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

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). 

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.