(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the tenth and final part in a series she is writing on valued policy laws).
In general, business interruption coverage is supposed to provide the capital needed to sustain a business while its operations are suspended as a result of damage caused by a covered peril.
Most business interruption provisions read as follows:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “Operations” during the “Period of Restoration.” The suspension must be caused by direct physical loss of, or damage to property […] The loss or damage must be caused by or result from a “Covered Cause of Loss.
The “Period of Restoration” (a.k.a. “Period of Indemnity”) in a business interruption claim is a concept of time. The period, as defined in most ISO forms, begins at the time of “direct physical loss or damage” and ends on the earlier of “the date when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality.” […] or “the date when the business is resumed at a new permanent location”
While there is normally little debate as to when the period of restoration begins, there is often much debate as to when the period ends, since most policies limit the time period to the time that it would take to repair or replace the damage “with reasonable speed or similar quality” and return the business to its pre-loss operational capability. This means that if an operation is suspended for four months but the premises could have been restored to operating conditions in eight weeks “with reasonable speed and similar quality,” the recovery would be limited to eight weeks, if there is no due cause for the delay.
To be clear, returning the business to “operational capability” does not necessarily mean to return the business to pre-loss income levels, which may take much longer to accomplish. Operational capability is merely the entity’s ability to produce goods and provide service at the same level, efficiency and speed as before the loss.
The business interruption value or the coverage provided during the Period of Restoration can be calculated using either of the following methods and both will yield the same result:
Business Interruption Value = Net Income Plus Continuing Expenses, or
Business Interruption Value = Gross Earnings Less Non-continuing Expenses
To say the least, time is of the essence in a business interruption claim. Many factors should be taken into account to avoid delays that could compromise a claim. In his recent book, Business Income Insurance Demystified, Christopher Boggs considers 10 time factors that directly affect the Period of Restoration in a business interruption claim.
Specifically, the time it would take to:
- Adjust the direct property damage
- Draw building plans and approve them
- Find and retain a contractor
- Apply and wait for building permits
- Prepare and clear a site
- Rehiring and hiring new employees
- Replace machinery and equipment
- Potential state or local intervention following a loss.
While the list is not exhaustive, it is certainly important to try to work on these factors simultaneously to swiftly restore operational capacity and obtain the most business interruption value out of the Period of Restoration.