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

As noted before, there are two diverging views on whether post-loss market conduct should be considered to determine the value of a business interruption loss. Experts have coined the debate between “economy ignored” and “economy considered” cases as follows:

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 could have had on the economy, market or demand for the insured’s goods or services […]

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 Catlin Syndicate Limited v. Imperial Palace, No. 09-60209, 2010 WL 9008731 (5th Cir. 2010), the Fifth Circuit Court of Appeals recently followed the “economy ignored” line of cases, foreclosing any consideration to an insured’s post-loss earnings to determine lost profits under Texas and Mississippi law. In Catlin, the insured did very well after Hurricane Katrina because it was one of the first casinos to reopen after the hurricane, but the Court only allowed consideration of the historical sales figures, finding that “loss” and “occurrence” are one and the same in the business interruption provision.  It ruled that “had no loss occurred” in the “Experience of the Business” provision means “had no hurricane occurred.”

Six months after Catlin, the Fifth Circuit Court of Appeals revisited the same issue in Consolidated Companies, Inc. v. Lexington Insurance Company, but this time under Louisiana law. In Consolidated, the insured did poorly after Hurricane Katrina. The insurer wanted to consider the poor post-loss market condition, arguing that the insured’s profits would have been reduced from their usual level even if there had been no property damage, but Catlin was too hard to distinguish.

In Consolidated the Court held:

We reject this [Lexington’s] interpretation for the same reasons we rejected it in Catlin (citation omitted). The jury was not to look at the real world opportunities for profit post-Katrina, but instead was to decide the amount of money required to place Conco [insured] in the same position in which it would have been had [Katrina not] occurred […]

The Court further stated that the insured “was not required to draw a bright line in its evidence between loss stemming from property damage and loss stemming from market conditions.” I love this quote. It certainly makes the debate interesting.

I recognize that the “economy ignored” cases are premised, for the most part, on valid concerns of preventing abhorrent windfalls, but this hard-line analysis may have undesired effects. In my recent post, I commented:

[…]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 […]

I have also noted that experts on this matter still believe and conclude that the “economy ignored” framework has the effect of treating business interruption coverage as some sort of catastrophe insurance, instead of insurance for the financial consequences of defined property damage, which is the intent and purpose behind business interruption coverage. The debate is very much alive. Stay tuned.

Consolidated Companies, Inc. (“Conco”), a food and food-related products distributor, sustained damages to one of its warehouses and equipment as a result of Hurricane Katrina. Conco was able to resume partial operations within ten (10) days of the hurricane, however, it took the company 15 months to resume its pre-loss operations. During those 15 months, Conco earned $205,840,489 in revenues and incurred $205,561,483 in expenses, netting a mere $279,006.

Lexington advanced $3 million under the policy and offered an additional $247,070 in final payment of the claim. Conco rejected the additional $247,070 and filed suit sounding in breach of contract and bad-faith alleging it had a business interruption loss in excess of $19 million (of which $12,308,522 were charges and expenses).

After a trial, the jury awarded $19,586,239 in business interruption, $2.5 million in bad faith damages, and an additional $5,365,797.50 in statutory penalties. Lexington appealed on several grounds, including whether the trial court erred in not instructing the jury to offset the charges and expenses ($12,308,522 ) from the calculated net income. Lexington prevailed, and the award on the business loss was therefore adjusted.

At issue before the Court was the following policy language:

If such loss occurs during the term of this policy, it shall be adjusted on the basis of the actual loss sustained by the Insured, during the period of restoration, consisting of the net profit (or loss) which is thereby prevented from being earned and of all charges and expenses (excluding ordinary payroll), but only to the extent that they must necessarily continue during the interruption of business, and only to the extent to which they would have been incurred had no loss occurred.

* * * *

1) RESUMPTION OF OPERATIONS: It is a condition of this insurance that if the insured could reduce the loss resulting from the interruption of business,

(a) by a complete or partial resumption of operations, or

(b) by making use of other available stock, merchandise or location

such reduction will be taken into account in arriving at the amount of loss hereunder, but only to the extent that the business interruption loss covered under this policy is thereby reduced.

As defined in the policy, the “actual loss” consists of the net profit or loss which the business interruption prevents from being earned. The term “charges and expenses” is further defined as expenses that would have been incurred without the loss and have to continue during the business interruption.

Conco argued that the charges and expenses incurred during the period of restoration are recoverable in addition to the lost profits, as calculated under the “actual loss” provision. The trial court agreed with Conco by finding that the “actual loss” provision was ambiguous and resolved the issue in favor of the insured. However, the appellate court disagreed, finding that the “Resumption of Operations” subparagraph resolved the question in favor of Lexington.

In an acrobatic effort to make a difficult issue simple, the Court wrote:

As a condition of coverage, operations had to be resumed “if the insured could reduce the loss resulting from the interruption of business” by such a resumption. The policy states that “such reduction will be taken into account in arriving at the amount of loss hereunder, but only to the extent that the business interruption loss covered under this policy is thereby reduced.”

This clause does not elaborate on what the “loss resulting from the interruption of business” means. Meaning is found in the general section immediately before the “Resumption of Operations” subparagraph. There, “actual loss” from an interruption of business is said to consist of the net profit that the interruption prevented the insured from earning plus “all charges and expenses (excluding ordinary payroll), but only to the extent that they must necessarily continue during the interruption of business, and only to the extent to which they would have been incurred had no loss occurred.” Three paragraphs later, the policy addresses the effect of the insured's resuming operations: “if the insured could reduce the loss resulting from this interruption of business ... by a complete or partial resumption of operations ... such reduction will be taken into account in arriving at the amount of loss.” (emphasis added). This is the same “loss” that is defined as being expected net profit plus charges and expenses. There is no ambiguity.

Therefore, when a partial resumption in operations reduces the “actual loss,” i.e., anticipatable profits and unavoidable costs, so substantially as to create some profit, all charges and expenses have, by definition, been covered by income. The only recovery in such an event is for the diminished profit.

Taking the actual dollar amounts presented in this case, we repeat that Conco earned $205,840,489 in revenues and incurred $205,561,483 in expenses for a net profit of $279,006. The charges and expenses for which the policy would pay had there been no resumption of operations was shown to be $12,308,522. As the policy requires, those expenses are ones that “necessarily continue during the interruption of business, and only to the extent to which they would have been incurred had no loss occurred.” Thus, they are not independent of the costs that are incurred during usual operations, but are a subset of them. Consequently, the roughly $12 million in expenses must be part of the $205 million in expenses that were incurred during resumed operations. All expenses were recouped from the income of the business and are not a “loss” to be compensated under the policy.

It is hard to understand how $12 million can just disappear in a few sentences, but insurance law abhors windfalls on any side. Unfortunately, since the “actual loss” was reduced by $12 million, the court of appeals also reduced the bad-faith damages, because the jury based its bad-faith findings mostly on the failure to pay the $12 million. 

For a copy of the complete opinion, click here.

A typical policy defines the duty to mitigate as follows:

The Insured has an obligation to incur any expense with the object of minimizing a loss hereunder, such expenses subject to prior agreement of Insurers being for Insurers account, provided that the loss is reduced as a result of such expenditure, and provided such expenditure is not recoverable from other policies taken out by the Insured. Insurers have the right to require the Insured to incur any expense which would reduce Insurers liability under this policy provided such expense is for Insurers account.

Metalmasters of Minneapolis v. Liberty Mutual, 461 N.W. 2d 496 (Minn. App. 1990) is an example of what can happen if the insured and insurer are not the same page with respect to mitigation costs.

Metalmasters manufactured precision computer disk drives and other small machine parts. A two-inch overhead pipe carrying water for cooling and air conditioning ruptured during the night and flooded Metalmasters' shop. Metalmasters was shut for nine weeks, with partial production resuming after three weeks.

Metalmasters began using its clean rooms within four months after the water damage, but in order to produce a rust-free product (and protect its product from the water intrusion due to the pipe loss), Metalmasters incurred an additional expense of $4.90 for each of 15,500 spindle assemblies, totaling $75,590.

Unfortunately, Metalmasters was not able to recover $193,500 of loss of net sales during the nine week interruption period because Metalmasters was not able to show a loss in gross earnings since it had a buyer purchase all of its non-damaged goods. However, Metalmasters was able to recover the $75,590 as a mitigation cost under the Extra Expense provision of the policy, despite Liberty Mutual’s hard fight.

I am always tickled by case law that restates obvious principles and where the court’s frustration with one of the parties is apparent.

These additional production expenses were expenses of mitigation. Liberty cannot have it both ways. If, as they strenuously urge, the insured has a contractual as well as a common law duty to mitigate damages, then the expenses of that mitigation must be covered. If the mitigation efforts take longer than the interruption period, then the business interruption clause cannot limit coverage to that period, since the activity is in the interest of the insurer. In this case the expense continued beyond the four weeks during which the clean rooms were inoperable.

Mitigation is a duty the insured performs for the insurer's benefit. Mitigation cost is recoverable so long as it is reasonable and less than the damages would have been without it. In this case the cost of mitigation is unquestionably less than damages would have been without the additional production expense.

Mitigation costs are generally recoverable under a range of coverages, but to avoid a Catch-22 situation where the insurer denies payment for mitigation efforts taken because they do not meet a certain definition under the policy, I suggest that after a business loss, the inusured or its representative openly discuss the insurer’s expectations with respect to mitigation efforts and how these costs should be presented for recovery.

Fountain Powerboat v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D. N.C. 2000), is illustrative 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 and that there was no actual impairment to access since Fountain was able to drive its workers over the flooded and eroded roads for three days.

Fountain filed suit seeking appraisal, but Reliance refused and asked the court to interpret the following provision:

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.

The court held as follows:

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 may be claimed is the length of time to restore Fountain's business to the condition that would have existed had no loss of ingress/egress occurred. The court also found that the insured’s efforts to pick up its employees and drive them to work were extraordinary (since they were driving over flooded and closed roads) and that the ingress/egress provision related only to reasonable access to the property.

Not all ingress/egress provisions are as expansive as the one interpreted in Fountain Powerboat, as most forms will limit the period of recovery to a few weeks. It is highly recommended that any business located in an isolated or hard to access area consider reviewing the ingress/egress provision of its policy to ensure that adequate coverage is provided.

In yesterday's post, I quoted Barry Zalma’s opinion, "without Insurance the economy of the world would collapse. No entrepreneur would dare invest money in a business if he could not spread the risk of loss." Scott Johnson and his fellow insurance agents would make a much greater impact upon their business clients if they could convince more to purchase complete coverage in the various forms of business loss insurance. Money is the lifeblood of any business organization.

In an upgrade to our website and to make all of Michelle's work more easily available, we have placed them together into an e-book for study. Just click below.

Service Interruption coverage usually reads as follows:

In consideration of additional premium, the Time Element [ie business interruption] coverage of this Policy is extended to cover the actual loss sustained caused directly by the interruption of the specified incoming services during a Period of Service Interruption, or if applicable, during the Restoration of Normal Operations […]

Coverage is provided for loss resulting from interruption of the following specified incoming services: Gas, Water, Electricity, Telephone […] by reason of any accidental [occurrence] to the facilities of the following suppliers: Any Public Utility[,] that immediately prevents in whole or in part the delivery of useable services specified[..]

Because reality bites harder than illusion, a case which illustrates the importance of “service interruption” coverage is in order. In Red Bird Egg Farms, Inc. v. Pennsylvania Mfrs. Indem. Co., 15 Fed. Appx. 149 (4th Cir. 2001), the insured ran an egg farm with more than half a million chickens. In this type of facility, constant ventilation is required or the chickens perish within an hour. To prevent this massacre, the insured employed an extensive system of electric ventilation fans that required a “three-phase” alternating current to operate correctly and keep the chickens cool.

For those who don’t know, alternating currents oscillate between positive and negative voltage. In ordinary household current, this oscillation is a straightforward sine wave and it is called a “single-phase” current. A three-phase current is essentially the “stacking” of three single phase voltage oscillations on a single line. This stacking enables greater power transmission over an existing electrical line. Each stacked wave is slightly out of phase with the others. Electric motors, such as the ones housed in the chicken facility, were built to handle only one type of alternating current. Three-phase power is used mainly in industrial applications. Three-phase motors will burn out if they are supplied with single phase current.

In this case, lightning struck outside the chicken facility and the power supply was interrupted. The facility’s generators, which were capable of generating three-phase alternating currents, responded immediately, but then failed because of a ruptured coolant hose. As the facility’s employees worked to fix the generators, the local power plant restored service, but only in a single-phase power, which blew out the motors of 100 ventilation fans. An employee disconnected the incoming power and activated a secondary generator, but that generator failed as well, at least partly because it could not handle the increased load of the burned out fan motors. All 500,000 chickens died.

The chicken facility submitted a claim for the loss of the birds, debris removal, damage to the generators, and business interruption. The carrier paid approximately $1,000,000 for the loss, but denied the business interruption claim under a loss of power exclusion endorsement, which read as follows:

(1) Any loss caused directly or indirectly by the failure of power or other utility service supplied to the described premises, however caused, if the failure occurs outside of a covered building.

But if the failure of power or other utility service results in a Covered Cause of Loss, we will pay for the loss resulting from that Covered Cause of Loss.

After a bench trial, the lower court found that the introduction of single-phase current caused the motors to blow out, which led to the demise of the chickens. The trial court also found that the power failure and restoration incident fell under the exclusionary language above. The facility appealed and argued that that since the motors in the fans burned out, the introduction of single phase power cannot properly be considered an “interruption” in power, and, in fact, can best be characterized as too much power for the three-phase fans.

The appellate court upheld the trial court’s finding stating:

First, the language of the policy excludes business interruption losses caused by a “failure of power or other utility service,” and does not mention “interruptions.” Accordingly, Red Bird's detailed discussion of the accepted meanings of the word “interruption” is irrelevant. It is the language of the policy that controls.

Second, the record evidence supports the determination that, contrary to Red Bird's assertions, single-phase current was not “too much” power for the ventilation fans. Rather, single-phase power was the wrong type of power for the fans. Red Bird's argument that single-phase power should be considered to be “too much” power is unsupported by the record.

Surprisingly, the trial court was not persuaded by the facility’s ensuing loss argument, that since the motors “blew out” there was business interruption coverage as a result of a fire. The appellate court was not so kind either.

Once the electric motors in the ventilation fans were exposed to single-phase current, the motors in many of the fans “burned out.” This appears to have involved overheating, melting of the insulation around wires in the motors, and some smoke. But, there was no evidence of any flames. The district court found as a fact that although the motors “burned out,” there was no actual “fire” involved. The damage caused in this case is enough like fire that perhaps a finding that the damage was fire damage would be supported by the evidence. However, the damage is not so obviously “fire” damage as to render the district court's factual finding clearly erroneous.

If there’s a lesson to be learned from this chicken demise, is that “service interruption” coverage should be strongly considered if a business heavily relies on utilities. As seen above, service interruption coverage would have provided business loss protection because the power supply was interrupted by the lightning, irrespective of the sophisticated power needs of the chicken facility.

In the post, Chip commented:

When considering a policy that covers "accidental physical risks of loss," I wonder what a "loss" would be if there were no "damage" that occurred with it. I cannot think of such a situation.

An avid reader commented:

A couple of scenarios come to mind where a loss has occurred but NO physical loss to the insured property has been sustained.

Referring to the ISO Homeowners program the coverage for Civil Authority comes to mind where ALE costs would be paid even if there is no physical damage to the insured property.

Another situation may be a municipal water source which is contaminated and a coffee shop/restaurant is shut down because of it. The water is not insured (at least not before it runs through the meter) yet there may be a Business Interruption claim as a result.

To which Chip responded:

Thanks for your comment. I think there is a "physical" damage or loss component to each.

The ISO business income form CP 00 30 04 02 promises to pay "for the actual loss of business income you sustain and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss." So, the form itself refers to "physical" damage or loss.

Under ISO homeowners forms for loss of use, those state that if "a civil authority prohibits you from use of the `residence premises' as a result of direct damage to neighboring premises by a Peril Insured Against, we cover the loss as provided in 1) additional living expense and 2) fair rental value above for no more than two weeks." Again, the "direct" damage is meant to be "physical" albeit to the neighbors policy.

This “loss or damage” debate is also highly litigated in business interruption claims. The opinion in Philadelphia Parking Authority v. Federal Ins. Co., 385 F.Supp.2d 280 (S.D.N.Y. 2005), is illustrative. In this case, a Pennsylvania state-created agency that operated a parking facilities at Philadelphia airport sued its property insurer for certain business losses sustained when the FAA grounded all civil aircrafts after the 9/11 terrorist attacks.

The parking authority presented a claim under its Business Income, Contingent Business Premises, and Civil Authority Provisions of the policy. The carrier denied business interruption coverage stating that no “direct physical loss or damage” had occurred “to the insured premises.” The carrier further denied coverage under the Civil Authority Provision stating that there was no direct nexus between the physical loss or damage (that occurred in DC, New York and Western Pennsylvania) and the closure of the airport and the parking facility in Philadelphia.

The parking authority argued that the claim was covered under its Business Income and Contingent Business claim, contending that the phrase “direct physical loss or damage” is ambiguous because it is unclear whether “direct physical” modifies “damage” as well as “loss” and that therefore the Court should construe the phrase in Plaintiff's favor and read the word “damage” to include economic damage. The court rejected this argument and held that:

[i]f Plaintiff's proffered interpretation of the language were correct, the Provisions' requirements would be unreasonable as applied to a business interruption claim based on purely economic damage. As discussed above, an insured making such a claim would need to show not only that the economic damage (to either the insured's covered property or a contingent business premises) resulted from a “covered cause of loss,” but also that the economic damage itself caused the interruption in the insured's business operations. It is difficult to imagine such a situation actually taking place. Moreover, it was clearly not the situation here.

However, if, as Defendant argues, “direct physical” modifies both loss and damage, the Provisions' requirements make sense: the interruption in business must be caused by some physical problem with the covered property (or the contingent business premises), which must be caused by a “covered cause of loss.” For example, if an insured business had to temporarily close its store because of structural damage caused by a fire, the Business Income and Extra Expense Provision would clearly cover the resulting losses. In that instance, the “direct physical loss or damage” would be the structural damage, and the “covered cause of loss” would be the fire. Thus, the Court will not adopt Plaintiff's “torturing the phrase” merely to create an ambiguity which does not exist when the contractual text is read in context and its words construed in their commonplace meanings.

With respect to the Civil Authority provision, the parking authority argued that the FAA’s order grounding civil aircrafts “effectively prevented ingress and egress of passengers into terminal areas of the airport and the parking facilities” and, as a result, there was a severe reduction in business. In this case, the court held that:

The plain language of the [FAA order] did not “prohibit[ ] access to” Plaintiff's garages as the policy requires. The NOTAM was issued to the attention of “all aircraft operators,” and deals only with the grounding of airplanes. While this unprecedented order may have temporarily obviated the need for Plaintiff's parking services, it did not prohibit access to Plaintiff's garages and therefore cannot be used to invoke coverage under Plaintiff's policy.

Since the [FAA order] did not prohibit access to Plaintiff's garages, it is unnecessary for the Court to decide whether the FAA issued the NOTAM “because of” the damage caused by the plane crashes in New York, Washington D.C., and Pennsylvania or, as Defendant argues, only to prevent additional terrorist attacks.

The question whether coverage is triggered by the mere existence of a “loss” without a finding of “damage” is one of the most debated causation dilemmas in property insurance coverage litigation. Philosophically, the “loss or damage” debate could be as difficult as the “chicken and egg” conundrum, but the mystery certainly keeps matters interesting.

In Gordon Chemical Co. v. Aetna Cas. & Sur. Co., 266 N.E. 2d 653 (1971), there was an explosion at the insured’s manufacturing plant which forced the insured to shut down operations for 15 months after the loss. In this case, the insured manufactured high impact polystyrene and sold its entire output to another manufacturing plant next door, which converted the polystyrene into different byproducts. The insured was unable to continue servicing its sole customer for 15 months and thus sustained a net profit loss of $215,350.00. Aetna contended that in order to mitigate its losses, the insured was obligated to purchase manufacturing materials from its competitors in the open market and resell the materials to its sole customer. The court did not find that such a feat was required under the terms and conditions of the policy.

Gordon was required to continue or to resume manufacture of polystyrene from monomer liquid plastic when and if possible and to sell the product manufactured by it as it would have done if no fire had occurred. However, it was not required to buy from competing manufacturers and resell their product, which it would never have done had no fire occurred. The purpose of the policy is to preserve the continuity of the insured's earnings. The policy does not accomplish that purpose if the insured manufacturer is required to act as a distributor for its competitors in order to reduce its business interruption loss.

Alternatively, most policies provide as part of an insured’s duties to mitigate that existing inventory should serve as a means for reducing a business loss. In Northwestern State Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1966), a cement company suffered a loss of production at one of two clinker plants. However, the insured did not suffer a loss in sales because there was a large inventory of finished cement and stock pile clinker. In this case, the court did not allow recovery for the loss of clinker production, but it did, however, allow recovery for extra expenses necessarily incurred in replacing finished stock to reduce to the loss.

Under the terms of [the policy] the insured is not permitted to sit idly by during a business interruption but must take affirmative action to reduce the loss of earnings. It must reduce the loss resulting from the interruption of business, if possible, by partial or complete resumption of the business; by making use of other property at the location; by making use of stock, raw, in process or finished. Such reduction is to be taken into account in arriving at the amount of loss.

It is clear that there would have been a loss of sales (income) except that plaintiff took the steps required of it by Paragraph 3 to reduce, and in fact to prevent, any loss of sales from occurring. Thus, the actual loss sustained by plaintiff was its loss of stock used to prevent loss of sales and thereby protect its earnings which would result in the normal uninterrupted operation of the business. The policies specifically state what is to be paid an insured for taking these required steps to prevent loss. Paragraph 4 provides the insured is to be compensated therefore by receiving such expenses, in excess of normal, as would necessarily be incurred in replacing any finished stock used to reduce the loss.

Further, on the subject of inventory, a court has found that if an insured is able to sell its entire damaged inventory, the insured may not have a viable business interruption loss. In Baxter Inter., Inc. v. American Guarantee and Liability ins. Co., 861 N.E. 2d 263 (1st Dist. 2d 2006), the insured sustained property and inventory damage after a hurricane suspended its pharmaceutical manufacturing operations.

In this case, Baxter submitted claims to recover losses resulting from property damage and business interruption. American indemnified Baxter for the property damage portion of its claim, including losses to Baxter's damaged finished goods inventory. American paid Baxter the amount Baxter would have received had Baxter been able to sell the inventory. Of the $30.7 million American paid in damages to Baxter's inventory, about $15 million accounted for lost profit. Baxter did not claim business interruption losses resulting from the damaged inventory. Baxter, however, claimed it suffered business interruption losses due to damage of other property. American maintained the profit component of the damaged inventory payment must be considered in calculating Baxter's total actual loss during the period of interruption. Baxter maintained American could not consider payments it made under the personal property provision of the policy to reduce its obligation under the business interruption provision. The parties filed cross-declaratory actions.

Baxter sought a declaration that American's liability for losses due to business interruption is independent of its liability for damaged inventory. American asserted the policy covered only “actual loss” due to business interruption, which must be calculated by considering profits Baxter realized from American's “purchase” of the damaged inventory.

On summary judgment the court held that:

[A]n insured cannot recover for lost profit due to business interruption where there has been no actual loss. In other words, business interruption is not itself a loss. An actual loss occurs only where the insured is unable to reduce or eliminate lost profit caused by the interruption. Baxter was able to reduce its lost profits by selling its damaged inventory to American during the business interruption.

Without citation to authority, Baxter contends its business interruption loss is independent from the profit it realized from selling its damaged inventory to American. Baxter explains the profit it realized from the sale of the damaged inventory was not the result of business interruption but the result of property damage. We fail to see how this distinction matters. The business interruption provision provides coverage for actual loss resulting from business interruption but not exceeding “gross earnings.” “Gross earnings” is defined in the policy as “total” sales and other earnings minus costs. It is not defined, as Baxter suggests, as “only the gains or losses resulting from such business interruption.” In other words, there is no suggestion from the language in the policy that a distinction can be made between different types of profit.

The Court made the following factual findings:

WMS manufactures electronic slot machines and provides different options for continuing services for those slot machines. Casinos can lease from WMS (1) stand alone slot machines, which operate individually; (2) “local-area progressive” (“LAP”); (3) “wide-area progressive” (“WAP”) slot machines, which are networked across multiple casinos and centrally monitored by WMS. Each class of WMS’s WAP machines participates in a single progressive jackpot, with WMS taking all wagers from a central monitoring location and paying out from that location. In Mississippi, WMS operated its WAP machines from a central facility known as “Premises 24” in Gulfport, which was connected to the actual slot machines at participating casinos by T-1 data lines provided by a third party.

WMS had a $100 million limit under its business income and extra expense coverage, but only $1 million under its dependent premise coverage. WMS was able to resume operations of its Premises 24 on December 2, 2005, but many of its casino customers took much longer to resume operations, if at all.

Concluding that the bulk of WMS’s losses resulted from WMS’s casino customers’ delay in reopening rather than from damage to WMS’s own premises, Federal paid the policy limits under the dependent business premise coverage. WMS’s losses, however, were much larger.

WMS’s relevant policy provisions read as follows: 

Property means: building; personal property; personal property of employees; electronic data processing property; valuable papers; fine arts or research and development property.

Premises Coverages-

The following Premises Coverages apply only at those premises for which a Limit Of Insurance applicable to such coverage is shown in the Declarations.

Except as otherwise provided, direct physical loss or damage must:

• be caused by or result from a covered peril; and

• occur at, or within 1,000 feet of, the premises, other than a dependent business premises, shown in the Declarations.

Business Income And Extra Expense

We will pay for the actual:

• business income loss you incur due to the actual impairment of your operations; and

• extra expense you incur due to the actual or potential impairment of your operations,

during the period of restoration, not to exceed the applicable Limit of Insurance for Business Income With Extra Expense shown in the Declarations [$100,000,000].

This actual or potential impairment of operations must be caused by or result from direct physical loss or damage by a covered peril to property, unless otherwise stated. (emphasis added)

Dependent Business Premises-

We will pay for the actual:

• business income loss you incur due to the actual impairment of your operations; and

• extra expense you incur due to the actual or potential impairment of your operations,

during the period of restoration, not to exceed the applicable Limit Of Insurance for Dependent Business Premises show under the Business Income in the Declarations [$1,000,000].

This actual or potential impairment of operations must be caused by or result from direct physical loss or damage by a covered peril to property or personal property of a dependent business premises at a dependent business premises.

The Fifth Circuit Court of Appeals agreed with Federal in finding that the business income/extra expense provision at issue unambiguously required that the losses in question flow from the damage to one of the listed premises and not just to property damage anywhere.

Although not clear, it appears that the Court decided that the term “property” in the business income/extra expense provision is limited to the premises listed in the declarations page. But after reviewing the appellate briefs from both sides, it is clear that the court refused to address crucial and meritorious arguments raised by WMS’s attorneys.

WMS essentially argued that the “Premises Coverage” section is a “trigger” provision which requires property damage at the defined premises, but that the “scope” of coverage is actually defined within the business income/extra expense provision, which would include property located elsewhere [not just at the described premises]

WMS argued in its appellate briefs that Federal’s failure to explicitly limit the scope of its business income coverage, as limited elsewhere in the policy, was an implicit grant of broad coverage:

Federal attempts to defend its interpretation by arguing that it is “absurd” to provide coverage to WMS for damage to the property of casinos because BI/EE coverage is a “Premises Coverage” because it is triggered by damage to the premises. The fact that BI/EE coverage is a “Premises Coverage" does not mean that only damage to property at the premises is compensable under the Policy. Imposing such a limitation would render [other] Premises Coverages such as Ingress and Egress and New Product Delay equally “absurd”. The Policy’s Ingress and Egress coverage protects against damage to property “at a location contiguous to” a covered premise. The Policy’s New Product Delay coverage protects against damage to any property that “results in a delay in the introduction of any new product” irrespective of where that property is damaged. Both are nonetheless Premises Coverages.

The WMS Industries v. Federal Insurance opinion is scant in length. As a federal law clerk, I always felt that parties deserved a detailed and lengthy explanation as to why the court ruled one way or the other. It is the least a court can do, to consider exhausted parties that have long battled for a court resolution and to also consider the concept of stare decisis, since opinions are likely to become the mantras of many attorneys for generations to come.

Click here to read the full opinion by the Court and Reply brief.by WMS Industries.

Most commercial property policies define the “period of restoration” as the period of time that:

Begins with the date of direct physical loss or physical damage caused by or resulting from

a Covered Cause of Loss at the “scheduled” premises, and

b. Ends on the date when: (1) The property at the “scheduled premises” should be repaired, rebuilt or replaced with reasonable speed and similar quality; or

(2) The date when your business is resumed at a new, permanent location. Whichever is earlier.

Often a commercial lessee will not obtain building coverage because the lessee does not own the leased property, but it will obtain coverage for business personal property and the equipment maintained at the leased premises. In these types of cases, commercial tenants who sustain a property loss will argue for a lengthier period of restoration by asserting that “scheduled premises” refers to the actual building in which it leases space, and therefore, the period of restoration should end when the building owner repairs, rebuilds, or replaces the building in which the damage is located. On the other hand, insurers argue that the period of restoration should end when the commercial lessee obtains new leased space and repairs, rebuilds, or replaces the business personal property that was lost.

But what if the commercial lessor takes too long to repair or restore the insured building? Should the lessor’s delay or inability to rebuild be taken into consideration in the lessee’s claim for business interruption coverage? After the terrorists attacks of 9/11, courts were asked to answer the question of whether the actions of the commercial lessor should be considered in determining the period of restoration. In general, courts held that the period of restoration should be only tied to the insured’s lease and business personal property and not to the original location of the building that housed the insured’s leased space.

Specifically, in Duane Reade, Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384 (2nd Cir. 2005), the court found that there was nothing in the business interruption clause that provided site-specific coverage, i.e., to resume operations at the World Trade Center. The Court specifically stated:

It would be entirely unreasonable to interpret the Restoration Period to include the time it would take for Duane Reade to resume operations in a store located at its former site where that site was neither the subject of the insurance policy nor expressly provided for in the calculus set forth in the Restoration Period.

In Lava Trading v. Hartford Fire Ins. Co., 365 F.Supp.2d 434 (S.D.N.Y. 2005), Hartford argued that the period of restoration ended when the insured “should have” replaced its personal property and relocated with “reasonable speed and similar quality.” In contrast, the insured argued that the phrase “property at the described premises” referred to the entire World Trade Center building, and because that building could not be rebuilt within the twelve months following September 11, 2001, the period of restoration should be the maximum twelve months allowed for under the policy. The Court rejected the insured’s argument, holding that the policy did not provide coverage for the “building” in which it operated, finding that the phrase “property at the described premises” referred to the insured’s business personal property located in its rented office suite.

Notwithstanding the bright line rule established in the World Trade Center cases, courts have found that if the commercial lessee has an insurable interest over the “described premises,” the period of restoration will be tied to the restoration of the original site.

For example, in Zurich American Ins. Co. v. ABM Industries, Inc., 397 F.3d 158 (2nd Cir. 2005), the insured was a contractor who employed more than 800 people to provide maintenance, janitorial and HVAC services in the common areas of the World Trade Center. In finding in favor of the insured, the court noted that although the insured did not “own” or “lease” the common areas and the premises of the other tenants, the insured “controlled,” “used,” or “intended to use” these areas and the common areas were vital to the execution of the insured’s business purpose.

The ABM court also reasoned that “while exclusive access to an area is not necessary to ‘control’ that area, exclusivity strongly supports that ‘control’ exists.” Id. at 166-167. The court found that “ABM’s privileged relationship with, and management of, its offices, storage spaces, freight elevators, closets, and sinks indicates that it exerted power and direct influence over these premises . . .[it] ‘controlled’ its occupied properties.” Id.

In light of these legal nuances, it is important to closely look at the relationship between the lessor and the lesee to determine whether the lessor’s failure to restore the premises where the business is located can be tied to the lessee’s period of restoration.

The truth is that these claims, like most lost income claims, can be extraordinarily complicated. My conclusion is important and optimistic:

So long as courts continue to interpret the OPA as providing broad theories of recovery, we have a tremendous opportunity to help victims get fully compensated for their economic loss. Attorneys should leave no stone unturned in assessing and valuing claims and pursuing every theory that could restore the livelihoods, property and way of life that have been indefinitely disrupted.

Since these claims will involve so much money, it seems that the following is appropriate for a mid-week break:

The case American Medical Imaging Corp. v. St. Paul Fire & Marine Insurance Co., 949 F.2d 690 (3rd Cir. 1991), is the epitome of an extra expense Catch-22. In American Medical Imaging, the insured was in the business of providing ultrasound testing services. The imaging services were rendered at physicians' offices, joint venture sites, and other health care institutions, while the scheduling, marketing, billing, and clerical functions were performed at the insured’s headquarters location.

A fire at the insured’s headquarters resulted in smoke and water damage that allegedly made use of the facilities impossible. The insured immediately rented space at an alternative site and relocated there the next day, albeit with substantially fewer telephone lines. The insured did not return to its headquarters for approximately six weeks.

The insured submitted a claim for the policy's $500,000 limits for lost income and extra expense premised on the period of restoration.

The extra expense provision stated:

We'll pay your actual loss of earnings as well as extra expenses that result from the necessary or potential suspension of your operation during the period of restoration caused by direct physical loss or damage to property at a covered location. The loss or damage must occur while this coverage is in effect and must be due to a covered cause of loss.

We'll pay your earnings and extra expense loss from the date the property is damaged until the earliest of the following:

• the date you resume normal business operations;
• as long as it should reasonably take to repair, rebuild or replace the damaged property, plus 30 consecutive days; or
• 12 months, regardless of your policy's expiration date.

St. Paul denied the claim, citing the fact that no suspension of business had occurred. Surprisingly, the trial court agreed with Saint Paul on summary judgment. The insured appealed.

Fortunately the court of appeals read the policy in its entirety and remedied the Catch-22 situation that policyholders often face:

If a trier of fact believes AMIC's evidence, we conclude that the alleged loss would be a covered one. According to its version of the facts, AMIC experienced a “necessary suspension” of its business operations briefly on the morning following the fire. Moreover, on that morning, it faced a “potential suspension” of a much longer duration. Fortunately for AMIC and St. Paul, AMIC acted promptly to mitigate its loss and managed to make arrangements to conduct its business on a scaled-down basis at an alternative site. As a result of that “necessary suspension” and that “potential suspension,” St. Paul was required to indemnify AMIC for any lost earnings or extra expenses arising from such suspensions during the period up to the date upon which AMIC was able to resume its normal business operations at the Gibraltar Road site, i.e., the covered location.

Under the district court's construction of the policy, the insured would have no motivation to mitigate its losses. Continuing in business at any level would bar recovery because the insured would be carrying on the same kind of activities that occurred at the covered location. We decline to accept the suggestion that this was the intent of the parties. Indeed, other provisions of the policy bear witness to a contrary intent. For example, the policy imposes on the insured an affirmative duty to mitigate its losses:

If you can reduce your loss by resuming operations at the covered location or elsewhere by using damaged or undamaged property ... you agree to do so.

Under the district court's reading, this provision would have imposed upon AMIC a duty, the performance of which would have forfeited its right to recover under the policy. We are confident that such an anomalous result was not intended and choose to read the policy terms regarding St. Paul's duty to indemnify as consistent with AMIC's duty to mitigate. Moreover, as appears from the earlier quoted portion of the policy, St. Paul's obligation to indemnify continues until the resumption of “normal business operations.” This necessarily implies that the obligation to indemnify can arise while business continues, albeit at a less than normal level.

Many can learn what to do by attending the Oil in the Gulf: Litigation & Insurance Coverage Conference on June 24 in Atlanta. Just before Robert Kennedy, Jr., gives the highlight keynote presentation with plenty of media fanfare, I will give a much more practical presentation-- dear to the hearts of all claimants-- regarding how the valuation of oil spill claims should be made. My co-presenter is an experienced Exxon Valdez valuation expert, John Kilpatrick, PhD, the Chief Executive Officer of Greenfield Advisors. His paper, The Aftermath of Katrina: Recommendations for Real Estate Research, should be considered by those representing BP oil spill claimants to provide some ideas as to the long term lost profit implications following this catastrophe.

The BP oil spill claim process for private claimants is currently a publicity stunt. Even President Obama noted this concern in a Bloomberg Businessweek article, Obama Doesn’t Want BP ‘Nickel and Diming’ Victims.

"President Barack Obama said he doesn’t want BP Plc “nickel and diming” fishermen and small businesses and that the company has a “moral and legal obligation” to compensate those affected by the oil spill in the Gulf of Mexico."

The truth is that unless BP is forced to hire a legion of accountants, economists, and scientific researchers right now, nickels and dimes are all oil spill claimants will be paid because the casualty adjusters BP has hired simply do not have the experience, knowledge and creativity to properly forecast and calculate lost profits and lost earning capacity. The insurance industry has substantially outsourced its obligation to adjust lost income and business interruption losses to specialized accounting firms. Claims adjusters no longer have the ability to handle lost profit claims. Unless a sufficient number of those specialized firms and other accountants are retained, along with transparent economic forecasts, claimants will probably not collect or realize the full extent of the damage caused by the oil spill.

BP currently pays a part of the damage, says it "will" pay for all legitimate claims,” and then intentionally fails to retain a sufficient number of motivated experts who can determine the full extent of the damage. BP is not spending the money required to compensate those whose lives and livelihoods have been devastated by this disaster. Yet, BP maintains the appearance of trying to fairly compensate those harmed. It seems as if BP has read the playbook of many insurance companies when it comes to prompt and full payment of business loss claims.

Most business interruption forms read as follows:

* * * * * *

Section V-Definitions

1. “Business income” means:

a. Net income (net profit or loss before income taxes) that would have been earned or incurred; and
b. Continuing normal operating expenses incurred, including payroll.

* * * * * *

Under this provision, carriers will often argue that if a policyholder was operating at a net loss greater than the business’ normal operating expenses, the business interruption recovery would be zero. In Florida, some carriers rely on Dictiomatic, Inc. v. Mercury Cas. Co., 958 F.Supp. 594 (S.D. Fla. 1997), where a court held that “business interruption insurance may not be used to put the insured in a better position than it would have occupied without the interruption,” to deny or offset recovery for operating costs if the business was not doing so well prior to the loss.

However, an appellate court in California used a different kaleidoscope to read the same provision and found that that, in the event of a covered loss that forced the complete suspension of its business operations, the policy would provide coverage for any lost profits, and, even if there were no lost profits, for ongoing expenses incurred during the period of suspension. In Amerigraphics v. Mercury Casualty Company, 182 Cal. App. 4th 1538 (March 23, 2010), the Court declined to follow Dictiomatic and held that:

[i]f a catastrophic event damages an insured's business premises and prevents the insured from being able to operate, any business in that situation would face two distinct problems: (1) a loss of money coming into the business (loss of income), and (2) payment of ongoing fixed expenses, even though no money is coming in. A reasonable insured would see that the definition of “Business Income” has two distinct components: (i) net income, and (ii) continuing normal expenses. Because the definition provides that “Business Income” includes both items, a reasonable insured relying on the plain language of the clause would reasonably conclude that the policy covers both items. Indeed, we note that the “Business Income” provision appears in the policy under the preceding heading of “Additional Coverages.” Given its placement in the policy and the plain language of the provision, it would be objectively reasonable for an insured purchasing the policy to construe it as protecting both its lost income stream and as defraying the costs of ongoing expenses until operations were restored.

Under both parties' interpretation, an insured business will be paid if the business were operating at a profit prior to the covered loss. It is only when a business was operating at a net loss greater than its operating costs that it would not be paid at all under Mercury's interpretation. But there is nothing in the policy language to suggest to an insured that if a business is not earning a profit it should not expect coverage for its continuing expenses during the period it cannot operate. It is not unusual for business income to fluctuate from year to year. A business should not have to be concerned that if it does poorly for one or two years and a covered catastrophic loss occurs during that time frame, then the business will not be paid anything under the “Business Income” provision. In essence, Mercury's interpretation relies on the implied assumption that only a profitable business would be protected by the provision. A business that is just starting out may operate at a temporary loss until it becomes established and secures a customer base. If that business knew that there would be no coverage under the “ Business Income” provision of the policy for ongoing expenses if it suffered a catastrophic loss under the policy, there would be no point for that business to purchase the additional coverage.

Feel free to contact me if you have any questions or concerns about how this new decision may impact your business interruption claim.

The post, Public Adjusters Arrested in Broken Tile Insurance Fraud Scheme, set records for “hits” on this site. I also received all kinds of emails and discussion from others. At lunch with six attorneys in our firm, I mentioned that I have been doing this line of work since 1983 and have never handled a broken tile claim. Four others had the same experience, one attorney had a couple, and only Michelle Claverol, in our Coral Gables office, had more than a few.

I learned that some experts conducted tests regarding the breaking of tile. They found that breaking tile is not as easy at it may seem. A pot, shoe, or falling object has got to hit a tile just right or the tile has to be loose or set improperly for breakage to occur. They are not fragile. The back side of a hammer is sharp enough to cause the breakage quite easily with a strong strike.

I was reminded that an attorney friend of mine advertised for broken tile claims at the Windstorm Conference several years ago. Apparently, he had a fake million dollar check with his firm and that of a public adjuster as payees. The space in the bottom left had “one cracked tile’ written on the explanation line. The Florida Bar certainly would not have approved of such an advertisement. Indeed, it is quite unprofessional. To imply to public adjusters and the public that attorneys can help obtain large recoveries for a small cracked tile loss begs for the type of conduct that happened as indicated in the post. This past legislative session, some in the Florida Legislature mentioned this type of conduct as a reason to change longstanding consumer protections regarding insurance. If public adjusters and policyholder attorneys want a bad reputation can be developed, all we need is for some to continue this type of conduct. Insurance adjusters and insurance company management are rightfully upset, and so are the rest of us. A few bad apples are harming legitimate and law abiding public adjusters and consumers.

Finally, the oil spill issues are dynamic. Following my post, Accountants and Business Interruption Experts Will Play an Important Role Recovering BP Oil Spill Income Loss Claims, a dozen or so accountants have offered their services for lost income and earning capacity oil spill claims. Two weeks ago, I was in Steve Riggs’ office at Carr, Riggs & Ingram when I appeared on Fox News in the following interview regarding the oil spill:
 

I suggest that businesses consult with their accountants regarding these lost income claims. On anything more than a simple loss, I encourage businesses impacted by the oil spill to at least discuss the matter with qualified counsel. Proof and presentation of these claims and proving the full impact of the loss of earning capacity are what business interruption attorneys do all the time. Whether counsel should be retained should be determined on an individual basis. Often, no attorneys will be needed.

As a general rule, an assignment of an insurance claim after a loss will give the assignee the right to collect insurance benefits under the insurance policy even though the assignee is not a party to the insurance contract. Couch on Insurance §35:7 (3d ed. 2009). There are, however, limits to the kinds of post-loss claims that can be assigned, particularly when they involve business interruption coverage.

Bronx Entertainment, LLC v. St. Paul’s Mercury’s Ins. Co., 265 F.Supp.2d 359 (S.D.N.Y. 2003), is illustrative of the type of analysis that courts will engage in when determining the recoverability of assigned claims. In Bronx Entertainment, an insured suffered windstorm losses at its golf driving range facility. The insured made an insurance claim for the property damage and business losses and then sold the business to Bronx Entertainment. As part of the business transaction, the insured also assigned the policy to the buyer. Bronx Entertainment subsequently presented a business interruption claim for its own business losses; the carrier denied the claim and Bronx Entertainment filed a lawsuit.

In Bronx Entertainment, the Court essentially held that the claimant could no longer show actual losses sustained as required under the business interruption provision because the sale reduced the amount of continuing business losses to zero. The Court explained, however, that it may be possible to maintain an action for the losses accrued by the original insured [the assignor] at the time of the assignment.

[i]n the instant case, plaintiff is seeking to collect business interruption damages arising out of a business which did not come into existence until 17 days after the wind damage, and after Family Golf [original insured], the named insured, to whom defendant had issued its policy had ceased to operate the business covered and had transferred the title, ownership and control of the premises to plaintiff. Therefore, plaintiff cannot assert a claim for losses it suffered. Of course plaintiff may maintain an action for Family Golf's losses that accrued as of the date of the assignment. However, plaintiff is proceeding on the theory that it is also entitled to those business losses which had yet to occur at the time of the assignment. This plaintiff cannot do because it would, in effect amount to an assignment of the entire policy to which defendant did not consent.

In other words, a business owner may assign the rights and benefits of an insurance claim to a potential buyer as part of the deal. The buyer, as assignee of the insurance claim, cannot pursue a claim in his or her own right, but rather make a derivative claim as if standing in the shoes of the original insured. It is also important to note that, as a matter of assignment law, the buyer [or assignee of the claim] will also be subject to any defenses that the carrier had or could have had against the original insured [assignee], i.e., normal policy exceptions and exclusions.

As noted by Bruce Smith:

...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.

...

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...with...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...in an expeditious manner. (emphasis added)

Regarding the documentation and financial information needed to support a loss income or earning capacity claim allowed for in the BP Oil Spill claim process, Bob Glasser was completely on point noting:

The ability to submit and ultimately settle a claim for lost revenue with either an insurance carrier, BP, or another entity will be predicated on the culmination of many hours of dedicated recordkeeping and consistent application of data accumulation protocol. The critical lesson learned is that when an organization is able to execute the above steps, the likelihood of proving a loss and recovery is substantially increased. (emphasis added)

Bob Glasser has a specialized understanding of the hospitality industry and has long taught how to calculate lost revenue and account for the expense of mitigation efforts that are unique in that industry, which is being devastated by the significant drop in tourism, even before the oil strikes land. This intimate knowledge was partially demonstrated when he advised:

Quantifying and documenting lost revenue has been a complicated undertaking for the hospitality industry. On one hand, documenting cancellations in connection with booked rooms is relatively straightforward. On the other hand, identifying lost demand prior to a booking can be quite subjective.

Capturing cancellations with appropriate and supportable documentation to withstand future audit can happen only if specific protocols and procedures are put in place now. The process needs to be properly documented and communicated to the relevant employees. Documentation objectives include memorializing discussions and correspondence among hotel sales personnel or reservation agents with guests, potential guests, corporate booking agents and wholesalers, for the purpose of identifying the reason for a cancellation. Loss documentation prepared today should be reviewed by a seasoned financial professional to increase the likelihood it will withstand challenge by an adverse party. Date, time, conversation or action reported contemporaneously, and person making the entry should be made as it is done and collected at least daily.

The protocol for associating lost income from cancelled bookings to the oil spill may include refinements to existing sales software or the use of a database/spreadsheet to include the group name, group contact, intended date of stay, number of rooms, F&B revenue, room revenue, ancillary revenue, date of cancellation and reason for cancellation as well re-booking date if any and where the group moved, if known. Additional recommended procedures to be implemented include but are not limited to the following:

1. Reservation call centers should be provided specific instructions on how to document lost demand when guests ask about oil spill conditions.
2. Properties should identify any group discounts they offer to either appease a group with complaints due to the oil spill or to maintain a group reservation that was considering cancelling due to the oil spill. These discounts would be considered a mitigation strategy to curtail future lost revenues.
3. Any extra expenses incurred for marketing promotion or additional advertising over the normal operations to negate a loss of occupancy due to the oil spill should be documented.
4. Subsequent drops in occupancy rates from historical levels attributable to the oil spill should be recorded. Therefore, pre-oil spill occupancy, ADR and RevPar reports must be archived and maintained for future documentary support of decline in revenue.

The Oil Pollution Act of 1990 specifically indicates that those claiming loss income or loss earning capacity do not have to own the property damaged to have a claim for lost income or earning capacity. This is significant because some state laws which apply to the oil spill might be not so broad. "Loss of profits and earning capacity" under the Oil Pollution Act of 1990 means damages equal to the loss of profits or impairment of earning capacity due to the injury, destruction, or loss of real property, personal property, or natural resources.

The Coast Guard publishes some information describing the business documentation which should be accumulated for an oil spill claim:

You must provide evidence that supports your claim, and you can use whatever documentation you believe best supports that claim. Listed below are examples of documentation often submitted with property damage claims:

• Photographs
• Tax returns for loss year and previous three years,
• Income Statements for loss year and previous three years,
• Balance Sheets for loss year and previous three years,
• Cash Flow Statements for loss year and previous three years,
• Receipts or other proof of revenue combined with proof of expenses
• Reports from the Federal On-Scene Coordinator (FOSC), fire department, police, or other responder
• Information on Coast Guard or EPA notification
• Newspaper reports describing the spill
• Any other documentation you feel supports your claim

A Compliance Guide for submitting claims under the Oil Pollution Act of 1990 has some specific information that BP claims representatives and its lawyers may need before approving business income or earning capacity claims. It provides:

General Information for Claims by Businesses:

• Description and documentation of business losses due to spill
• Copies of letters of business cancellations caused by the spill damage
• Maps or descriptions of the area showing the business location and the spill impact area
• Financial statements for at least two years prior to spill and from the year of the spill
• Signed copies of income tax returns and schedules for at least three years prior to spill
• Details on efforts to mitigate losses or why no efforts were taken
• Statement from you or witnesses on how the spill led to loss of income or earning capacity; explain any earnings anomalies
• For hotels, daily and monthly occupancy information for two years prior to spill and the year of the spill

General Information on Claims by Fishing or Marine Charters:

• Description of business losses caused by the spill
• Evidence that vessel(s) were in the area impacted by the spill and were unable to carry on their business due to the spill
• Maps or descriptions of the area showing business location within spill area
• Statement from you or witnesses on how the spill caused the loss of income; explain any earnings anomalies
• Signed copies of income tax returns and schedules for at least three years prior to spill
• Details on expenses not paid out during period being claimed (e.g., wages)
• Booking records for three years prior to spill and year of spill
• List of charter rates, including any services the business specializes in (e.g., sport fish-ing)
• Copies of any logs relating to boating activities for the year prior to and the year of the spill
• Registration documents for the vessel(s), copies of business license, vessel license, fishing license, captain's license

My advice to all claimants with significant business loss from the BP Oil Spill is to consult with an attorney and retain an expert to prepare a sound and proper explanation of business income loss or loss of earning capacity. Mitigation attempts required under the law can be explored with your counsel and those with experience in disaster recovery. In many instances, the claims may often need no attorney involvement because they are not very complex. The larger and more complex the claim, the greater the need to have a professionally prepared lost income claim with calculations by an experienced expert like Bob Glasser and Bruce Smith.

My friends and attorneys at Levin, Papantonio, Thomas, Mitchell, Echsner, Rafferty & Proctor, P.A. are doing it right. I had the pleasure of working with them as co-counsel on a great number of Hurricane Ivan matters, and they were kind enough to attempt to refer some major business income claims to me following Hurricane Katrina. My understanding is that they have decided to not charge clients for work to recover money that BP will voluntarily pay as a partial damage claim, and they will charge attorney fees only on claims that are denied or have disputed amounts. That is fair. There are some businesses that will need help right away to prepare and present these claims, and the fees for those services should be far lower than the one third of any recovery that some attorneys have been quoting.

Bob Glasser sent me the following article, that I minimally edited, which will help some insurance and BP claimants in their future first and third party claims.

How to Capture Hotel Lost Profits Today Due to the Gulf Oil Spill
in Order to be Reimbursed by the Responsible Party

With uncertainty and concern surrounding the impact of the Gulf oil spill to the coastline from Florida to Texas, many companies are asking what needs to be done to quantify and document lost income for future claims. Many businesses are considering filing insurance claims. Others may be looking at the potentially responsible parties for direct reimbursement. Regardless of the source of indemnification, proper documentation of claimed losses is critical.

Quantifying and documenting lost revenue has been a complicated undertaking for the hospitality industry. On one hand, documenting cancellations in connection with booked rooms is relatively straightforward. On the other hand, identifying lost demand prior to a booking can be quite subjective.

Capturing cancellations with appropriate and supportable documentation to withstand future audit can happen only if specific protocols and procedures are put in place now. The process needs to be properly documented and communicated to the relevant employees. Documentation objectives include memorializing discussions and correspondence among hotel sales personnel or reservation agents with guests, potential guests, corporate booking agents and wholesalers, for the purpose of identifying the reason for a cancellation. Loss documentation prepared today should be reviewed by a seasoned financial professional to increase the likelihood it will withstand challenge by an adverse party. Date, time, conversation or action reported contemporaneously, and person making the entry should be made as it is done and collected at least daily.

The protocol for associating lost income from cancelled bookings to the oil spill may include refinements to existing sales software or the use of a database/spreadsheet to include the group name, group contact, intended date of stay, number of rooms, F&B revenue, room revenue, ancillary revenue, date of cancellation and reason for cancellation as well re-booking date if any and where the group moved, if known. Additional recommended procedures to be implemented include but are not limited to the following:

1. Reservation call centers should be provided specific instructions on how to document lost demand when guests ask about oil spill conditions.
2. Properties should identify any group discounts they offer to either appease a group with complaints due to the oil spill or to maintain a group reservation that was considering cancelling due to the oil spill. These discounts would be considered a mitigation strategy to curtail future lost revenues.
3. Any extra expenses incurred for marketing promotion or additional advertising over the normal operations to negate a loss of occupancy due to the oil spill should be documented.
4. Subsequent drops in occupancy rates from historical levels attributable to the oil spill should be recorded. Therefore, pre-oil spill occupancy, ADR and RevPar reports must be archived and maintained for future documentary support of decline in revenue.

The ability to submit and ultimately settle a claim for lost revenue with either an insurance carrier, BP, or another entity will be predicated on the culmination of many hours of dedicated recordkeeping and consistent application of data accumulation protocol. The critical lesson learned is that when an organization is able to execute the above steps, the likelihood of proving a loss and recovery is substantially increased.

Those making a third party claim or insurance claim should consider obligations of mitigation and consult with competent legal counsel and trusted business professionals.

About the Author
Bob Glasser is a managing director at BDO Consulting, a division of BDO Seidman, LLP, in the New York office. Mr. Glasser is a certified public accountant, a certified fraud examiner and a certified insolvency and reorganization accountant, with more than thirty years of diverse financial management and accounting experience at public and private companies.

Mr. Glasser, who is also known as “B.I. Bob,” leads the firm’s New York Insurance Claim Services practice, assisting insured businesses—including hotels, manufacturers, distributors and service organizations throughout the world—to prepare and substantiate business interruption and property damage claims resulting from physical damage due to hurricanes, floods and other perils. Mr. Glasser has also been involved in forensic investigations of employee theft in the hospitality and retail industries.

EDO hold a variety of certifications, including CPA, CFE, MAI, ASA and MRICS and can be accessed at www.bdo.com
.
Robert Glasser, Managing Director
(212) 885-8173
rglasser@bdo.com

At its very basic form, the standard ISO CP 00 30 "Business Income (and Extra Expense) Coverage Form" states that:

"period of restoration" does not include any increased period due to the enforcement of any ordinance or law that regulates the construction, use or repair, or requires the tearing down of any property.

Most business policies also have a standard ISO CP 00 10 “Building and Property Coverage Form,” which will provide coverage for the increased costs incurred to comply with the enforcement of new building codes up to a cap or limit. However, the delay in repairs or replacement caused by complying with the required forms may still not be covered by this basic form.

Large-scale business owners, should speak with their brokers about company or manuscript forms that provide not only complete coverage for the increased costs, (i.e., not limited to a percentage), but will also provide coverage for the period of time required to adhere to the code upgrades. Typical wording is the following:

Increased Cost of Construction
This policy also covers any increase in the Business Interruption and extra expense loss arising out of the additional time required to comply with state law or ordinance.

All business owners should call their agents to give their policies a little spring check-up on code upgrade coverage.

Clients involved in these types of claims often ask if the cost of accounting is recoverable after the claim is resolved.

While the typical answer to this question is “It depends,” The FC&S Bulletin addresses and clarifies the question as follows:

There is nothing in the wording of the business income portion of the policy [CP 0030] that obligates the insurance company to pay the insured's accounting cost to determine the extent of the business income loss. The policy promises to pay for "the actual loss of Business Income you sustain due to the necessary suspension of your 'operations' during the 'period of restoration.'" Business income is defined in the policy to mean "a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and b. Continuing normal operating expenses incurred, including payroll." The accountant's fee is neither net income nor continuing normal operating expenses.

Now, CP 00 30 also provides extra expense coverage and some may argue that this coverage would apply to the accounting documentation charges. The argument goes that extra expense is defined to mean necessary expenses that the insured incurs during the period of restoration that would not have been incurred if there had been no direct physical loss; and, the accounting fees in question would not have been incurred had there been no loss. Furthermore, the policy also requires that the extra expense be incurred to avoid or minimize the suspension of business and to continue operations. Since it is fair to assume that the insurance company would not have paid the business income loss if the insured had not submitted the requested accounting information, and since the insured's business would have continued to be suspended or operated at reduced income if the insured had not been paid for the business income loss, the accounting documentation was a necessary expense to continue the insured's operations.

We do not agree with such an interpretation of the extra expense coverage. However, one of the duties of the insured in the event of loss is to cooperate with the insurer in the investigation or settlement of the claim. If the insurer requests that the insured provide accounting documentation to support a claim, this can be seen by the insured as a duty required of him by the insurer. And, it is reasonable for the insured to assume that the insurer would pay for the insured's costs in performing this duty. The policy's terms do not require such a payment, but the costs the insured incurs while cooperating with the insurer should be taken into consideration in the final settlement of the claim.

So, how about a review of that exciting "Volcanic Activity" provision in the basic, broad, and special CP forms? If the recent Hard Rock Casino advertisement series about "you know who you are" has any truth, those still reading this post know they are the true insurance coverage nerds everybody in the office consults when a hard coverage issue arises.

The basic and broad "causes of loss" form covers "volcanic activity" with the following language:

11.Volcanic Action, meaning direct loss or damage resulting from the eruption of a volcano when the loss or damage is caused by:

a. Airborne volcanic blast or airborne shock waves;
b. Ash, dust or particulate matter; or
c. Lava flow.

All volcanic eruptions that occur within any 168-hour period will constitute a single occurrence.

This cause of loss does not include the cost to remove ash, dust or particulate matter that does not cause direct physical loss or damage to the described property.

The FC&S notes that: 

Volcanic action coverage also was previously available only on an optional basis by endorsement. As a basic cause of loss under the ISO commercial property program, it covers damage from the above-ground effects of a volcanic eruption—airborne blast and shock waves, ash, dust, particulate matter, and lava flow. It does not include, as detailed in the earth movement exclusion, the removal cost of volcanic ash or dust that has not physically damaged insured property, nor the seismic effects of a volcanic eruption.

Coverage under this cause of loss applies to any volcanic eruptions occurring within a seven day period (168 hours). Under the original versions of the form (prior to the 1988 revisions), this period was three days.

The special form policy covers all the "risks" of direct physical loss unless excluded. While it then excludes volcanic eruption, the form then excepts the exclusion for "volcanic activity" to provide this coverage:

(5) Volcanic eruption, explosion or effusion. But if volcanic eruption, explosion or effusion results in fire or Volcanic Action, we will pay for the loss or damage caused by that fire or Volcanic Action.

The bottom line is that many ash claims will likely be denied because insurers claim that the volcanic activity or ash did not result in any "physical damage." If you happen to have that problem, "you know who you are" and who you need to call.

Have a great day!!

Business interruption insurance is intended to return to the insured's business the amount of profit (gross earnings minus normal expenses) it would have earned, had there been no interruption of the business or suspension of its operations as a result of a covered loss. Policyholders’ recovery for business interruption claims as a result of the recent volcanic eruption is unlikely because most policies require direct physical damage to the insured in order to trigger this type of coverage.

With so much lost income at stake, the coverage dispute will certainly be hard fought. As a matter of Property and Aviation Law, some state courts have found that ownership interest of a surface proprietor could extend to the airspace above the property. See, e.g., Berenson Wholesale v. Arizona Public Public Service Co., 803 P.2d 930 (Ariz. App. 1990). As noted in my previous blog,

It has been reported that volcanic ash is extremely fine and, if aspirated, it could damage airplane engines and affect the navigation gear. P&C National Underwriter reported that the last eruption from this volcano lasted more than 12 months.

It is likely that policyholder advocates will argue that the volcanic ash damaged the integrity of the property’s airspace. Of course, a reading of each policy at issue will be necessary to understand the nature of the coverages afforded for a disaster of this nature and to qualify the definitions of what constitutes “property,” “direct physical loss” and “property damage.” At this time, though, the coverage issue is far from resolved.

Depending on the specific policy language involved and the nature and circumstances of the damages, the airline industry and many insureds could find recovery for business losses caused by this massive natural disaster.

For example, with so many businesses dependent on airline services for their supply and demand operations, contingent business coverage, if applicable, could provide business interruption coverage for the suspension or delay in the chain of services or goods. 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.

If coverage is found, the airline industry and other insureds could also look into extra expense coverage as an additional coverage that goes beyond the typical coverage for direct physical losses contemplated by the general insuring agreement. Extra expense coverage should allow a business to continue in the event of an emergency, by indemnifying the insured for reasonable and necessary increased costs of operations that would not normally have been incurred, but for the covered loss (i.e., employee overtime and temporary computer systems or office equipment). 

Will the airlines be able to recover the lost revenue during the suspension of operations? Not this time. On April 21, 2001, Bloomberg reported that analysts do not believe that the European airlines will be able to recover business interruption benefits unless the volcanic ash caused direct or physical damage to any airport buildings or airplanes, which none have been reported thus far.

Loretta Worters, spokesperson for the Insurance Information Institute (I.I.I.), noted that “in terms of business interruption for airports, there would be none because there is no physical damage to the airport or planes. So certainly this will be a financial set back for the airlines.” Lloyd’s of London, which received almost $1 billion in premiums from airlines in 2009 alone, must feel relieved.

However, it has been reported that volcanic ash is extremely fine and, if aspirated, it could damage airplane engines and affect the navigation gear. P&C National Underwriter reported that the last eruption from this volcano lasted more than 12 months. It is possible that, with time, some jet planes will be damaged, but it is hard to predict how insurance carriers will deal with this type of loss.

Among many other issues, Duane Reade asserted that it had the right to recover losses for the entire period actually required to rebuild the World Trade Center complex. St. Paul, in contrast, contended that Duane Reade's recoverable losses were limited to those suffered within twenty-one months following the September 11, 2001 destruction of the store-the amount of time it calculated as reasonably necessary for Duane Reade to relocate its store and resume operations. The coverage dispute was worth millions and Duane Reade was ready to fight, but in the end, St. Paul prevailed.

The policy at issue contained the following Period of Restoration provision:

The measure of recovery or period of indemnity shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace such property that has been destroyed or damaged, and shall commence with the date of such destruction or damage and shall not be limited by the date of expiration of this policy.

In Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F.Supp.2d 235 (S.D.N.Y.2003), the trial court ruled in favor of Duane Reade by finding that the hypothetical Period of Restoration was extended until Duane Reade resumed its operations in a “functionally equivalent” manner to its pre 9-11 operations. The trial court also declared that the length of the Period of Restoration was tied to the time it would take to rebuild the drugstore at the World Trade Center site. After this ruling the trial court ordered the parties to enter into appraisal to determine the value of the claim. In accordance with the district court’s ruling, the panel appraised the value of the Business Interruption claim to be in excess of $40 million.

St. Paul appealed the declaratory ruling. The Court of Appeals disagreed with the trial court’s interpretation and held that the policy did not provide business interruption coverage until Duane Reade could resume operations in a store located at its former WTC site. Instead, it held that coverage extends only for the hypothetical time it would reasonably take Duane Reade to “repair, rebuild, or replace” its WTC store at a suitable location. In its reasoning the Court of Appeals stated that Duane Reade’s lost profits for rebuilding at a different site would probably fall under the Leasehold Interest clause of the policy rather than the Business Interruption clause and that any losses continued beyond the Period of Restoration would be covered by the Extended Recovery Period provision. Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384 (2nd Cir. 2005),

To be sure, there are few if any locations in New York City comparable to the WTC, and Duane Reade will most likely not be able to recreate the profit stream it once enjoyed there. But any discrepancies between the new building and WTC in terms of benefits and advantages are exclusively accounted for under the Leasehold Interest clause.

Id. at 386.

After this opinion, the appraisal panel revised the value of the BI loss at roughly $14 million. The appraisal panel had also awarded in excess of $4 million under the policy’s Extended Recovery provision.

I am not sure why, but Duane Reade dismissed the lawsuit and filed a new lawsuit to recovery under the Leasehold and Extended Recovery provisions in accordance with the appellate opinion. St. Paul pulled an old trick out of the hat and moved to dismiss the second lawsuit under the doctrine of res judicata and to confirm the appraisal award. The trial court agreed with St. Paul, but before kicking the case out of court forever, the Court gutted out the $4 million award under the Extended Recovery provision.

The Extended Recovery Provision read as follows:

This policy is extended to cover the Actual Loss Sustained by [Duane Reade] resulting from interruption of business for such additional length of time as would be required with the exercise of due diligence and dispatch to restore [Duane Reade]'s business to the condition that would have existed had no loss occurred, commencing with the [later] of the following dates:

a) the date on which liability of [St. Paul] of loss resulting from interruption of business would terminate if the [Extended Recovery Period] clause had not been attached to this policy or

b) the date on which repair, replacement, or rebuilding of such part of the property as has been damaged is actually replaced, but in no event for more than twelve months from said later commencement date.

Duane Reade argued that that the requirement of actual replacement should be interpreted to be satisfied when the store could have been replaced, but the court disagreed and interpreted the clause to require “actual replacement” and since Duane Reade had not replaced it was not entitled to this coverage:

Under Duane Reade's reading, prong (b) would automatically be satisfied whenever prong (a) were satisfied. In contrast, by enforcing the requirement for actual replacement, the Court has given meaning to both requirements. For example, if Duane Reade were to delay and actually take more than the time that reasonably would be necessary to replace a protected property, prong (a) would be satisfied (and coverage under the Restoration Period would terminate) when the property could have actually been replaced, and prong (b) would be satisfied (and coverage would recommence under the Extended Recovery Period) when Duane Reade did actually replace the property.

Duane Reade, Inc. v. St. Paul, 503 F.Supp. 699, 701 (S.D.N.Y. 2007).

Duane Reade did not give up and appealed, but the Second Circuit Court of Appeals was less than sympathetic to its plight, ending the saga on March 31, 2010.

Reading this article was like watching a train wreck, but in slow motion and surround sound. Everything that could go wrong did. The multi-million dollar research data was lost, the quality or existence of duplicate data was unknown, the research grants were suspended until 100% resumption of operations, patent paperwork was delayed, key faculty members went to teach elsewhere, and the world was deprived of new bioscience research. Of course, despite the broker’s best efforts to get the BI worksheet right, the institution was significantly underinsured.

However, the institution had only itself to blame for its demise.

According to the risk managers, the lesson to be learned from these costly mistakes is that the purchase of insurance is never a substitute for a risk management plan and that risk financing should only be considered after careful analysis of the value of the business and any related interdependencies of revenue.

A BI worksheet normally uses annual financial statements to determine the insurable value, but in a catastrophic scenario like an unprecedented storm or a consuming fire, the lag in revenue may continue even after the business returns to its pre-loss operational capacity and the exposure oversight can be costly. The following suggestions were offered to minimize risk exposure in a catastrophic scenario:

• Prioritize all revenue sources by contribution toward the aggregate value of the organization, not just by the dollar amount
• Streamline revenue sources within an organization so to identify highest risk exposure
• Identify key buildings and facilities critical to overall revenue generation
• Consider revenue from other sources which may pose contingent exposures
• Establish a Business Continuity Planning Process (or risk management plan) as a pre-loss triage process that concentrates efforts on critical activities (ie. mitigation efforts)

Once the exposures have been identified, a business should then consider financing the risk through the purchase of insurance. In general, after a covered loss occurs, the basic business income coverage should protect the insured from the loss of net income to the extent income would have been earned, including normal operating pre-loss expenses. In the case above, however, the basic coverage can only go so far. If the insured depends on specialized facilities and does not have redundant space or backup facilities to continue or resume operations, the insured can finance the risk of most losses by purchasing additional coverage forms such as, extra expense coverage, ordinary payroll, an extended period of indemnity, contingent/dependent coverage, service interruption and a special research and development form that is available for organizations engaged in this business. A catastrophe may very well deprive the world of a breakthrough scientific discovery, but with adequate coverage and sufficient business resilience, we can continue expecting great things from mankind.

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 could have had on the economy, market or demand for the insured’s goods or services […]

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 [...]

On March 15, 2010, a few weeks after my post, the “Economy Ignored” line of cases scored big in Mississippi. See, Catlin Syndicate Limited v. Imperial Palace, No. 09-60209, 2010 WL 9008731 (5th Cir. 2010). Recognizing the aforementioned debate among courts, the United States Fifth Circuit of Appeals held that as a matter of Texas and Mississippi law:

[A] business interruption loss will be based on historical sales figures and we [courts] should not look prospectively to what occurred after the loss.

Imperial Palace, a Mississippi casino, was shut down for several months after Hurricane Katrina. The casino claimed to have had a business loss claim of $165 million, but Catlin Syndicate calculated the loss at $6.5 million. Basically, the parties disagreed on whether the policy allowed consideration of post-loss earnings in the calculation of business interruption loss.

The provision at issue in Imperial Palace is typical, and read as follows:

Experience of the business- In determining the amount of the Time Element loss as insured against by this policy, due consideration shall be given to experience of the business before the loss and the probable experience had no loss occurred.

Catlin Syndicate argued that under the policy, Imperial Palace’s recovery should be based on the net profits that the casino would have earned had Hurricane Katrina not struck the Gulf Coast by looking solely at pre-hurricane sales, arguing that “had no loss occurred” means “had no hurricane occurred”. The casino, on the other hand, argued that the policy allows consideration of its post-loss earnings and asked the court to interpret “had no loss occurred” to mean that Hurricane Katrina occurred, but the loss to the property did not.

In simpler terms, the casino argued that it should be entitled to recover what it would hypothetically have earned had it been able to remain open immediately after Katrina, while all of its competitors were closed due to damage to the storm.

Although the Fifth Circuit Court of Appeals agreed that, in theory, a “loss” is distinct from an “occurrence,” the Court followed several “economy ignored” cases and found that “loss” and “occurrence” are one and the same in the business interruption provision and ruled that “had no loss occurred” means “had no hurricane occurred,” thereby foreclosing any consideration to post-loss earnings.

While I recognize that the “economy ignored” cases are premised, for the most part, on valid concerns of preventing abhorrent windfalls, this hard-line analysis may have undesired effects. In my recent post, I commented as follows:

[…]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 […]

It appears that Texas and Mississippi will adhere to the “economy ignored” framework, where “had no loss occurred” means “had no occurrence occurred.” This is concerning. Notwithstanding Imperial Palace, experts on this matter still believe and conclude that the “economy ignored” framework has the effect of treating business interruption coverage as some sort of catastrophe insurance, instead of insurance for the financial consequences of defined property damage, which is the intent and purpose behind business interruption coverage. The debate is therefore very much alive.

Truth be told, certain business interruption claims are hard to quantify. Policyholders should be aware of the accounting methodologies employed in the calculation of a business loss to avoid presenting the ubiquitous “speculative” claim that could be easily denied under the consequential (or remote) loss exclusion.

In Florida, courts have held that in order to recover under the business interruption policy, an insured must prove that it sustained damage to property, that the damage was caused by a covered loss, that there was an interruption to the business (“suspension of operations”) which was caused by the property damage, and that there was an actual loss of business income during the period of time it took to restore the business and that the loss of income was caused by the interruption of the business and not by some other factor or factors. See, Dictiomatic, Inc., v. U.S. Fidelity & Guar. Co., 958 F. Supp. 594 (S.D. Fla. 1997), citing Ramada Inn Ramogreen, Inc., v. Travelers Indemnity Co., 835 F.2d 812 (11th Cir. 1988).

In Dictiomatic, the court denied the insured’s business interruption claim as a matter of law after it found, as a matter of fact, that the insured failed to prove it would have realized business income (selling hand-held electronic translators) which was lost solely as a result of Hurricane Andrew. The insured also failed to establish that it would have enjoyed income during the time of restoration, sufficient to pay normal operating expenses or to generate profits.

In my opinion, the policyholder’s demise in Dictiomatic was most likely the result of improper calculation of the actual business loss, since the numbers presented to the court were perceived as inflated and contradictory. Surely, a more thorough review of the evidence before it was presented to the trial court could have avoided a judgment after the insured’s case in chief and potentially resulted in an opportunity to challenge the carrier’s case. If there is one thing to be learned from the “hand-held electronic translator” business, it is to be careful and accurate in presenting a claim for business interruption.

In reviewing my own practice and various treatises on this area of insurance law, there is a consensus that the following strategies will most likely result in a fair resolution of a business interruption claim:

1. Review the policy - it does not matter if you can quote coverage forms by memory, the best practice is to review the policy, along with any applicable endorsements, to note all the various categories of losses and expenses that are covered, or not, as well as to recognize and execute all duties and obligations under the policy.

2. 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 claim denied. If this happens, the claim will inevitably have to be litigated. In Florida, a denial for failure to give timely notice will unfortunately create a rebuttable presumption that the carrier has been prejudiced as a result thereof. Tiedke v. Fidelity & Cas. Co. of New York, 222 So.2d 206 (Fla. 1969). Therefore, if the insured decides to litigate the claim denial, the insured has the burden of presenting enough factual evidence to overcome this presumption and the court must determine if the time between the loss and the notice was reasonable under all of the facts and circumstances of the case. See, Employers Cas. Co. v. Vargas, 159 So. 2d 875, 877 (Fla. 2d DCA 1964). Also, when giving notice of a claim, avoid making any verbal or written statements regarding coverage, the requirement to give notice, is just that; a duty report the loss in a timely fashion.

3. Cooperation - After a claim is reported, a carrier will begin its adjustment or investigatory phase. During this period of time, the insured is required by the contract to provide as much information as reasonably possible to assist the insurer in its investigation of the claim. Many business owners and managers raise their brows at the type of information that sometimes is requested in support of a BI claim. Rightfully so. At times, the information requested may infringe on trade secrets or information that fuels the business’ competitive advantage. 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, which, most of the time, is merely seeking to quantify a claim and will not oppose such an agreement.

4. 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.

5. Cost Tracking - In general, a policyholder bears the burden of measuring, documenting, and establishing its claim. Most businesses have internal accounting programs and systems that organize its ingress/egress functions. Hopefully, these systems operate remotely and will survive a catastrophic loss. Otherwise, the insured will face the daunting task of reconstructing its pre-loss costs and post-loss projections from scratch.

6. Document everything - if there is one thing that people can learn from lawyers is the practice of documenting every relevant communication with all relevant parties. Many business owners and managers already engage in this type of practice, but in times of distress and anxiety about survival, many forget to maintain this important practice. I always say, there is nothing more powerful than those green cards at the post office; this practice simply makes life easier.

Business interruption insurance policies frequently provide indemnity not only for lost profits and fixed charges and necessarily continuing expenses, but for expenses, or "extra expenses," which the insured incurred to reduce the loss and resume business operations. Extra expense coverage is an additional coverage afforded to a business, and it goes beyond the typical coverage for direct physical losses contemplated by the general insuring agreement of a building and personal property coverage form in an insurance policy. Extra expense should allow a business to continue in the event of an emergency, by indemnifying the insured for additional expenses that would not normally have been incurred, but which are not covered under their traditional business interruption provision.

However, if the business policy does not contain Extra Expense protection, these costs may never be recovered, despite the due diligence of a business enterprise to resume operations. Under an Extra Expense Coverage provision, expenses incurred for the purpose of resuming business operations are recoverable only to the extent that they, in fact, reduce the loss, and recovery is limited to variable costs directly attributable to the loss mitigation efforts, rather than fixed costs which would have been incurred even in the absence of the loss.

Examples of covered expenses could be temporary office space, temporary computer systems or furniture for the temporary space, overtime for workers who need to spend additional time outside of their normal work day due to the covered event. If employees were not able to bring their lunch to work because the employee’s lounge/kitchenette was burned in a fire, an extra expense claim could be made for feeding them during this time period.

For example, in Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted expenses, such as incremental utility costs and other overhead, to the damaged business property to enable the insured to repair the property and resume operations earlier than anticipated, as well as extra expenses for security to avoid theft of business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials is not.

It is important to note that, as with most insurance policies, the insured has a duty to mitigate its damages after the loss. Extra Expense Coverage allows the insured to recover a measure of the incidental costs expended in trying to mitigate damages pursuant to the terms and provisions of most insurance policies. Therefore, even in tough times, it still makes business sense to keep additional insurance protections (ie. Extra Expense Coverage) to avoid wasting the same or more money the business is trying to save by downgrading coverage.

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