The Ins and Outs of Business Interruption Insurance
By Nancy Kornegay, Karl Killian and Shawn Pickens | August 29, 2018 at 12:00 AM
When a catastrophic loss hits, a commercial insured’s business interruption (BI) insurance coverage can be the difference between business survival and demise. Anticipating the traps lurking in ever-evolving policy wording, likely loss-quantification approaches, and a host of other complicating factors, including constantly shifting insurable risks, can present significant challenges to even the most insurance-savvy business.
Add to this the fact that a disputed claim can take years to resolve — distracting management from its primary focus of getting the business back up and running — and the need for a team that includes competent forensic accountants and able coverage counsel working on behalf of the insured becomes clear.
Thus, the savvy insurance buyer should regularly evaluate whether seemingly nuanced changes to policy language or new coverage options properly respond to the insured’s risks.
Common claim disputes
What follows are five commonly encountered claim disputes. With proper assessment at the policy-placement stage and experienced shepherding of the claim through the preparation and settlement process, these challenges can often be avoided.
- Disconnects between policy language and statements of value
BI coverage extends insurance for lost profits resulting from property damage at an insured location. Policies will provide coverage for properties or locations that are specifically listed, and some policies will also provide coverage—at lower sub-limits—for unlisted locations.
Establishing insured locations is usually done through schedules included in the insurance policy or from location descriptions in the insured’s statements of values (SOVs). Insurers are extending the use of SOVs from the traditional premium-setting application to a mechanism for establishing insured properties, policy limits and deductibles. As a result, disputes increasingly arise out of inaccuracies regarding property descriptions and assigned values.
Disputes stemming from SOVs arise when (1) an insured location appears to be absent from coverage because its description in SOV documents differs from the policy itself, or (2) the values listed are significantly less than actual losses sustained. Avoiding these types of disputes is achieved at policy inception and renewal through proper care in ensuring properties are listed accurately and without ambiguity, and also by paying close attention to the reported values themselves in light of changing risks and policy language.
Absent clear language, policies that apply limits based on SOVs also create uncertainty about whether claims require examination of all covered properties or whether loss valuation is limited only to consideration of the damaged properties or units. The question can become particularly vexing for multi-location businesses and their insurers where insured damage is limited to certain locations, but the impact of the insured event is felt throughout the business. This disparity between actual and stated values can thus have a double negative impact on an insurance claim. Not only will the property damage coverage be inadequate, but BI coverage is also likely to be limited.
The details of policy placement and whether the policy terms regarding SOVs are ambiguous can be outcome determinative. In Lightfoot v. Hartford Fire Ins. Co., the insured suffered significant business losses from Hurricane Katrina. The insured held three insurance policies — primary, secondary and tertiary layers — that covered BI losses.
The insured claimed BI losses and sought coverage under its tertiary layer policy, alleging that losses exceeded the $20 million of coverage in its primary and secondary layers of coverage.
The tertiary-policy insurer denied coverage on the basis that its policy was a “scheduled” policy that limited the covered losses to the BI value as listed in a SOV spreadsheet. The court denied the insurer’s summary-judgment motion because a genuine issue of material fact regarding whether the insured’s losses were sufficient to invoke policy coverage precluded summary judgment. In addition, the court held the terms of the policy were inconsistent with the insurer’s interpretation of the insured’s claimed BI value.
- Ambiguous or onerous time-element deductibles
While deductibles defined as a certain or minimum dollar value are generally unambiguous, deductibles stated as either waiting periods or percentages of stated values present challenges.
Waiting-period deductibles afford BI coverage after a certain period expires following the loss event, for example, 30 days after physical damage from a covered peril. However, other policy provisions can be at odds with the deductible provisions. For example, ingress/egress coverage often limits coverage to a specified duration that can be shorter than the overall waiting period.
Further, policies frequently require policyholders take steps — including incurring costs — to mitigate losses. To the extent mitigation during the waiting-period reduces an insurer’s liability, disputes can arise over whether the insured is entitled to reimbursement.
Policies that define deductibles as a percentage of SOVs also present challenges. Stated values are typically reported separately for structures, contents and business interruption income.
Absent clear policy wording, deductible-computation questions arise. For example, should the total of all SOVs be considered in computing a deductible or only the SOVs of the damaged property or elements within a property? Further disagreements can arise as to whether property-damage SOVs are only to be considered against property-damage claims and BI SOVs are only to be considered against BI claims or the sum of both property and BI SOVs are to be combined. Clarity is important because alternative interpretations can yield radically different recovery outcomes.
- Inadequate or non-existent contingent BI coverage
Especially with widespread losses like those during the 2017 hurricane season, businesses can incur significant lost profits from both (1) physical damage to owned property, inhibiting the ability to generate income, and (2) because of the extended impact over a greater geographical area, including suppliers or customers, which directly impacts the insured’s business operations. Losses stemming from the latter are addressed in contingent BI coverage (CBI).
CBI provisions usually describe coverage in terms of dependent properties — “those who supply materials to the insured or whom purchase the insured’s goods.” [Zurich Am. Ins. Co. v. ABM Indust., (denying CBI coverage after the terrorist attack on the World Trade Center).]
Given the significant losses that can arise, and the need for third-party information, CBI claims present evidentiary challenges and are frequently vigorously contested. Claim resolution may come only after extensive claim settlement negotiations, or may require mediation, arbitration or litigation.
- Availability of coverage for changed market conditions
Loss events that fundamentally change market conditions present significant challenges in BI claim resolution. BI coverage can exclude, cover or be silent as to changed-market conditions. Obviously, the insured’s specific post-loss experience will affect whether the specific “market conditions” coverage language is helpful or hurtful to the insured’s full recovery.
Given the coverage-language variations among various policy forms, and because these market-condition issues can be complex, a careful and skilled reading of the relevant insurance policy is a must. The importance of carefully parsing the relevant language is exemplified in the 2011 Berks-Cohen decision [Berks-Cohen Associates, L.L.C. v. Landmark Am. Ins. Co.] out of the Fifth Circuit Court of Appeals, which involved a loss arising from Hurricane Katrina.
The policy in Berks-Cohen covered wind damage but excluded flood damage. It also barred BI coverage for lost profits due to favorable market conditions caused by the covered cause of loss – wind. However, the policy did not expressly exclude lost profits from an excluded cause of loss – flooding.
The insured sought recovery that included higher post-loss profits from a greater demand for housing after Katrina. The insurer claimed the flood exclusion barred recovery for favorable-market losses. The court, however, deemed the flood exclusion inapplicable and held in favor of the insured’s recovery of these higher losses due to the favorable post-Katrina market conditions.
- Inadequate claim preparation fee allowances
Claim preparation or claim data expense allowances cover the costs a policyholder incurs in determining the extent or amount of insured loss or damage resulting from a covered cause of loss. Claim preparers may also interface with the adjuster and forensic accountants in responding to requests for information, and working to prepare a covered claim.
Recently, these fee-allowance provisions have limited coverage to costs incurred “at the request of” or “required by” the insurer, leaving to the insurer’s discretion whether and to what extent they will reimburse the policyholder for claim preparation services.
Policyholders benefit from broad coverage for the fees charged by consultants and other professionals tasked with claim preparation. The insured’s experienced claims consultant is beneficial to the insurer because the claims consultant understands the insurer’s needs and expectations and can contribute to the efficient resolution of a claim.
When purchasing insurance coverage, the buyer must select coverage that responds to future unanticipated events. Robust examination of business risk is critical to an informed purchase decision. Insureds should recognize that seemingly nuanced coverage changes can cause significant swings in recovery timing and value. Consulting with individuals who have experience and skill in this area can help avoid the traps that lurk in policy language.