History is important. Insurance history gives context and meaning to the thoughts and views of what should be and why things should be the way they were and are. Those historic views have been ever increasingly challenged in social media and very dynamic processes throughout the United States in the past few years. I want to know what people were thinking and what their intent was regarding insurance policy forms. Insurance history and policyholder advocacy is my life.
I have found myself reflecting and studying the history of where business interruption forms came from because of the Covid business interruption lawsuits. The concept of “loss” as being different from “damage” is a significant theme for these lawsuits. It is really a nerdy exercise to look for old policies and for thoughts of those initial forms of coverage. The truth is that there were no “business interruption” forms in place at the time of the 1918 Spanish Flu. The Spanish Flu was a huge life insurance bubble with successful insurance companies explaining and advertising how quickly they paid claims to families. If you think about it, those insurers knew how catastrophic it was for the earning members to no longer be able to provide because of a peril that was not specifically excluded for life insurance. But we forget about those days.
As far as I can figure out, when the all-risk forms were made and the business interruption forms were made, the insurance world seemed a lot more concerned that they needed to exclude floods and nuclear holocaust and simply forgot about the Spanish Flu type catastrophe issues. Thus, the Virus Exclusion came up in the 21st Century. I do not know why so many CPCU types simply do not admit to this other than they are concerned about the ramifications that lead to payment—they forgot to exclude a major catastrophe because they did not think about it.
In our Merlin Law Group library, we have a book, Business Interruption Insurance, by Rough Notes in 1950, but published thereafter in 1952. It gives credit to a Frederick C. White for coining the phrase and providing the title of “business interruption insurance.” If a nerdy ghost could be shivering his timbers, I imagine that he would not think of a me raising Fredrick White as the author of this so important coverage issue years after his death. Cheers to Frederic!
Researching Fredrick White’s name, I then found this in a 1920 Cyclopedia of Insurance in the United States regarding “use and occupancy” coverage insurance, written by Willis O. Robb of the New York Fire Insurance Exchange:
USE AND OCCUPANCY INSURANCE. ‘Use and Occupancy Insurance,’ in the broad sense, insurance against the loss caused by fire in the way of interruption of business in a going concern, has had but a comparatively small development in the United States, and much of that development has apparently been in a wrong direction. There are two chief reasons for this. In the first place, in those states requiring or encouraging the use of a standard fire policy there is no separate provision for insuring contingent interests, such as rents, profits, use and occupancy, leasehold interest, etc., although these interests manifestly cannot be properly covered under the ordinary standard fire policy, with its express exclusion of loss due to interruption of business, its requirement for the payment of any loss in one sum and at one time, and its manifold minor provisions designed only for regular property insurance and losses. And in the next place, partly because a higher rate is ordinarily charged for so-called profit insurance than for so-called use and occupancy insurance, and partly because of the failure to understand and measure the real interest sought to be covered, the forms employed have been confused, evasive, or quite in adequate.
The first of these handicaps can be overcome only by amending or overriding the statutes enacting and establishing the standard policy; either greater liberty must be given fire underwriters by the law in the matter of insuring these contingent interests, or riders largely modifying the regular provisions of the standard fire policy for the sake of a clear cover for such interests must be employed and tolerated. The removal of the second handicap would appear to be mainly a question of education.
Strictly speaking, use and occupancy insurance, as was held in the well-known New York Court of Appeals case of Michael vs. the Prussian National Insurance Company, the so-called Buffalo Grain Elevator case, covers only the loss to the owner or occupant of the ability to use the property described in the policy. In the Tanenbaum cases in the Supreme Court of the same state, it was expressly, and no doubt properly, held that ‘use and occupancy,’ as that ex pression is used in a contract to procure insurance which was described only by that term, was not and could not be profits from earnings, however ascertainable. Apparently, therefore, use and occupancy in its proper sense is substantially the same as rental value, and to be measured in the same way as to insurable value and recoverable loss. But as understood by American underwriters generally, use and occupancy insurance is a form of contract that promises to indemnify the policyholder (usually a manufacturer) at a certain rate per day, in case of total interruption, and at a pro rata of that rate in case of partial interruption, caused by a fire in his premises. Only the vaguest understanding of the proper method of fixing that per diem rate, or the total insurable value of the interest insured, is usually found among either underwriters or policyholders. That is because they do not clearly see, or (on account of the question of rate already referred to) do not wish to acknowledge, that what the applicant wants and the under writer should furnish is simply and solely a form of profit insurance, not use and occupancy insurance at all, in the proper sense of that expression: In England, this kind of insurance has been for more than a dozen years more correctly handled as the profit insurance it really is, on a form specially adopted throughout to its precise purpose, with great resulting advantage to the public and to the underwriters, so that a really important new branch of fire insurance has been developed. A recent English writer on this subject is therefore quite justified in referring to the American practice in the following curt fashion:
‘In the United States of America, a scheme called Use and Occupancy is the system which is intended to compensate the insured for the loss of profits by fire. The company issuing a Use and Occupancy policy agrees to pay a pro rata amount of the sum insured for each day the business is entirely stopped, and in proportion in the event of a partial interruption. It is unnecessary to say that such a system cannot assess the loss of profits sustained, except in businesses where the turnover does not fluctuate. Such businesses are so few that a use and occupancy policy is of little commercial value.’
It is true that this summary dismissal of the American Use and Occupancy policy does a little less than justice to it through failure to perceive that, however inaccurate a measuring rod a fixed per diem may be wherewith to measure a fluctuating rate of profit, it is, after all, likely to produce a fair average of result operating through any considerable period. But certainly the English method described by this same writer (Mr. Alex B. Wright, Insurance Against Loss of Profits by Fire—Consequential Loss, “London, 1912, C. & E. Layton) is vastly more flexible, equitable, and attractive. Under that method the applicant indicates whether he wishes to insure net profits only, or fixed charges only, or the two together under the general name of profits, and whether the basis or standard for measuring the loss is to be the ‘turnover,’ measured in money, or the output, measured in quantity of goods produced. Then, for instance, if profits plus fixed charges are to be insured, and turnover is to be the standard, he is given insurance for the amount he declares his net pro fits plus fixed charges for a year would represent, and on the occurrence of a loss the actual annual turnover is ascertained, along with the percentage which net profits plus fixed charges have constituted of that turnover, and this percentage is applied to the reduction or loss of turnover due to the interruption by fire, thus giving the profit loss pure and simple, to which will be added the items constituting the increased cost of ‘working’ necessarily incurred in continuing the business. Several necessary safeguards are introduced into the contract, so that, for instance, if fixed charges were not, in fact, continued after the occurrence of the fire, a corresponding deduction would be made from the amount of the adjustment. Under the English practice the period of liability as distinguished from the term of the policy is limited to a definite number of months following the fire, usually, though not always, less than a year. If in a given case it were longer than a year, instead of taking the annual turnover as the basis or standard of adjustment, the turnover for the longer period of liability is used, while, if the period of liability is a year or less, the standard or basis of adjustment is the annual turnover only. Usually, an audit is made once a month after the occurrence of the fire, until the full restoration of productivity, and monthly payments on account are made by the underwriters, though of course the ascertainment of the basis of entire adjustment, namely, the volume of the annual turnover and the percentage of that turnover represented by profits, is made immediately after the loss occurs. A number of minor checks, balances, and safeguards are introduced into the system, but this synopsis will sufficiently indicate the general character of the English handling of this subject and its manifest superiority to the practice in common use in the United States.
In my way of understanding, “Use and Occupancy is the system which is intended to compensate the insured for the loss of profits by” and for all risks of business income covered. That is why we are in this Covid business income loss fight. Those risks are not specifically excluded and thus covered.
I am fortunate to be appointed by the judge as a lead on the Erie Insurance Company Policyholder Steering Committee. I have learned so many things from so many very smart policyholder attorneys whom I had not met before. I am a better policyholder advocate for all of this.
Thought For The Day
We are not makers of history. We are made by history.
—Martin Luther King, Jr.