Before I proceed, I must caution the reader with a caveat-the actual policy language in any given claim is of critical importance, therefore, a careful reading of the applicable provisions should be the first step in any claims practitioner’s book.
The issue of whether a total cessation or a mere slowdown in productivity is required to trigger business interruption coverage is one of those questions that will most likely be defined in the policy. If not, courts will be given an opportunity to answer the question, which could lead to undesired results for either party.
In Keetech v. Mut. Of Enumclaw Ins. Co., 831 P.2d 784 (Div. 3 1992), a hotel was covered in ash after Mount St. Helen erupted. Although the hotel sustained “physical damage” as a result of the ash, the hotel remained open. Some of this damage, such as the destroyed plants and shrubs, were not replanted until six months later. Because of the ash fall, and the succeeding ash blowing onto the premises, the physical appearance and physical attractiveness of the motel was damaged. Although the hotel remained open and operated at all times, it suffered a decrease in hotel occupancy and made a claim for business income loss. The carrier denied the claim and suit followed.
The policy in question stated, in part:
[T]he actual loss sustained by the insured resulting directly from necessary interruption of business … for only such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair or replace such part of the property herein described as has been damaged or destroyed … Due consideration shall be given to the continuation of normal charges and expenses, … to the extent necessary to resume operations of the insured with the same quality of service which existed immediately preceding the loss; and
4. 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 complete or partial resumption of operation of the property herein described, whether damaged or not, …
such reduction shall be taken into account in arriving at the amount of loss hereunder.
The Keetech court denied recovery under the cited provision, holding that “the purpose of business interruption insurance is to indemnify for loss due to inability to continue to use specified premises. Here, [the insured] did not suspend its business activity; its business was not interrupted as provided for in the loss of earnings endorsement.”
Although many courts follow the “total cessation” approach in Keetech, many others will allow recovery under a “slow down” theory, depending on the language of the policy at issue. For example, in American Medical Imaging Corp., v. St. Paul Fire and Marine Ins. Co., 949 F.2d 690 (3rd Cir. 1991), the court allowed recovery even though business continued at less than normal level.
In American Medical Imaging, the insured’s business was damaged by fire. The insured immediately rented space at an alternative site and relocated the next day to a place with substantially fewer telephone lines, which were essential for the business’ operations. The insured did not return to its headquarters for approximately six weeks.
St. Paul denied the claim, citing the fact that no suspension of business occurred, and a lawsuit followed. American Medical lost at the trial level, but prevailed on appeal. Under a provision similar to the one cited above, the court ruled in favor of American Medical:
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.
American Medical points out the problem at the heart of the “total cessation” approach: the insured can be punished for attempting to mitigate its own loss, as well as the insurer’s potential loss. Vincent Morgan’s article in CAT Claims: Insurance Coverage for Natural and Man-Made Disasters, explains that while the “total cessation” approach may have some logic, it also has significant shortcomings:
- Failing to accurately address the realities of large businesses that operate worldwide on a “round the clock” basis that would never cease operations
- Creating perverse incentives for insureds to enhance their insurance recovery by not taking all possible steps to maintain partial operations, increasing the loss and decreasing economic output; and
- Creating inconsistent obligations for insureds because of the corresponding duty to mitigate, leaving an insured that can mitigate a loss by maintaining partial operational capabilities without coverage due to the lack of total cessation.
If you suffer a business interruption loss, I recommend contacting a professional right away to work with your insurer to determine how you can most effectively use your insurance and protect your business.