage was not purchased. I do not think accountants could have helped because expenses did not change much with a 35 minute postponement---but the revenues certainly did. Who would pay to watch bands in the rain with a Tropical Storm approaching? As many agents would say, “penny wise and pound foolish” is the policyholder who does not opt for full coverage of likely perils:

[D]efendant produced evidence demonstrating that an essential element of plaintiff's claims is nonexistent. Specifically, our examination of the record before us reveals that plaintiff has failed to show that the loss complained of is embraced within the insuring language of the policy. First, defendants produced the document entitled “A Proposal for Event Cancellation Insurance” that expressly provides that the coverage is “for Non Refundable costs and expenses only (i.e. no cover for profits).” Likewise, defendants produced a copy of the policy, and under the terms of Section 2.1 of such policy, it is clear that the insured loss or “ascertained net loss” only includes profit “where insured and stated in the Schedule.” Defendants introduced a copy of the schedule of benefits, showing that profit is not stated on such schedule, and therefore, is not insured under the policy. Thus, defendants met their burden in establishing that the lost profit from low ticket sales, low DVD sales, low T-shirt and souvenir sales caused by the 35-minute interruption, which plaintiff asserts as damages under its breach of contract and bad faith claims, are not insured under the terms of the policy.

Given that defendants established that essential elements of the non-moving party's claims are nonexistent, the burden then shifted to plaintiff, the non-moving party, to forecast evidence or specific facts that demonstrate the existence of some sort of loss, insured under the terms of the policy, which defendants refused to pay. Under Section 2.1 of the policy, this would include “[e]xpenses which have been irrevocably expended in connection with the insured Event(s), less any savings the Assured is able to effect to mitigate such loss[.]” While plaintiff alleged in an interrogatory response that “Plaintiff has received $37,135.20, an amount that is woefully less than Plaintiff should have been paid under the insurance policy in question [,]” plaintiff has failed to set forth specific facts or forecast evidence that it incurred any non-refundable expenses and costs as a result of the 35-minute interruption in excess of the $37,135.20 that defendants have already paid. The only facts set forth by plaintiff demonstrate an uninsured loss consisting of lost revenue. Because plaintiff failed to meet this burden of establishing a net loss that defendant was obligated to pay under the terms of the contract, yet refused to pay, there is no issue of disputed fact with respect to the damages element of the breach of contract claim. Accordingly, the trial court's grant of summary judgment in defendant's favor with respect to this claim was proper.

This case did not turn out well for the policyholder. I hope Michael Jackson’s promoters and others who invested in his performance have better luck and much better coverage. This type of coverage is very valuable when you have a lot riding on an event. Death, weather, and all types of risks can happen at the worst possible time. “Safe is better than sorry,” and that is why this coverage exists.
 

I will suggest that the Windstorm Network look into this coverage at our Board Meeting this Wednesday. The Windstorm Conference is being held in Jacksonville, Florida, next January 25 through 28, 2010. Register and book your room early so you do not miss it. It is typically sold out several months in advance.

The seminar topics and speakers are:

Topic: “Appraisal - Appraising Large Losses”
Presenters: W. Wesley Baldwin of The Baldwin Company and Jonathan Wilkofsky, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Builder's Risk Program and Coverages” (part 1)
Presenters: Samuel Bergman of Rolyn Companies, Inc.; Stephen R. Figlin, SPPA of Stephen R. Figlin & Associates, Inc., and Peter Kahn of Matson, Driscoll & Damico

Topic: “Builder's Risk Program, Coverages and Adjustments” (part 2)
Presenters: Samuel Bergman of Rolyn Companies, Inc.; Stephen R. Figlin, SPPA of Stephen R. Figlin & Associates, Inc., and Peter Kahn of Matson, Driscoll & Damico

Topic: “Introduction to Building Code Coverage” (part 1)
Presenters: Mark Friedman, Esq. of Wilkofsky, Friedman, Karel & Cummins, and Fred Yutkowitz, Esq. of Fairview-Licht Company, LLC

Topic: “Building Code Coverage Requirements for Repairs” (part 2)
Presenters: Mark Friedman, Esq. of Wilkofsky, Friedman, Karel & Cummins, and Fred Yutkowitz of Fairview-Licht Company, LLC

Topic: “Business Income - Primary Analysis and Authentication”
Presenters: Brad White & Max Flynn of Meaden & Moore, and Hayes Walker, III of Rollins Accounting & Inventory Services

Topic: “Business Income & Extra Expense - Measuring Small Losses” (BI part 1)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Business Income & Extra Expense - Extended BI Coverages, Application and Calculation” (BI part 2)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Business Income & Extra Expense - Manufacturing Losses” (BI part 3)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Commercial Property Forms and Endorsements”
Presenters: Dennis Perlberg, Esq. of Perlberg & Speyer, LLP, and David Karel, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Deposition ABC's - Preparation is Key to Survival”
Presenters: Mary Kestenbaum Fortson, Esq. of Merlin Law Group and William F. Burke, Esq. of Adler, Pollock & Sheehan

Topic: “Ethics”
Presenters: Nicole S. Figlin, SPPA of Stephen R. Figlin & Associates and W. Richard Burr SPPA of Young Adjustment, Inc.

Topic: “Homeowners Coverages”
Presenters: Randy Goodman, SPPA of Goodman-Gable-Gould/AI and Joel Gumbiner, Esq. of Gumbiner & Eskridge, LLP

Topic: “Insured's Cooperation and Duties - How to Prevent a Problem”
Presenter: Robert P. Rutter, Esq. of Rutter & Russin, LLP

Topic: “Science of Roof Damage Claims”
Presenters: William F. Merlin, Esq. of Merlin Law Group and Timothy Marshall of AT Designs, Inc.

Topic: “Subrogation Opportunities Do's and Don'ts”
Presenter: Jean Niven, Esq. of Merlin Law Group

Topic: “The Adjuster as an Expert Witness”
 Presenters: Dave Pettinato, Esq. of Merlin Law Group and Jonathan Wilkofsky, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Vacancy and Occupancy Defenses - Its Many Faces”
Presenters: Tina Nicholson, Esq. of Merlin Law Group and Ronald Reitz, CPPA of Quality Claims Management, Inc. 

Dr. Therese M. Vaughan, CEO of the National Association of Insurance Commissioners, will give the keynote address. Dr. Vaughan was Iowa State Insurance Commissioner from 1994 through 2004 and also the Robb B. Kelley Distinguished Professor of Insurance and Actuarial Science at Drake University.

This conference is open to the entire insurance community. Insurance company adjusters, brokers, agents, attorneys, accountants, and public adjusters are invited. I expect the First Party Claims Conference will be an excellent resource and provide practical tools and answers to a variety of insurance related matters. If you adjust roof claims, you simply cannot afford to miss that presentation with its all-star speakers.

Information on the education program (topics & speakers), exhibitor/sponsor opportunities, conference registration, and hotel accommodations is available at www.firstpartyclaims.com

On the Central Gulf Coast we know all too well that after a catastrophic event, it is deeply comforting and reassuring to have the support of our family, friends, neighbors and extended neighbors. In addition to knowing that the replacement or repair of our homes and personal or business property will be taken care of, we should also be able to rely on our wise decisions to cover those additional and necessary expenses for the time period it takes to put our lives back together without the need to stretch our budgets and burden our families, friends and communities.

Some of the most overlooked and underused benefits are Additional Living Expense Coverage, Loss of Rents Coverage, Business Expense Coverage and Business Interruption Coverage. Though these coverages are often reimbursed after the actual costs have been incurred, many insurance carriers will make partial payments to policyholders to assist them on their way to recovery.

The only way to know if you have these coverages is to review the policy. We strongly encourage all of those affected by these recent storms to thoroughly review their complete insurance policy, including riders and endorsements. If you no longer have, or never had a policy, seek one from your insurer immediately.

A typical benefit under the Coverage for Additional Living Expense is coverage for rental or temporary housing when a covered event renders the covered primary home uninhabitable. Other additional expenses can also be covered, such as the additional expense in travel to and from work due to the new living location.

Often owners of residential rental property will have coverage under their rental dwelling policy that covers loss of rents when the covered property is made uninhabitable by a covered event, as a renter has no obligation to continue to make rental payments due to force majeure. A lease or a rental agreement will be helpful in documenting the amounts to be paid under this provision.

A benefit of Business Expense Coverage under a commercial policy may allow a covered business to take the necessary steps to continue the business at another location during the period of restoration to the covered property. This coverage is much like the Additional Living Expense Coverage in that it is intended to offset the “extra expense” associated with returning to the normal operation of the business.

Another valuable coverage to businesses is the Business Interruption Coverage, a.k.a, Time Element Coverage. This coverage often helps prevent a business affected by a covered event from going out of business or into bankruptcy by its receiving the benefit of lost income payments for the period of restoration or replacement of the damaged property.

Though many of these coverages are limited to a 12 month or 24 month period, unless there is an endorsement for an extension, these coverages should be explored and understood at the outset of any insurance claim. Policyholders should read their policies carefully to determine which coverages are available to them and to determine the duties and obligations of policyholders in order for them to make a proper claim for those coverages. Policyholders should also have their insurance carrier verify and commit to coverage early to ensure prompt reimbursement.

At this year’s annual Windstorm Conference held in Orlando, FL [link], there were many vendors in attendance that offer insurance policy related services. Temporary housing services can prove to be very beneficial to policyholders who have been displaced when their home is rendered uninhabitable by a covered event.

While visiting with some of the temporary housing vendors at the Windstorm Conference, we discussed the dilemma for many policyholders with regard to obtaining the temporary housing benefit under their Additional Living Expense Coverage. In the aftermath of a catastrophic event most policyholders are thrown in to a time of uncertainty and do not have the savings or resources immediately available to them to secure temporary housing.

The temporary housing services work directly with the insurance company. The hotel or rental bills are paid by the insurer on behalf of the policyholders directly to the temporary housing service. Informing policyholders that this kind of service can be available could lead to the benefit of temporary housing for policyholders at the time most critical in the recovery—the initial, emergency stages.

Insurance policies can be very difficult to understand. Policyholders should consider making an extra copy of their policy so that they can mark the areas that need further clarification. Policyholders should then consider discussing the meaning of these provisions with a claim representative as soon as possible. If policyholders are not fully satisfied with the answer(s) given, they should consider asking to speak to a Claims Manager or asking to be referred to someone who can assist them. If policyholders are still dissatisfied, have been wrongly denied, or have been told there is limited or no coverage due to exclusionary language, policyholders should consider seeking legal counsel to protect their interests.

Our hearts and prayers go out for all of those affected by these tragic storms and tornadoes and we send our wishes for a speedy recovery.

Best to All,

Deborah

Many carriers limit their payments on a BI claim to (1) the amount of profits lost to a business while it was closed as the result of a covered peril, and (2) operating costs (i.e. salaries and utilities). This limitation in unfairly restrictive, and does not take into account the basic rule behind this and many other types of insurance.

The role of insurance is to place insureds back into their pre-loss condition. Insureds pay their premiums so that after they suffer a covered loss they may then bring their business back to the condition that it would have been in had the loss never occurred. This opens the door to payment for other items that an insured might never have known that it could recover, such as (1) the cost of advertising for reopening a business that has been shuttered; (2) increased costs that have been incurred in order to keep the business afloat during the indemnity period; (3) costs pertaining to the preparation of the claim. These are but a few of the additional costs.

A case which I recently handled also illustrates some of the legal issues that may arise in BI claims. Our firm was retained to assist in the resolution of a BI claim in South Florida. The insured operated a large, membership-driven operation which had closed down for 16 days as a result of Hurricane Wilma. The underlying claim for the physical property, which we did not handle, resulted in a final payment of $200,000 (which was an outstanding result). The insured did not receive full payment until one and a half years after the loss, which was to prove a pivotal point.

The carrier limited its initial payment on the BI claim to $16,000. It attempted to support this number by stating that this was the amount due to the insured for lost profits and operating costs for the sixteen days in which the business was shuttered.

However, there were several factors which the carrier had not taken into account. Although the insured had reopened its business 16 days after the loss, it was a shadow of its former self. There were holes in the ceiling. The glass storefront had been shattered. The place smelled of mildew. For a place that had prided itself as being a first-rate operation, these damages were incalculable.

During the year and a half in which the business struggled along, facing increasingly difficult conditions, the insured lost numerous members and was unable to attract new ones. A once thriving business saw its future hopes imperiled. It was, at the time our firm began its involvement, on its last legs.

Initially the carrier was insistent that the insured had been properly compensated for the loss of its income. Any other payments due would be a minimal amount. The carrier also claimed that the insured had not been been doing all that well prior to the hurricane, and that the current numbers were inflated.

Our firm painted what we felt was a more realistic picture of what had transpired. A business had, for all intents and purposes, been closed for a year and a half. The indemnification period was not sixteen days, but a year and a half. The business had made some money over the year and a half, but not as much as it would have made had (a) the storm never hit, and (b) the insured been paid within an appropriate time-frame.

During settlement negotiations, the carrier changed its tune, and agreed to an additional $235,000 in BI coverage.

Our insured was stunned—not only had it seen more money than it expected, the possibility now existed that it could keep its business afloat. In these times, that is no small feat. It was an honor to represent them, and we look forward to hearing about their continued success.

-Ed Acle

The Value of Forensic Accountants in a Business Interruption Claim

In today’s economic environment, everyone is looking for value. In my experience. I have found that the earlier the forensic accountant is involved in the claim process, the more value he/she typically provides. The value derived from the forensic accountant is his/her technical knowledge of accounting and familiarity with the claims process, which may result in a more expeditious resolution to the Business Income claim.

In simple terms, the purpose of Business Income coverage is to indemnify the insured for its net income or loss plus continuing operating expenses during a period of interruption (period of restoration), resulting from a covered loss. In addition, the insured may be covered for additional expenses (Extra Expense), which it incurred due to the loss incident.

To quantify a Business Income loss, an analysis of pre- and post-loss revenue, costs and operating expenses is required. A competent forensic accountant will provide an adjuster, policyholder, or legal counsel with his/her knowledge and experience in matters, including, but not limited to: technical aspects of accounting rules and procedures and other related data, familiarity with policy terms and conditions, and establishment of accounting and document control procedures to ensure inclusion of all relevant data into the claim calculation.

The above-mentioned services will result in an expeditious compilation of a Business Income claim that properly indemnifies the policyholder for its Business Income loss in accordance with its coverage(s). Some specific examples of how the forensic accountant can assist:

• Requesting the relevant books and records needed to support a Business Income claim.
• Using his/her general knowledge of coverage to properly analyze, indentify and segregate revenues, costs and expenses to coincide with coverage and facilitate the expeditious preparation of the claim. Please note, a forensic accountant does not provide coverage interpretation, as this is the responsibility of an adjuster and or legal counsel.
• Providing an avenue for communication between the “two sides” on technical accounting and related matters that may be beyond the understanding of the adjuster and or legal counsel.
• Preparing a Business Income analysis, which coincides with the language of the policy coverage and that indemnifies the policyholder for its covered loss in an expeditious manner.

Conclusion

A forensic accountant serves as a resource of technical knowledge in accounting related matters that an adjuster or legal counsel may not feel comfortable with. The early inclusion of a forensic accountant into the team of claim professionals will go a long way in assuring that the policyholder is being properly indemnified for its covered loss under the terms of the policy coverage.

--Bruce Smith