Most insurers will automatically cut-off business income loss benefits after a business rebuilds or repairs the damaged premises and opens for business. However, this all-too-prevalent claim practice could be inadequate and harmful if the policy has an extended business income endorsement and post resumption conditions are ignored.

A recent Colorado case illustrates this common practice in business income claims and the outcome of this case could prove to be an industry game changer.

In Berwick v. Hartford Fire Ins. Co., Inc., Civil Action No. 11-cv-01384-MEH-KMT (D. Colo. Sept. 4, 2012), a group of oral and maxillofacial surgeons insured their offices with Hartford Fire Insurance. On May 8, 2008, the insured location burned down, and the premises were rendered uninhabitable. On January 23, 2009, almost nine (9) months after the fire, the surgeons were able to reoccupy the offices and resume operations.

Two years after the fire, the surgeons submitted a sworn proof of loss in the amount of $461,912.00 for business income losses over the course of 2 years. The surgeons claimed that the income losses incurred beyond the date they resumed operations were a direct result of the fire. Many patients and referring dentists did not know the surgeons had reopened at their original location despite their advertising (ie. open office – but less patients)

The losses were measured and quantified by a certified public accountant. Hartford measured the business income loss up until the date when the surgeons resumed their normal operations and paid $70,000. Hartford claimed the surgeons were operating at normal pre-loss volumes and any losses beyond that date were speculative market consequences unrelated to the fire.
The surgeons filed a breach of contract and unfair claims practices lawsuit for failure to pay benefits under the extended business income loss endorsement. Both parties filed motions to determine whether the date when the surgeons resumed its practice operated as the cut-off date.

The Hartford policy had a business income and extra expenses provision which covered loss of income caused by direct physical loss or physical damage at the “scheduled premises” caused by or resulting from a covered cause of loss for “12 months of actual loss sustained.” The Hartford policy also included an extended business income coverage provision:

beginning on

 (1) the date Business Income coverage ends, and ending on

(2) “the earlier of:

(i)[t]he date the insured could restore ‘operations’ with reasonable speed, to the condition that would have existed if no direct physical loss or damage occurred;

or (ii) 30 consecutive days after the (re-occupancy) date. 

Hartford argued that the extended business income coverage provision was never triggered because the surgeons reoccupied the insured premises and resumed operations within the 12-month period of coverage and that the move-in date was the date when the surgeons – “could have restored their operations with reasonable speed.”

The surgeons conceded the extended business income coverage provision had starting point and an ending point, but argued that Hartford’s interpretation rendered the extended business income provision illusory and barren.

The court considered the arguments, but did not rule in favor of either side as a matter of law. The opinion framed and clarified this all too common impasse in business interruption claims. 

The critical consideration in this analysis is the meaning of the term “restore their operations.” […]

The definition of “operations” in the insurance contract “means your business activities occurring at the’ scheduled premises.’ “ If, on January 23, 2009, Plaintiffs’ business had its office ready for customers, its employees present, all its necessary equipment in place, and in fact opened its doors but had no customers (a fact subject to some dispute), had it “restored” its “operations”? Remember, the Policy provided for benefits during a period of restoration. Necessarily, the period of restoration ended when Plaintiffs’ business was, once again, fully operational. I am sympathetic with Plaintiffs’ argument that, therefore, extended business income coverage potentially provides benefits after the moment the insured’s business becomes fully operational, or else it has no meaning at all. What I do not have before me is sufficient evidence to determine what happened during the weeks leading up to January 23, 2009. Were Plaintiffs given sufficient advance notice that this would be the end of the restoration period such that they, using reasonable speed, could have restored normal operations on January 23, 2009 by sending out flyers, making phone calls, engaging in advertising, and otherwise letting the world know that they were back in business in the weeks or days leading up to the re-opening (italicized terms being those used in the contract)? Further, under the Policy’s definition of “Loss of Business Income,” was there a discernible (and provable) diminution in operations “caused by or resulting from” the fire?

Finally, the Policy requires Plaintiffs to use reasonable speed to restore operations. Plaintiffs are not contractors and presumably (although I do not have a record on this) did not themselves reconstruct the Premises. Thus, the Policy should not be interpreted as requiring Plaintiffs to use reasonable speed to actually restore the Premises, which is what occurred as of January 23, 2009 (for the speed in which the Premises were restored was likely out of Plaintiffs’ control), but to restore operations, which may or may not have occurred by January 23, 2009. Restoring the Premises and restoring operations have to be interpreted differently.”

In the end, the court allowed both sides to present their case to the jury, finding that the terms “could restore” and “reasonable speed” connote some subjectivity and fact finding. But the questions presented by the court are valid and should always be considered when adjusting business interruption claims. Automatic cut-off dates are unreasonably harsh and should not be used as standard claim practices.