Business Interruption Insurance

Midwest Floods Have Caused an Unprecedented Amount of Damage

The recent floods in southern Indiana and elsewhere in the Midwest have caused an unprecedented amount of damage to commercial and industrial property. With the widespread and catastrophic nature of the damage, it should come as no surprise that insurers will seek to limit their losses, including denying potentially covered claims, leading to protracted litigation with some policyholders over flood and business interruption losses. Losses that have not been carefully documented will almost certainly be challenged and may not be paid. Thus, it is not always safe to deal exclusively with your insurance broker. It may be necessary to seek legal help to maximize your recovery for losses stemming from the interruption of your business.

Business interruption insurance is designed to compensate policyholders for losses arising from the inability to continue business operations as usual after unexpected events. This type of insurance provides loss of income coverage for your business by replacing operating income during a period when damage to your business' premises or other property prevents income from being earned. To constitute a recoverable business interruption loss under the typical standard insurance contracts, five criteria must usually be met. The insured must meet the following criteria: 1) the insured must have suffered physical damage; 2) the damage must have occurred to insured property; 3) the damage must have been caused by a covered peril; 4) the damage must have resulted in a measurable business interruption loss; and 5) that measurable business loss must occur during the period required to reasonably and diligently restore the damaged property.

Typically, it is a policy requirement that the insured make reasonable efforts to mitigate its losses. Business interruption policies frequently provide coverage for these "extra expenses" which the insured incurs to reduce the loss and resume normal business operations. These "extra expenses" include such items as moving costs, rent for temporary locations, extra compensation for overtime work, extra utility charges incurred at a temporary location, and premiums paid to accelerate repairs to damaged property. Some policies require advance approval of all "extra expenses."

The purpose of business interruption insurance is to place a policyholder in the same economic position it would have maintained had there been no loss. Measuring the loss involves taking into consideration many interrelated business activities such as sales, production, and inventory loss. Considering all of these facets of the business is necessary because even though there is physical damage and a loss of productive capacity, the policyholder must show that there is an actual, or related economic, loss. Furthermore, to recover under a business interruption policy, the policyholder does not necessarily have to be operating at a profit before the interruption. As long as the policyholder is able to demonstrate that its business had an improved expectation of profit for the period of restoration, recovery is allowed. Of course, the evidence of this must be based on real circumstances and not mere speculation.

Standard business interruption policies cover losses calculated from the time of the damage caused by the insured peril until the time that the property could be repaired or replaced so as to be suitable for normal business operations. This period of time is commonly referred to as the business interruption period, the period of suspension, or the period of restoration. Generally, the length of the period of restoration is a fact specific inquiry. If a business is unable or unwilling to restore the damaged property, the period of time for recovery is the time it would have or should have taken the policyholder, exercising due diligence, to repair or replace the damage. Similar to the amount of the actual loss sustained, determining the period of time over which to measure the loss can often become an issue of contention, as it is a significant driver of the total magnitude of the business interruption loss.

Like all property insurance policies, business interruption coverage requires the policyholder to notify the insurer of a claim and/or submit a proof of loss. It is important to know and understand the particular notice and other requirements of the specific policy. Where a policy provides for notice and a proof of loss within a stated period, the insured must comply with that provision as a condition precedent to recovery under the policy. In addition to providing an appropriate notice and proof of loss, there are a myriad of other concerns to consider. Gathering the various types of documentation necessary to establish a loss and procuring a competent accountant to assist in the proper calculation of the claim are also key considerations. Because of the complex issues involved in obtaining recovery under your business interruption policy, it is advisable to obtain legal counsel early on in the process and to have counsel available on an as-needed basis throughout the adjustment process. Getting legal counsel involved early in the process will help you reach the ultimate goal - obtaining the maximum amount of recovery due under your business interruption policy in the shortest period of time possible and getting business operations back up and running at their full capacity.

James Petersen is a partner in Ice Miller's Business Litigation Practice Group. Angela Krahulik is an associate in the Firm's Environmental/Natural Resources/Toxic Tort Practice Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.