I ran across an article in the National Underwriter publication, FC&S Bulletin, regarding a situation where the insured experienced a “slow down” in its debt collection operations after a lightning strike. The problem was discussed as follows:
I insure a bill-collection agency on a business owners policy, form BP 00 02. The agency’s automatic dialing system was struck by lightning and damaged. The direct damage loss was covered.
However, the system could not be replaced immediately, so temporary employees were hired to place manual calls. The insurer paid these employees under the BOP’s extra expense coverage. The agency owner now is making a business income claim, but I don’t think business actually was suspended. It just was slowed down.
Should business income coverage apply?
Business income coverage is not triggered. The BOP policy provides business income for losses that are caused by the necessary suspension of operations, but it does not define suspension. In such cases we must refer to the plain meaning of the term. Webster’s Revised Unabridged Dictionary defines "suspend" as "to cease from operation or activity." Suspension is defined as the "act of suspending."
The situation is a change in the method of business but not a suspension. Only extra expense is payable.
While many carriers require a “total cessation” in order to trigger coverage under a business income provision (not extra expense), some courts have disagreed with this “all or nothing” approach.
In American Medical Imaging v. St. Paul Fire & Marine Ins. Co., the insured’s business was damaged by fire. The insured immediately rented space at an alternative site and relocated the next day to a place with substantially fewer telephone lines, which were essential for the business’ operations. The insured did not return to its headquarters for approximately six weeks.
St. Paul denied the claim, citing the fact that no suspension of business occurred, and a lawsuit followed. American Medical lost at the trial level, but prevailed on appeal. Under a provision similar to the one cited above, the court ruled in favor of American Medical:
Under the district court’s construction of the policy, the insured would have no motivation to mitigate its losses. Continuing in business at any level would bar recovery because the insured would be carrying on the same kind of activities that occurred at the covered location. We decline to accept the suggestion that this was the intent of the parties. Indeed, other provisions of the policy bear witness to a contrary intent. For example, the policy imposes on the insured an affirmative duty to mitigate its losses:
If you can reduce your loss by resuming operations at the covered location or elsewhere by using damaged or undamaged property … you agree to do so.
Under the district court’s reading, this provision would have imposed upon AMIC a duty, the performance of which would have forfeited its right to recover under the policy. We are confident that such an anomalous result was not intended and choose to read the policy terms regarding St. Paul’s duty to indemnify as consistent with AMIC’s duty to mitigate.
American Medical points out the problem at the heart of the “total cessation” approach: the insured can be punished for attempting to mitigate its own loss, as well as the insurer’s potential loss. Vincent Morgan’s article in CAT Claims: Insurance Coverage for Natural and Man-Made Disasters, explains that while the “total cessation” approach may have some logic, it also has significant shortcomings:
- Failing to accurately address the realities of large businesses that operate worldwide on a “round the clock” basis that would never cease operations;
- Creating perverse incentives for insureds to enhance their insurance recovery by not taking all possible steps to maintain partial operations, increasing the loss and decreasing economic output; and
- Creating inconsistent obligations for insureds because of the corresponding duty to mitigate, leaving an insured that can mitigate a loss by maintaining partial operational capabilities without coverage due to the lack of total cessation.
If you suffer a business interruption loss, I recommend contacting a professional right away to work with your insurer to determine how you can most effectively use your insurance and protect your business.