Business interruption coverage provides protection against loss of income when a business suffers property damage from an insured peril (e.g., fire, water loss) that interrupts the operation of the business.1 A typical business interruption policy form provides that the insurer will pay the actual loss of business income the insured sustains during the necessary suspension of its operations during the “period of restoration.”2
Business interruption policies also normally cover “extra expenses” incurred during the period of restoration that would not have been incurred without the loss. This coverage pays for the extra expenses incurred to avoid or minimize the suspension of business and to continue operations at the business premises described in the insurance policy or at a replacement premises or temporary location, including relocation expenses and costs to equip and operate the replacement premises.
The key theme that is apparent in both coverages is that coverage depends on. . . the Period of Restoration. In other words, the coverages grant states that the insurer is only required to pay for loss of business income and extra expense incurred during the period of restoration.
The period of restoration is generally understood to mean either:
- The time it should take a reasonable insured exercising due diligence and dispatch to repair, rebuild or replace the property; or
- The time it takes the insured to actually repair, rebuild or replace the damaged property, or resume operations at a new location.
Courts have interpreted the “should” language to mean a theoretical restoration period based upon a hypothetical repair/rebuild when the property is not actually repaired, rebuilt, or replaced.3
If the property is repaired, rebuilt or replaced, then actual repair, rebuild or replacement time should be used in measuring the restoration period. But, insurers have convinced courts to apply a theoretical restoration period where the insured failed to move with reasonable speed or failed to exercise due diligence and dispatch in repairing, rebuilding or replacing.4
Disputes often arise between insurers and policyholders regarding what is a reasonable restoration period. In fact, insurers routinely argue that the restoration period is always the theoretical time it should take an insured complete repairs and resume business—even when the theoretical approach is completely removed from any of the actual facts and circumstances.5
However, courts have extended the restoration period when insurers’ conduct, either in payment or in adjustment activity, has caused the delay.6
Courts also have extended the restoration period because of delays that are due to circumstances outside the policyholder’s control. Real-world contingencies, such as construction delays that lengthen the time an insured requires to get back to business, and delays outside of the insured’s control will serve to lengthen the period of restoration.7
The common theme we can take away from the case law is that the period of restoration cannot and should not be judged in a vacuum without context to the particulars of a claim. The end of the restoration period must be evaluated based on the specific factual circumstances of the case. Insureds should not be penalized when the delay in repairing, rebuilding or returning to business was caused by events outside of their control.
Commercial policyholders submitting business interruption claims should not be surprised when their insurers insist on a theoretical approach to determining the length of the restoration period, ignoring the actual facts and circumstances. Policyholders, public adjusters, and policyholder advocates must be ready for this initial push-back from insurers and aware that courts have extended the restoration period to account for delays when they are outside the control of the insured.
Consequently, policyholders submitting business interruption claims should be reluctant to accept an insurer’s theoretical restoration period that does not take into account delays in repairing, rebuilding, or replacing damage to insured property due to factors outside the insured’s control.
1 See generally, 11 Couch on Insurance §167:9 (3d ed. 2006).
2 Insurance Services Offices, Inc. (“ISO”) forms CP 00 30 04 02 at p. 1 of 9 “Business Income and Extra Expense Coverage Form” and CP 00 32 04 02 at p. 1 of 8 “Business Income (Without Extra Expense) Coverage Form.”
3 See, e.g., Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F. 3d 384 (2nd Cir. 2005); Steel Products Co. v. Millers Nat’l Ins. Co., 209 N.W. 2d 32 (Iowa 1973).
4 See, e.g., Fireman’s Fund Ins. Co. v. Mitchell-Peterson, Inc., 578 N.E.2d 851 (Ohio App. 1989); Beautytuft, Inc. v. Factory Ins. Ass’n, 431 F.2d 1122 (6th Cir. 1970); Congress Bar and Restaurant, Inc. v. Transamerica Ins. Co., 165 N.W. 2d 409 (Wis. 1969).
5 See, e.g., Breton v. Graphic Arts Mut. Ins. Co., 2010 WL 678128 (E.D. Va.); Meadowcrest Living Center L.L.C. v. Hanover Ins. Co., 2008 WL 2959707 (E.D. La.).
6 See Vermont Mut. Ins. Co. v. Petit, 613 F. Supp. 2d 154 (D. Mass. 2009); Pontchartrain Gardens, Inc. v. State Farm Gen. Ins. Co., 2009 WL 86674 (E.D. La 2009); Streamline Capital, L.L.C. v. Hartford Cas. Ins. Co., 2003 U.S. Dist. Lexis 14677 (S.D. N.Y. 2003); Western Am., Inc. v. Aetna Cas. & Sur. Co., 915 F.2d 1181 (8th Cir. 1990); Omaha Paper Stock Co. v. Harbor Ins. Co., 445 F. Supp. 179 (D. Neb. 1978), aff’d 596 F.2d 283 (8th Cir. 1979).
7 See, e.g., United Land Investors v. Northern Ins. Co. of America, 476 So. 2d 432, 438 (1985); Eureka-Security Fire & Marine Ins. Co. v. Simon, 401 P.2d 759, 763-4 (Ariz. App 1965); United Nuclear Corp. v. Allendale Mut. Ins. Co., 709 P.2d 649, 656 (N.M. 1985); Anchor Toy Corp. v. American Eagle Fire Ins. Co., 155 N.Y.S.2d 600, 604 (Sup. Ct. 1956).