“Lost time is never found again”– Benjamin Franklin
Business income coverage is supposed to protect a business’ net income and operating expenses while its operations are suspended as a result of loss or damage caused by a covered peril. An unexpected interruption of productivity for a period time can be devastating for a business. And because the period of income recovery after a loss is governed by the concept of time, businesses should always have a contingency plan to maintain continuity in the event of a loss and not rely solely on the expectation of recovery from an insurance claim. Time is an illusion humans created so our simple brains could understand that not everything happens at once. Our brains perceive and value time differently – disagreements will always abound over this concept. If insurance contracts do not set forth clear definitions governing this type of time-element coverage, business income claims could be as mysterious as the concept of time itself.
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.
Under this standard provision, there is normally little debate as to when the period of restoration begins, – the date of the loss. The debate will always heat up on establishing when the period ends, since the already fictitious concept of time is measured by a subjective premise – 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. Luckily, this theoretical period is limited to a fixed point of time (i.e., 12 months in most cases). Otherwise, the debate could last an eternity.
As expected with such an obscure subject, courts across the country have interpreted the issue of theoretical vs. actual period of restoration differently. However, the growing consensus is that when the insured rebuilds “as was” (same location with similar quality of operations before the loss) the actual period of recovery governs the measurement even if the theoretical period was estimated to be shorter.1 However, when the insured does not rebuild at all, or does not rebuild “as was,” courts will apply the theoretical period of recovery based on how long a reasonable person would have needed to repair the damaged property.
In cases where the business is able to repair, rebuild and resume operations within the policy limits of time, the period of restoration is no longer theoretical, but actual, and the business income loss is measured and calculated from the date of the loss until the date the business resumes its pre-loss operational capability (subject to certain offsets like “make ups,” “idle periods” and “residual values” – concepts that can also be confusing and challenging)
Actual or defined periods of indemnity are usually not contested. Dilemmas will normally evolve when dealing with a theoretical periods of restoration where carriers 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.
The plot thickens when the insured sets up a temporary facility or operation to stay alive and minimize their losses and the period of time that it would take to rebuild would exceed the coverage period (ie. 12 months). In these cases, carriers will argue that the temporary facility is the permanent location and will measure the loss from the date of the loss through the date the temporary facility was set up (a few days or weeks). The difference in time perception can be worth millions, and the dispute is likely to end up in court. In this example, at least one court agreed that the loss should be measured under the theoretical period (which could be longer than the policy’s 12 month limit) even though the business subsequently made the temporary facility its permanent facility.
[The] contract provides a theoretical as opposed to an actual replacement time as the basic time standard for computation of business interruption loss. We also agree that the contract language ‘such described property’ was appellees’ ‘real or personal property * * * (on) the premises of R.D.C., Inc., in Rossville, Walker County, Georgia.’ Although a substitute plant of potentially equivalent capacity was promptly obtained, appellees’ actual losses as shown by the proofs continued beyond that date; and appellees were entitled to reimbursement for such losses for the term of the theoretical replacement period as provided by the contract.2
Philosophical challenges aside, claims get paid on a daily basis after everyone decides to compromise their ideas and valuation around the concept of time. In the meantime, all we can do is maximize the use of our time today.
1 Anchor Toy v. Am Eagle Fire Ins., 155 NYS2d 600 (NY Sup Ct. 1956).
2 Bautytuft v. Factory Insurance Association, 431 F.2d 1122 (6th Cir. 1970)