The “Period of Restoration” 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.
In smaller losses, where the insured is able to rebuild and resume operations rather quickly, the period of recovery will be measured by the “actual time” it took to rebuild and resume operations. In large-scale or catastrophic losses, however, it may take years for an insured to resume its pre-loss operations. Many times, insureds are so financially devastated by a loss that they are unable to even attempt at resuming the business. In these cases, recovery is measured by a theoretical period of restoration, where differences of opinion are likely to take place.
When dealing with a theoretical period of restoration carriers will come up with rigid formulas to determine how long it “should” take its insured to rebuild and resume operations, but these formulas seem only to work in a vacuum as they rarely take into account “real world circumstances”, which is why many will take their battles to court.
Anchor Toy Corp. v. American Eagle Fire Insurance, 155 NYS 2d 600 (Sup. Ct. 1956) is seminal to understand theoretical periods of restoration. In Anchor Toy, the insured’s factory burned to the ground. The insured did not rebuild the site. Instead, the insured directed its energies to purchasing another factory, but the deal fell through and the insured gave up on resuming operations.
After considering expert testimony with respect to the time it would theoretically take to rebuild and resume operations, the Court then held that:
It is defendants’ contention that the building to be rebuilt would be an exact duplicate of this structure. The detailed description would reduce the time to be spent on architectural services to a minimum. This premise is however at fault. The rebuilding contemplated by the policy is the replacement that would actually follow after a disaster. It is beyond the bounds of reasonable contemplation to expect that a replacement structure would ignore all progress in the art and slavishly retain any proven disadvantage. It must be the intent of the policy that the new building to be erected would be modern as well. Doubtless if an extraordinary additional time would be required to include improvements or innovations these would not be included. It would follow that an architect’s services and time for their performance would be needed.
In rejecting the rigid formula that the carrier proposed, the court went on to state:
Actual construction would take twenty-two weeks. Installation of machinery was fixed at six weeks, but one week of this would coincide with the completion of the building. This totals thirty-eight weeks. This is the time it would take to replace the structure providing the building was put up by the experts in the court room. But buildings seldom are. In the field it snows, and men fall off girders, and the wrong size window glass is delivered. An estimate of eight weeks for these contingencies is not believed to be excessive.
In a recent article published by the American Bar Association titled Business Interruption Insurance: Calculation of the Period of Restoration Must be Informed by Post Loss Challenges, it was noted that:
Anchor Toy stands for the straightforward proposition that even where a property owner does not rebuild, it still may recover its business interruption loss as if it had rebuilt. This is important protection because after a major loss, businesses may face difficulties securing financing, worker attrition, a diminished market, or other challenges that stand in the way of a return to profitability. When faced with such challenges, insureds may decide that it is economically or otherwise impractical for them to repair or rebuild lost property. In such instances, the theoretical period of restoration makes insurance recovery possible. By taking into account real-world circumstances when calculating the theoretical period of restoration, however, the insured likely can obtain all the benefits due under the policy.
Another opinion that considers the challenges an insured may face after a devastating catastrophe is SR Intl. Bus. Ins Co. v. World Trade Center Properties, LLC, 2007 WL 519245 (S.D.N.Y 2007). In SR International the insured argued that in cases where the insured property was located inside the World Trade Center, the rental value claims should be computed via a “theoretical period” vis a vis the “actual time” it would take to rebuild the WTC site, as it was on the morning of 9/11.
While the Court held that the claim loss of rent claim would be valued by an appraisal panel under a “theoretical period” to rebuild as it was on the morning of 9/11, the court also stated that the panel may:
[…] indisputably may consider “real-world circumstances” such as rental market rates or vacancy statistics for the relevant time periods after 9/11 in arriving at its valuation. Such data will undoubtedly reflect a changed, post-9/11 commercial real estate market in New York. The Appraisal Panel is entitled to give that evidence whatever weight it feels it deserves. “[Although] [t]he restoration period remains theoretical … it is not computed in a vacuum.
In sum, both opinions allow the insured to factor in “real world” contingencies in the theoretical period, which should yield a more accurate measure of recovery even in the strictest hypothesis.