Under New York law, certain coverage disputes may not prevent appraisal. You may have heard the general rule that issues involving coverage disputes under an insurance policy are purely legal issues that should not be determined by an appraisal panel. Appraisal in the property insurance context is meant to resolve a disagreement over the amount of loss for which the insurance carrier is responsible. This seemingly clear rule becomes murky when the parties disagree on its application to the facts of the loss at hand.
Hundreds of thousands of businesses are still struggling to repair the damages caused by Super Storm Sandy. In New York, claimants will be told that their policies only cover business income losses during the period of time that it would take a “reasonable business” to return to its pre loss operational performance and that repairs shouldn’t take this long. The measuring stick in New York, however, is not as rigid and it considers the actual facts and circumstances that affect the rebuilding or repair efforts.
Business interruption claims are typically evaluated in two phases. Claim professionals will first determine the period of indemnity (a.k.a., period of restoration) and then measure the loss of income by reviewing the business’ income and expense trends and future projection charts.
“Lost time is never found again”– Benjamin Franklin
Business income coverage is supposed to protect a business’ net income and operating expenses while its operations are suspended as a result of loss or damage caused by a covered peril. An unexpected interruption of productivity for a period time can be devastating for a business. And because the period of income recovery after a loss is governed by the concept of time, businesses should always have a contingency plan to maintain continuity in the event of a loss and not rely solely on the expectation of recovery from an insurance claim. Time is an illusion humans created so our simple brains could understand that not everything happens at once. Our brains perceive and value time differently – disagreements will always abound over this concept. If insurance contracts do not set forth clear definitions governing this type of time-element coverage, business income claims could be as mysterious as the concept of time itself.
When measuring a business income loss, a company can treat all payroll and benefits (if directly related to payroll, i.e., FICA, worker’s compensation, etc.) as “continuing expenses” in its accounting worksheet as defined in CP 00 30 10 (Business Income and Extra Expense Coverage Form). If the policy has an Ordinary Payroll Exclusion or Limitation, the company can maintain all non-hourly payroll as a continuing expense in the worksheet and submit the payroll for the hourly employees under an additional coverage endorsement, which is purchased for a specific number of days (e.g., 30, 60, 90, and up to 365) to be recovered within the Period of Restoration.
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.
Time is often the most important and controversial element in evaluating a business income claim. Determining an adequate Period of Restoration is sometimes as counterintuitive as solving a quantum mechanics formula. In the book, Business Interruption – Coverage, Claims and Recovery, 2nd Ed. (2011), the authors illustrated a real world challenge in determining an adequate Period of Restoration and a savvy business owner that made the most of his time.
Despite the emergence of global markets and internet economies, physical location is probably the most important factor for the success of many businesses today. Therefore, when a catastrophic loss occurs, many business owners are faced with the tough decision of rebuilding or replacing the property at the same location or relocating the business elsewhere.
In today’s world, business models are limited only by our imagination. Transforming an idea into a business reality is probably one of the most rewarding achievements in our society. However, not all businesses are alike and, as such, not all business interruption claims should be put through the same rigors. While most business income policies contain standardized language, insurers should take into account the atypical nature of a business when necessary so as to never deprive a policyholder of its right to receive the capital needed during the period of restoration to sustain the business while its operations are suspended as a result of damage caused by a covered peril.
A recent IRMI article titled “Limiting the Interruption in Business Interruption” discussed the importance of considering payroll during the risk assessment phase of obtaining business insurance coverage. The forms regarding business income and ordinary payroll are hyperlinked for ease of use and understanding.