C L A I M D E N I E D March 2002 A publication of the Lowenstein Sandler Insurance Law Practice Group Business Interruption Insurance: Do You Have Adequate Coverage? by Alexander J. Anglim, Esq. forced shutdowns. However, stan- Suspension of Operations Inside dard business interruption coverage Business interruption coverage is DO YOU KNOW WHERE forms are complex, and provide rel- triggered by a “necessary suspension” YOUR INTELLECTUAL atively narrow coverage. These of the insured’s operations. PROPERTY INSURANCE IS? policies become more complex However, standard policy forms do By Robert D. Chesler, Chair, with the addition of “coverage not define the term “suspension.” Insurance Law Practice Group, extensions” that fill gaps in the Obviously , a total shutdown of the Lowenstein Sandler PC basic policy . Policyholders must insured’s operations is a “suspen- also consider whether there are any sion;” in some circumstances, a par- THE INSURANCE unique aspects of their operations tial shutdown may also satisfy the MARKETPLACE 2002: that require them to manuscript “suspension” requirement. Note A “HOLE” NEW WORLD their own individual coverage pro- that the analysis of partial shutdowns By Barron S. Wall, ARM, PMC and visions. Therefore, companies is highly fact-sensitive, so it is diffi- Karen Wallace Walter, Esq., ARM must examine their policies and cult to state a general rule. Insurance Consulting Associates their operations before a loss Therefore, rather than assuming occurs, to determine the coverage there is no coverage, a policyholder NEW ARTICLES ON THE that they will need in the event of facing a partial shutdown should per- OUTPOST a business interruption. This arti- form a thorough coverage analysis to cle outlines some -- but certainly maximiz e the likelihood of recovery . not all -- of the issues policyholders Introduction should consider when examining Period of Restoration Almost all companies obtain their business interruption cover- Business interruption policies business interruption coverage to age. are triggered during the “period of protect against losses caused by restoration,” typically defined as This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only. A L D
the reasonable amount of time that it should take to restore the T HE 5 TH A NNUAL N EW J ERSEY insured’s operations. The inclusion I NSURANCE C OVERAGE I NSTITUTE of the term “reasonable” is an important limitation on coverage. Presents Thus, if the insured upgrades its Surviving Today’s Hard Market ...companies must examine their policies and their oper- As premiums increase and capacity decreases, policyholders ations before a loss occurs, to are vying for their share of coverage. This seminar will teach determine the coverage that you the steps you can take to survive in today’s hard market. they will need in the event of Learn about: a business interruption. The Hard Truth about the Hard Market facility , extending the period of Survival Techniques: Disaster Planning interruption, rather than simply and Emergency Response repairing it to its pre-loss condi- tion, any profits lost during the Proving Your Business Interruption Claim additional repair period are not covered. How to Avoid Coverage Litigation However, this provision can be quite mischievous, as insurers Speakers from: sometimes argue that any losses incurred outside the period of LOWENSTEIN SANDLER PC restoration are not covered, regard- Attorneys at Law less of the reason. For example, consider an insured that suffers a Bollinger Insurance 30-day shutdown. It makes sales and from inventory during the shut- Insurance Consulting Associates down and resumes production on the 31st day . On the 32nd day it gets a large order, but is unable to April 30, 2002, 8:00 - 11:30 am fill it because its inventory was Park Avenue Club, Florham Park depleted by the shutdown. Courts are split on whether the lost order Please register online at www.insurance-lowenstein.com, is covered. Policyholders should by phone to Karen Cerreto at 973.422.6466, ask their brokers to secure language or by email to kcerreto@lowenstein.com. clarifying their entitlement to cov- erage in this situation.
The period of restoration also aged building. Note, however, that a loss of income, the business inter- fails to account for the fact that policyholders can obtain coverage ruption policy does not presume customers do not always return for this contingency by purchasing that to be the case. Rather, the immediately after a shutdown. an endorsement for loss caused “by insured must prove the amount of Many businesses find that it takes order of civil authority .” profit it would have earned but for time to win back customers after a Another potential scenario to the interruption. lengthy shutdown; unfortunately , consider is the destruction of a key Note that a business does not the standard policy does not cover supplier’s (or a key customer’s) necessarily have to be profitable to such post-repair losses. Insureds building. As in the previous exam- sustain a compensable loss. “Business vulnerable to such a loss should ple, the loss is not covered because income” is a defined term in the pol- consider purchasing the “extended no “covered property” has been icy , and typically includes net losses. period of indemnity” endorsement, damaged. The insured can obtain Thus, a money losing enterprise can which provides 30 to 90 days of coverage for this risk by paying an recover if it can establish that its loss- post-repair coverage. additional premium for “contingent es were greater than they would have business interruption” coverage. been without the interruption. Physical Damage to Covered An insured whose business depends Property upon a single supplier or customer Conclusion The insured must also establish would almost always want to pur- Business interruption policies that the suspension was “due to chase this coverage. Coverage is are dense, complex instruments. physical damage to covered proper- also available for losses due utility or Accordingly , policyholders should ty .” There is generally no coverage telecommunications outages caused consider having qualified counsel for shutdowns that are not caused by off-premises events. Depending (or at least a specialty broker or by damage to the insured’s proper- on the nature of the insured’s busi- insurance adviser) analyze their ty . Consider a situation where the ness, a lengthy telecommunications policies before a loss occurs. Ideally , police deny access to the insured’s or utility outage could be devastat- this review would occur prior to the ing. Again, policyholders must purchase or renewal of the subject ...a mere loss of sales or pro- examine their exposures before a policies. After conducting the duction does not trigger cov- loss occurs to make sure their cover- review , many policyholders will find erage. age is adequate. that the basic policy is inadequate for their needs and that they must Actual Loss of Business building because of severe damage purchase one or more of the cover- Income to nearby property, as occurred age extensions discussed above. If when downtown Manhattan shut In addition to a suspension of necessary , an insurance broker or down after the WTC collapse. operations and physical damage to consultant can also help manuscript The WTC suffered “covered prop- covered property , an insured must further changes. For example, it erty damage,” but most downtown also prove it sustained an actual loss may be desirable to specify the mea- buildings did not. Basic business of business income. Thus, a mere sure to be used in determining lost interruption policies do not cover loss of sales or production does not profits. Given the quantity and losses arising out of the policyhold- trigger coverage. Even though lost complexity of issues inherent in this er’s inability to access its undam- sales or production usually results in coverage, policyholders should seek
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