On Saturday October 12, 2019, several decks of upper floors of the Hard Rock Hotel & Casino under construction just off Canal Street in New Orleans suddenly collapsed. As emergency personnel were engaged in the immediate efforts to rescue and aid the crews working at the hotel site, the City of New Orleans was busy implementing its emergency response teams.
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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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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:
A law firm in New York was without power prior to Superstorm Sandy making landfall. The reason for the power outage was because the utility company preemptively shut down power for several days prior to the storm as it anticipated there would be significant pre-storm flooding. The insured premises sustained no flooding or physical damage during the storm. However, the law firm made a claim under its commercial insurance policy for loss of business income and extra expense as the office building was without power from October 29, 2012 through November 3, 2012. During that time period, there was no electricity or elevator service in the building.
Many businesses buy business interruption coverage to cover a loss of business income in the event of a covered loss. Business income provisions generally provide benefits for an amount of time designated in the policy, typically termed the period of restoration,1 or until the business is able to resume operations.
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.
The Fifth Circuit Court of Appeals limited a policyholder’s recovery in its most recent opinion, National Union Fire Insurance Company v. Gulf Island Fabrication (No. 11-30375, March 9, 2012).
On April 29, 2008, four cranes were being used to lift a piece of machinery at Gulf Island Facility’s heavy steel fabrication facility. One of the cranes side-loaded and collapsed, crushing one of the cranes and killing the crane operator inside. The other three cranes were substantially damaged. Shortly thereafter, Gulf Island rented substitute cranes to continue the building operation, ultimately incurring rental expenses in the approximate amount of $11,117,838. One of the cranes was deemed a total loss with a replacement cost value (RCV) of $3,459,807.
Insureds have a contractual obligation to mitigate damages after a loss occurs. Most businesses take drastic measures to resume operations swiftly and will spare no expense in minimizing the down time. In a market where delays are not tolerated and consumers are ever more demanding, the efforts to resume operations are more akin to survival strategies than contractual indulgences. These desperate efforts to keep doors open and machines running can eliminate business income losses in their entirety, a feat much appreciated by insurance companies. Even though these mitigation efforts usually save insurers business income benefits they would otherwise owe, some insurers refuse to reimburse these expenses because, although incurred within the period of indemnity, the payment obligations fall outside the period of restoration.
Millions of businesses have been affected directly or indirectly this hurricane season. Hurricane Irene and Tropical Storm Lee caused significant structural and infrastructure damages, expansive floods and lengthy power outages. Many so-called coverages will play important roles in the adjustment and recovery process. Proper training and in depth understanding of all available coverages and remedies will ensure quick and proper resolution of the slew of claims related to these storms. The flip side will cause delays and headaches.
The issue of whether a total cessation or a mere slowdown in productivity is required to trigger Business Income coverage is one of those questions that will most likely be defined in the policy. If not defined, courts will decide if the requisite elements are met for business income coverage. In my earlier post, The Shortcomings of a Total Cessation Requirements—Understanding Business Interruption Claims, Part 55, I highlighted how many courts follow the “total cessation” approach, but that many others will allow recovery under a “slow down” theory and discussed the limitations and implications of following a “total cessation approach.”