Last week I wrote about business interruption insurance and how it can help your business during tough times. Today, I would like to expand on that further and discuss what you, as the policyholder, need to show in order to obtain coverage for your business interruption losses. A policyholder may suffer a loss of income from an event, such as a hurricane, but the loss of income may not be tied to property damage. For that reason, business interruption provisions often require a “causal connection” between the business’s loss of income and covered physical loss or damage.
Last week I discussed the case of Quality Oilfield Prods., Inc. v. Michigan Mut. Ins. Co., 971 S.W.2d 635 (Tex.App.—Houston [14th Dist.] 1998, no pet.). The provision in Quality Oilfield is a good example of the “casual connection” requirement because it explicitly limited coverage for business income loss “caused by damage to or destruction of property.” The “caused by” language creates the requirement that links the loss of the insured’s income to the damage suffered by the property.
The “causal connection” requirement is imperative in situations where an event affecting a community has a subsequent effect on the insured’s business. For example, in the Lousisana case of Southern Hotels Limited Partnership v. Lloyd’s Underwriters at London, Civ. A. No. 95-2739, 1996 WL 592732 (E.D. La. Oct. 11, 1996), after Hurricane Andrew caused havoc to an insured’s community, there was a lack of customers and the insured hotel owner made a claim for loss of income and for damage to air conditioning units, a pool pump, and the telephone system. The policyholder claimed that the damage made his hotel rooms unavailable for occupancy. However, evidence showed that the insured did not turn away any customers due to the damage allegedly resulting from the hurricane.
The Court in Southern Hotels noted that there was no evidence shown that “causally connects the damage in the rooms to the loss of revenue,” given that client demand never exceeded the availability of undamaged rooms. The Court explained: “[to] state a triable issue for business interruption damages, the plaintiff must show that it lost revenue as a result of damages caused by Hurricane Andrew.” The policyholder must show “a causal nexus” between the damage caused by the hurricane and the business interruption loss. Because the policyholder failed to show any such causation, was lacking, no business interruption coverage was found.
So in order to get business interruption coverage for lost business income, the policyholder has to do more than just claim that a covered peril affected his/her business; s/he has to show a real causal connection between the actual damage to his/her business and the loss of business income.