INSURANCE: Insurance Bridges Business Breach

“Business as usual” may never again be the usual business.

The horrific events in New York and Washington, D.C. in September produced an unspeakably tragic loss of life and brought businesses to a standstill if not to the brink of ruin. Communication networks were overloaded and nearly useless, and air travel was shut down.

When a company loses income from foreseeable risks, such as a fire, natural disasters or from an unpredictable occurrence like a terrorist attack, a key asset may be its business interruption insurance. Typical coverage protects policyholders by providing a cash payment for revenue losses and extra expenses due to actual or potential operations impairment from property loss or damage attributable to a “covered peril.” Often, loss or damage from an earthquake or flood is specifically excluded.

Such coverage is available as a free-standing policy or as part of a general commercial package and can cover payroll, rent, utility bills, taxes and even insurance premiums.

Some policies require an outright “suspension” of business operations before a policyholder can file a claim. Other policies use the term “period of restoration” to specify the timeframe during which lost income and extra expenses are calculated. Typical policies contain a deductible that excludes the first three days of losses from coverage.

In 1991, a federal appeals court ruled that, after a fire forced a business to move its offices, the mere slowdown in business was enough to trigger coverage. The business, which thrived on telephone orders, lost income because it could not set up enough phone lines at its temporary location. The insurer claimed that the company suffered no loss because operations were resumed within a day. The appeals court sided with the company, noting that it quickly arranged for new office space and held that it was entitled to coverage until “normal” operations were restored.

Sometimes physical damage is not a prerequisite to recovery. When businesses in Michigan were forced to close after street riots forced the governor to order a curfew, the insurers declined coverage for lost income because the establishments were not damaged. However, a state appeals court ruled that coverage for “actual loss … when, as a direct result of the peril(s) insured against, access to the premises … is prohibited by order of civil authority” entitled the owners to file a claim.

Proving income through sales records may work for some companies some of the time. For firms that have experienced a recent large growth spurt, records from prior years may unfairly dilute the company's “real” accomplishments. Moreover, business interruptions tend to effect small, growing companies more severely. When submitting loss documentation to an insurer, these businesses may want to include market forecasts.

If a claimant's business is in financial trouble, the insurance payout may be zero. A Tennessee appeals court has ruled that insurance proceeds cannot place the policyholder in a “better economic position from having its business interrupted” than if no stoppage had occurred. Similarly, if the operations of a business are interrupted, but the firm can still fill its customers' orders, then an insurer doesn't need to provide coverage, according to a New York federal district court.

Under most business interruption policies, the insured has a number of obligations. For starters, a business must promptly notify the carrier about the origin, nature and extent of the damage. Also, a company must take reasonable precautions and measures to limit further damage. Besides permitting an adjuster to examine the damaged premises, a claimant must be willing to open its books and records so that the insurer can verify the financial impact of the loss. It is unrealistic for an insured to expect a check, simply on the basis of a signed, sworn proof of loss form. Indeed, the carrier may, depending on the size of the claim, reasonably require a protracted investigation of the loss. Meantime, the insured may be compelled to resume as much of its operations as possible.

Bills have been introduced in Congress to make the federal government the insurer in case of terrorist attacks. Meantime, property insurers reportedly will eliminate damage coverage from terrorism when current policies are renewed.