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Business Interruption Insurance Presents Challenges in Tumultuous Year for Natural Catastrophes
An exceptional spate of natural catastrophes in the United States during the first half of 2011 caused approximately $265 billion in economic losses ($60 billion in insured losses), a figure that already tops the $220 billion in losses posted in all of 2005, the costliest full year to date, according to the Insurance Information Institute.
Of the insured losses, a large percentage is attributed to business interruption (BI) coverage, which is designed to put a company back in the fiscal condition it would have been in without the loss–no better and no worse.
Yet with all of this disaster experience, simple claims resolution often remains elusive. In many cases, universal application of policy language is unsettled or the facts of an event are not clear-cut, leading to inconsistent policy interpretation, protracted negotiations and litigation.
Mark S. Katz, a partner at Mound Cotton Wollan & Greengrass, explained that BI policies require damage to an insured property at an insured location, a demonstrated relationship between the damage and the interruption of business, and established monetary losses from the interruption.
The difficulty arises when a business loses income because of an event but does not suffer physical damage. In several instances, BI coverage is available in the absence of physical damage, said John D. Shugrue, partner at Reed Smith in Chicago.
However, Laura A. Foggan, leader of the insurance appellate group at Wiley Rein LLP in Washington, D.C., said that these situations may require physical damage to property of someone other than the policyholder. For instance, BI may require property damage to the supplier or customer, and civil authority coverage may apply only if the government directive is due to property damage.
Similarly, damage to a retailer or customer that prevents it from purchasing an insured’s product might also trigger BI coverage.
One of the emerging questions in this area is how far down the supply chain an insured can look for damages on which to pin its losses, said Barry Buchman, partner at Gilbert LLP in Washington, D.C. Less than a handful of cases have addressed this issue, he said.
Katz agreed–insurers and insureds need to focus on the policy language. Some policies only cover losses related to a “tier 1” or “tier 2” supplier, or it might use terms such as direct or indirect supplier. And BI policies usually still require damage by a covered peril, he reminded.
Civil Authority Provisions
Civil authority provisions of BI insurance cover financial losses and extra expenses–for up to a certain number of days–that result when government agencies issue orders that prevent business access or operation. Again, no physical property damage to the policyholder’s own premises may be required.
In the past, Buchman said, courts construed civil authority policy language very broadly, so insurers have tightened requirements. Many policies now require adjacent property or property within a certain radius to be damaged in order for recovery. They also often include a deductible for the first 72 hours, and that clock sometimes does not begin to run until the damage occurs, so closures in advance of an event might not be covered. Additionally, BI coverage usually does not extend to suppliers and customers impacted by civil authority orders.
There also may be coverage for an insured's lost business income as a result of damage to other property that prevents access to or exit from the insured's facility. Typically, ingress and egress coverage is indicated for any blockage or inability to get to or from a business that does not fall under the civil authority provision, Buchman said. In most cases, the policy requires an adjacent property or one within a specified distance to be damaged.
Utility Service Interruption
BI coverage also can be available if a utility supplier is damaged by a covered cause and cannot provide service to an insured business, Buchman said. Then, the business cannot remain open and suffers lost revenue. Service interruption coverage also applies when electrical or water service interruption damages inventory, for example, when perishable goods are ruined because they cannot be refrigerated.
Utility service interruption coverage endorsements vary widely as to the utility services included, whether direct damage and time element losses are covered, and whether damage from transmission lines is covered.
Experts already are seeing a great deal of these claims from recent natural disasters, particularly 2011’s Hurricane Irene, which involved widespread civil authority measures, road closures and power outages. The terms and conditions on which BI coverage is provided vary widely from one insurance policy to another, and from insurer to insurer, so confusion and disputes are likely, Shugrue said.
Insureds who lack familiarity with their BI coverage need to assess their risk before an event to ensure their income losses will be covered, even in the absence of physical damage to their own property. Once an event occurs, it is critical for insurers and insureds to consider all available options for coverage and for policyholders to present a proof of claim that includes them.
Additional resources are available from LexisNexis® including:
• Recorded Webinar “2011 Global Catastrophes – Market and Insurance Coverage Considerations,” with discussion by a panel of attorneys and insurance professionals.
• 18-Page white paper, “Business Interruption Coverage: Trends, Challenges & Solutions.
The white paper focuses on five main emerging challenges in business interruption coverage:
Property damage requirements for lost income claims: Working through this policy mandate
Concurrent causation: Focusing on multiple exclusions and sub-limits that can come into play when a loss has simultaneous possible causes
Choice of forum: Ensuring claims are viewed under the most favorable insurance laws
Strategies for predicting lost revenue: Valuing losses in an economic downturn
Post-event market conditions: Calculating lost income
Access these complimentary resources and find out more.
Complimentary White paper, “Business Interruption Coverage: Trends, Challenges & Solutions"
Webinar, “2011 Global Catastrophes—Market and Insurance Coverage Considerations”