As a matter of principle, 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. Since business income coverage was designed to keep the money flowing when the operation is out of action, the timing of the payment is, of course, of the essence. Chip’s recent post, AON Warns Agents That Insurance Companies Are Getting Tough on Commercial Claims, is alarming, and I advise everyone to pay attention to any signs of systematic claim delay tactics in the handling of business income claims. These practices should not be allowed.
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. For example, 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.
Often, the debate on when a period of indemnity ends can drag out for years in protracted litigation to determine whether actual replacement ends the period of indemnity or whether the carrier’s delay in payment extends the period of indemnity. While I always appreciate intellectual debates of this nature, at least one court has held that the period of restoration can be computed immediately by an appraisal panel or the court. In SR Intern. Business Ins. Co., Ltd v. World Trade Center Properties, LLC, 2005 WL 827074 (S.D.N.Y. February 15, 2005), the court found that a declaratory action to determine whether to use a theoretical or an actual measure of the restoration period was ripe for adjudication since it was clear that the parties were in disagreement.
As discussed below, one of the purposes behind using a theoretical measure of the restoration period is that it allows a court to establish the time for which the insured can be compensated before the rebuilding is completed. See Alevy v. Alliance Gen. Ins. Co., No. 95-56034, 1996 WL 623065, at *2 (9th Cir. Oct.24, 1996) (unpublished opinion); Bard’s Apparel Mfg., Inc. v. Bituminous Fire & Marine Ins. Co., 849 F.2d 245, 251 (6th Cir.1988). It is precisely the hypothetical or abstract nature of the restoration period in a case such as this that ensures the recovery granted the insured party will not be subject to contingent future events. See Rogers v. Am. Ins. Co., 338 F.2d 240, 243 (8th Cir.1964) (“A ‘cut off’ date is a necessity. Otherwise, claims would be opened to a degree of speculation which would be absurd. There would be no available method to determine with any degree of accuracy the amount of such losses.”).
Logic persuades us that if the Period of Restoration is subject to immediate calculation, so the amount which will be lost during that period should also be subject to immediate calculation and paid immediately. The practice of paying business income losses at the end of a long claims process is not what business income coverage intends. Insurance companies have a duty to adjust the loss with their insureds, and, similar to any other type of insurance claim, payment should be calculated in a swift manner after a full and fair disclosure of information. Business income should not be treated any differently, as the AON report suggests.