BUSINESS INTERRUPTION:
STRATEGIC CONSIDERATIONS
FOR CATASTROPHIC LOSSES
Jay W. Brown
Hilary C. Borow
Beirne, Maynard & Parsons, L.L.P.
1300 Post Oak Blvd., Suite 2400
Houston, Texas 77056
Fax: 713.960.1527
Telephone: 713.623.0887
March 2006
Business Interruption (BI) Coverage
• What it covers?
• Whether it covers?
• When it covers?
• What it covers?
If the policy pays, what is the payment
based on?
Huh?
The Concept:
Gross Earnings Coverage
(earnings before taxes)
ISO’s business income coverage forms
are essentially gross earnings-type
forms.
In the U.S., gross earnings coverage is
the most commonly encountered type
of BI insurance.
Gross earnings-type business
interruption insurance covers the
reduction in the net income,
plus continuing
normal expenses.
Result:
Compensation for reduced earnings.
Expenses no longer incurred during the
interruption are not covered.
Continuing expenses, such as payroll, lease
expenses, and expenses that continue to be
incurred regardless of the business’
condition, are covered.
Theoretical Goal:
To protect the earnings an insured
would have enjoyed had there been
no interruption.
Rationale:
To indemnify the insured for losses
sustained from the inability to use
the premises.
• What is paid?
An estimate is paid — How much income
would have been received if no loss had
occurred?
• What is paid?
Basis for estimate:
The actual experience of the business
prior to loss.
The probable experience during the
period of interruption had no loss
occurred.
The fundamental BI coverage
calculus is a projection . . .
Ask: What if . . . ?
provides a wonderfully fertile
field . . . .
Business projections can vary widely.
. . . room for disagreement.
Lurking not so far behind BI
claim negotiations . . .
“The Hammer.”
Article 21.55 — Prompt
Payment Deadlines.
Whether it is covered?
3 Requirements for BI Coverage . . .
Absolutely, positively must have all
three.*
* With one exception.
Core Coverage Grant:
3 Requirements:
A. Must be direct physical damage to
insured property caused by covered
peril.
3 Requirements:
A. Must be direct physical damage to
insured property caused by covered
peril.
B.
That physical damage must itself
result in an interruption of insured’s
business that causes actual monetary
loss.
3 Requirements:
A. Must be direct physical damage to
insured property caused by covered peril.
B.
That physical damage must itself result
in an interruption of insured’s business
that causes actual monetary loss.
C.
The monetary loss must occur during
the “Period of Restoration” — defined
by the policy.
A Closer Look . . .
A Closer Look:
A. Must be direct physical damage to insured
property caused by covered peril.
2 Causation Links:
covered peril  physical property damage
causes
physical damage  business interruption
causes
BI must result directly from covered physical
damage — not simply from the covered peril.
Example . . .
Hurricane Wanda is bearing down on
Galveston for the Labor Day
weekend.
Dangerous hurricane causes hotel
cancellations, exodus of tourists, but
only minor property damage.
Practice pointer . . .
Wallis case — In property damage
claims, an insured can recover only for
damage from covered perils. The
insured has BOP to segregate. If the
insured is unable to meet this burden to
segregate, no recovery.
Wallis v. United Services Automobile Ass’n., 2 S.W.3d
300 (Tex. App.–San Antonio 1999, pet. denied).
Practice pointer . . .
With a catastrophic loss – the BI may
be due to many factors. Some
business loss may be caused by the
peril itself, and some business loss is
caused by the property damage.
Practice pointer . . .
Do not mix apples and oranges.
Practice pointer . . .
Do not “lump in” BI due to covered
property damages with the concurrent
BI loss due to related factors.
Practice pointer . . .
The insured must show:
The physical damage, which must
itself be covered property damage,
caused the loss of income.
Practice pointer . . .
Consider a refinery or manufacturing
facility . . . Time-consuming maintenance
items are “saved up” for scheduled shutdowns. With your catastrophic loss, show
the specific BI due solely to the down time
for repairs for the covered property damage
caused by the catastrophe – not for the
other main-tenance items that lengthened
the shutdown.
Total vs. Partial Suspension
Most policies require a “necessary
suspension” of business.
The word “suspension” historically has
not been a defined term in BI policies.
Majority Rule = Complete cessation of business
is required.
Texas follows the majority.
Example . . .
Royal Indemnity Insurance Co. v.
Mikob Properties
Facts:
Lakeside apartment complex, one
building destroyed by fire; other
two buildings had minor damage.
Debris piles, ongoing construction,
tenants leave.
Example . . .
Mikob Properties argued the value of
their quiet picturesque lakeside
location was diminished.
Court held:
Tenants’ voluntary exodus from other
buildings was not a “necessary suspension
of operations or tenancy,” b/c other
buildings remained available for rent.
Practice pointer . . .
Many BI claims fail due to a lack of
complete cessation of business operations.
Keetch — Mount St. Helen’s eruption
Practice pointer . . .
Coverage Forecast:
Complete cessation will no longer be
required in many future claims.
Total vs. Partial Suspension
Most policies require a “necessary
suspension” of business.
The word “suspension” historically has
not been a defined term in BI policies.
Form CP 00 30 10 00 is a newer
ISO BI form.
An old term now has a new definition:
Complete cessation of business is not
required with the newest ISO forms.
“Suspension” includes “slow down or
cessation” of business activities.
Caveat:
Newer ISO forms still not in
widespread use.
C. The monetary loss must occur during
the “Period of Restoration.”
When is the “Period of Restoration”?
“Period of Restoration” is a defined term,
with a beginning . . .
Period of Restoration . . .
Begins: 72 hours after physical
loss (for BI claim).
and an end . . .
Period of Restoration . . .
Ends: “The date when the property . . .
should be repaired, rebuilt, or
replaced with reasonable speed
and similar quality; . . . .”
Period of Restoration . . .
Not: The actual time required to
rebuild.
(Although the actual time to rebuild
would be probative.)
Period of Restoration . . .
is a hypothetical concept:
Assuming, hypothetically, the property
is rebuilt or repaired with reasonable
speed, by when will it be completed?
Example . . .
Duane Reade, Inc. case:
A drugstore operated within the
World Trade Center.
Drugstore contended the Period of
Restoration was the actual time that would
be required to rebuild the entire complex that
would ultimately replace the World Trade
Center.
The insurer argued the Period of Restoration
ended when the drugstore could have been
rebuilt at some other location.
Practice pointer . . .
For the insurer:
Obtain firm, bona fide bids from
qualified contractors to rebuild the
premises at a specific price by a time
certain.
Practice pointer . . .
For the insured:
When rebuilding, document any
and all reasons for any delays. The
time actually required to rebuild
will be strong evidence of the time
it should have taken to rebuild.
Practice pointer . . .
Since the Period of Restoration is a
hypothetical concept, the property does not
have to be actually repaired or rebuilt to
recover.
A business owner may wish to retire or
permanently close the business at that time,
but can still collect on the BI claim.
Actions By Civil Authority
A typical provision:
Examine the Language . . .
Covers:
Insured’s own property not damaged, but BI
loss due to order of civil authorities b/c of
damage to other property.
Example . . .
A tall building with the bottom floor
completely burned out.
Order of Civil Authority: No one shall
enter the building.
Insured is an upper-floor tenant whose own
premises were not damaged.
Impairment of Ingress/Egress:
Provides coverage for BI due to insured
peril preventing ingress or egress.
Requirements for Ingress/Egress Coverage:
Ingress or egress must be wholly
impaired. Not sufficient that ingress
or egress is simply more difficult.
Requirements for Ingress/Egress Coverage:
Ingress or egress must be wholly
impaired. Not sufficient that ingress
or egress is simply more difficult.
The event preventing ingress/egress
must be an insured peril.
Requirements for Ingress/Egress Coverage:
Ingress or egress must be wholly impaired.
Not sufficient that ingress or egress is
simply more difficult.
The event preventing ingress/egress must
be an insured peril.
Lack of ingress/egress must be the cause of the
BI loss.
Physical damage may not be required – policies
differ.
Extra Expense (EE) Coverage
• What it covers?
• When it covers?
• What EE covers?
Extra expenses necessary to remain in
business or shorten down time, incurred
because of the property loss.
Example . . .
Costs of renting temporary space to
continue operations after the premises
destroyed by fire.
Three key criteria for EE coverage:
Must be necessary
Timing: incurred during period of restoration
“but for” cause: but for a covered property
loss, no EE incurred.
Conceptually EE rewards the insured for
mitigating the BI loss:
EE avoid or minimize downtime
EE promotes continued operations of
business.
Example . . .
Tropical Storm Allison floods basement of
Bank of America building downtown.
Destroys electrical supply to entire building.
Law firm must relocate to continue
functioning -- $ in EE.
Relocation EE covered?
Relocation expense covered?
No.
Reason: Property damage itself not due
to covered peril – usual exclusion for
flood losses.
Example . . .
Auto Dealership Destroyed by Tornado
Costs to rebuild, repair dealer
showroom? . . . No.
Clean up debris costs?
Security watches because of unsecured
doors, windows?
Overtime for EEs to assist in restoring
operations?
Hot meals brought in – reduced
employee time away from job site?
Unusual Advertising Expenses: “We are
still in business!”
In summary . . .
Consider actual claim. BI from a
downtown Houston business due to
Tropical Storm Frances.
Facts:
The flooding formed a virtual moat around
downtown Houston, severely curtailing
access.
A covered peril – a tropical storm.
Insured suffered covered property damage –
two blown out upper story windows, soaked
carpets.
Ingress/egress to downtown was severely
hampered.
BI Coverage?
No.
Reasons for no coverage:
Ingress and egress were not completely impaired, just
made considerably more difficult.
There was no loss of ingress/egress to “The
premises” – once you were downtown you could get
there easy and go right in.
No complete cessation of business – diminished
operations continued.
Policy required the loss of ingress/egress to be caused
by damage to the property.
BUSINESS INTERRUPTION:
STRATEGIC CONSIDERATIONS
FOR CATASTROPHIC LOSSES
Jay W. Brown
Hilary C. Borow
Beirne, Maynard & Parsons, L.L.P.
1300 Post Oak Blvd., Suite 2400
Houston, Texas 77056
Fax: 713.960.1527
Telephone: 713.623.0887
March 2006