On January 30, 2019, New Jersey residents suffered a tremendous loss. Marcal Paper, in Elmwood Park, New Jersey on the edge of Route 80, burned to the ground. Along with it, 80 years of a family owned business, jobs, community, and an iconic sign that lit up Route 80 were lost.
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A very insightful reader posted this comment to my blog post, Period of Restoration-Valuing Business Interruption Claims, Part I:
When adjusting business interruption claims, I find that the biggest disagreements I have with carriers are not with the length of the restoration period. They’re with my projected revenues had no loss occurred.
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On August 22, 2013, a fire destroyed an office building where one tenant, Bernstein Liebhard LLP, was a mass tort law practice. The firm’s mass tort practice was shut down for a year. The insured law firm sued Sentinel Insurance Company Limited for $27 million arising from lost income from several hundred mass tort clients who failed to retain the firm during the 12-month period after the fire.
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The U.S. Virgin Islands holds a special place in my family’s heart. Nothing makes my wife Ashley and I happier than a sail full of trade winds carrying us to the next secluded cove or rowdy beach bar. While most of the national media focused on Hurricane Irma’s trek toward Florida, it is now clear that St. Thomas and St. John took the brunt of the storm while still a Category 5.
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In addition to covering property damage, most first-party commercial insurance policies offer business interruption coverage. Business interruption coverage typically has two different built in coverages: business income and extra expense. Both are intended to assist businesses in the event a covered peril damages business property and impacts business operations.
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When calculating a business income loss, it is important to look at the company as a whole and to look at individual segments of the business. Under a standard loss calculation where the projected “but for” revenues were considered by deducting the revenues from sales of substitute products and applying a profit factor to the loss incremental revenue, the business revenue may not show a numerical decrease. At first blush, one could argue that there was not a loss, because the gross profits were higher pre-loss than post loss. However, a true loss can be masked in instances where a loss impacts one portion of the business but sales or business income in another segment of the business increases.
Farm stand fresh vegetables and sweet and savory baked goods can make any day better. Verrill Farms had been in the produce and bakery industry in Concord, Massachusetts, for decades but before you could buy deli sandwiches or take home fresh heirloom tomatoes, Verrill Farms was a daily farm started in 1918.
The farm was passed down for generations and as the years passed the business grew. However, “[o]n September 20, 2008, Verrill Farms suffered a fire loss to its farm store. Within two days of the fire, Verrill Farms reopened its business at alternate locations at reduced capacity. Within another month, the business had resumed nearly full capacity in temporary facilities at nearby locations. After the fire and during the process of restarting the business at the alternate locations, no employees were laid off. All employees who remained on the payroll were involved in operations that allowed Verrill Farms to maintain its business and generate income.”
When you have an insurance claim for a business loss, when a covered peril has interrupted business to a point there has been a landslide in business value or the doors are closed completely, you need to carry out a business valuation. Interestingly some of the best court cases discussing proper business valuation are not for property damage cases but other types of losses. Situations for business valuations and the methods used can come up in other types of cases and are helpful in our research.
Business Interruption losses can be complicated, confusing, and for some business the damages are the end of the story. Having the right coverage for your business, your buildings, and the business property can make all the difference for your livelihood if a loss occurs. One additional coverage that is also common to purchase is Extra Expense Coverage. Many of our posts have given insight and case evaluations about Extra Expense claims:
Actual property damage outside the US was used to support a claim for business interruption for a popular restaurant chain. In an interesting case for loss of business income,1 policyholders were able to prevail by showing how a local evacuation order and hurricane damage in the Bahamas would trigger coverage for 2 ½ days of lost revenue for shut-down stateside restaurants.
In this case, BBB Service Company, Inc., an owner of several of the popular Wendy’s Old Fashioned Hamburgers restaurants in Florida and Georgia, sued for breach of contract and bad faith arising out of the loss of business income due to shutting down their Broward County restaurants.