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Insuring changing exposures: the evolution of business interruption coverage.

Regardless of which side of the table you are sitting on, business interruption insurance typically is one of the most misunderstood of coverages.

This is despite the fact that its genealogy dates back more than two centuries, to the late 1700s when court records show that insurance written specifically on income and profits was available. (1) This type of insurance--which indemnified insureds for the loss of rents or profits derived from property or operations--differed from typical property insurance, which even at that time was restricted to paying losses that arose from direct physical damage to the insured property. Legal records show that early standard fire policies would not pay for lost income or profits, with courts differentiating between the direct property loss covered by a fire policy and the subsequent, or consequential, loss of income that could result. (2) Specific insurance on profits and income had to be purchased.

Early forms of this insurance were developed to insure the profits that ship owners counted on through freight shipments or chartering activities. Income from the rental of property also was insured.

Advertisements that appeared in The National Underwriter newsweeklies in the early days of the Great Depression illustrate the importance of the coverage at that time. The America Fore Group of Insurance Companies--parent of the former Continental insurance companies--stressed the importance of business interruption insurance as a key element in a complete insurance package of protection for businesses. One of the ads speaks to the ability to include "salaries of essential employees as well as lost profits and those expenses which continue during the suspension of business due to fire, explosion or windstorm."

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Those words, though written in 1929, remain true to the importance of the coverage: the need to insure employee salaries, profits, and continuing expenses during a period of suspension. These are the same elements of loss that cost a business its survival today after it has been shut down because of damage from a covered cause of loss.

As Lord Peter Levene, chairman of Lloyd's, stated in an October 2003 speech to a New York Risk and Insurance Management Society (RIMS) meeting:
   Consider, for example, the impact of 9/11. It was not just felt by
   those businesses and people who were in the Twin Towers. Thousands
   of businesses were disrupted, some many miles, even thousands of
   miles away. If one office of an international company is destroyed
   or has to close, the company's entire operations can grind to a
   halt. Typical estimates suggest that this cost, the cost of
   business interruption, accounts for 2025%--or $10 billion--of the
   overall 9/11 loss. (3)


From the earliest origins to the extensive business income claims that resulted from the September 11, 2001, attacks on America, insurance on lost income and profits has continued to be seen as critical to the survival of individual businesses.

Different Terminology through the Ages

Although the three basic elements of coverage stated in those ads from 1929--lost profits, salaries of essential employees, and other continuing expenses--remain at the crux of the business interruption insurance coverage grant, there have been many changes in the way coverage is arranged and in the terminology used to describe it.

Originally called use and occupancy insurance, the name evolved to business interruption insurance in the 1930s--even though use and occupancy forms still could be found. The term business income insurance was coined in the 1980s by the Insurance Services Office (ISO), when it introduced its simplified commercial property program.

Regardless of specific name, it is generally accepted that the coverage is part of a broader category of time element coverage. It is triggered as a consequence of direct physical damage, which gives rise to its being categorized as indirect or consequential coverage.

In lay terms, it is supposed to provide the capital needed to sustain the business while it's shut down and, in some cases, financially support efforts to regain market share after the property is repaired.

Evolution of Coverage Forms

Use and Occupancy Forms

As the original name--use and occupancy insurance--implies, business interruption insurance was designed to provide financial support to businesses when physical damage precluded their owners' ability to use or occupy their property.

This terminology reinforces the requirement that coverage is triggered not by a loss of business income but, rather, by a suspension of business. In other words, mere loss of revenue after property is damaged is not enough to trigger the coverage--there typically must be an actual suspension of business, i.e., a loss of the ability to use or occupy the property.

Valued Use and Occupancy Policy

This interpretation was supported early on in a 100-year-old New York case, Michael v. Prussian Nat. Ins. Co., 63 N.E. 810 (1902). The insurance policy in Michael was written "on the use and occupancy" of Buffalo Elevating Company property with a limit of $4.77 a day for each working day that the company was prevented from using the elevator and handling grain.

The owner of the grain elevator plant had entered into a pooling arrangement with other elevator properties. The purpose of the pooling arrangement was to establish uniform rates. Members placed all earnings into the common pool, which was distributed to members according to an agreed-upon formula. Each member's share of the pool was not impacted by an inability to use its elevator because of fire damage. Buffalo Elevating, therefore, continued to receive its percentage of the common fund despite that fact that it could not operate after the fire. The insurer, Prussian National, claimed that it was entitled to subrogate against the proceeds paid out by the association during the time of the fire.

The court disagreed, however, stating that the insurance policy in question insured the business use of the property and not the loss of earnings and profits. As stated in the court records,
   The contract of insurance is quite exceptional in its nature ...
   The insurance is neither specifically upon the building, nor upon
   the machinery which it contains. It is "on the use and occupancy of
   the property and elevator building, with boiler and engine houses
   attached."

   The peculiar feature of the contract is that it contemplates, as
   its subject-matter, not the mere material loss of the plant, or any
   part of it, but the loss to the owner of the ability to use it ...
   The policy is in fact a valued one-where the parties intended, and
   have agreed beforehand, to estimate the value of the subject of the
   insurance.


Actual Loss Sustained Use and Occupancy Policy

This valued use and occupancy policy may be contrasted with an actual loss sustained form that was litigated in the case of Goetz v. Hartford Fire Insurance Co., et al, 215 N.W. 440 (Wis. 1927). Hartford and five other insurers appealed a judgment of the circuit court, which directed them to pay equal shares of the expenses incurred by the A.H. Peterson Co. during a business suspension that was caused by a fire. The Peterson Co. was shut down for forty-nine days, during which expenses of over $3,800 continued to be incurred.

The company, however, would have operated at a loss of more than $4,000 during those forty-nine days had it been in operation. In reversing the circuit court ruling, the Wisconsin Supreme Court turned to the wording of the applicable coverage form which, while it was a use and occupancy contract, was written on an actual loss sustained basis. As the supreme court reasoned,
   It is not questioned but that at least two separate and distinct
   elements are recognized in this provision of the contract which may
   go to make up the "actual loss sustained" to indemnify for which
   the defendants undertook; namely, one of "net profits," and the
   other of "fixed charges and expenses." The element of "net profits"
   drops from this case; the jury having found that none such would
   have been made during the same period if no such suspension had
   occurred.

   The insured having suspended businesses [because of the fire], it
   avoided of course such loss of over $4,000, with its consequent
   [sic] depletion of assets or additional liabilities to that extent.


Since the net loss outweighed the continuing expenses, there was no actual loss sustained, and the court reversed the lower court ruling. Interestingly, although the use and occupancy form no longer is used, this 1927 interpretation of the two elements that must be met in an actual loss sustained form remains applicable to many coverage forms used today. It also illustrates the fact that two policies, both entitled use and occupancy forms, will be interpreted differently based on the details of the coverage form.

Today, as it was in the early 1900s, it's important to read and understand the details of the coverage form being used.

The "Business Interruption" Forms

Two Item Contribution Form

The next major development in form evolution was the two-item contribution form, which incorporated two insuring agreements: one covering net profits and continuing expenses and the other covering ordinary payroll. The form, which was introduced in the mid-1920s, originally required a 100 percent coinsurance clause, i.e., businesses had to insure 100 percent of their business interruption value or risk a penalty at the time of a claim. The form also required that the second item--ordinary payroll--be insured for the amount anticipated it would need for at least ninety days.

Subsequently, the coinsurance requirement was reduced to 80 percent and coverage for ordinary payroll became optional. The coinsurance requirement applied separately to each of the two elements--businesses had to purchase insurance equal to 80 percent of its annual net profits plus charges and expenses, except ordinary payroll and heat, light, and power. The same coinsurance requirement applied separately to ordinary payroll, and businesses also had to select the number of days that the ordinary payroll would be insured.

The purpose of covering payroll when this form was in vogue and still today is to enable a business to retain employees who might find work elsewhere if they were laid off during a business suspension. It therefore makes sense that the provision for ordinary payroll, Item II in the two-item contribution form, did not guarantee that the business would recover the payroll if retention of the employees were not necessary at the time of the loss in order for the business to resume operations. It was covered on an actual loss sustained basis, with the business collecting only that portion of the ordinary payroll that was needed and actually paid to employees.

In addition, the two items were distinctly separate from one another, and insurance purchased to cover ordinary payroll could not be redirected to the net profit portion of the loss if the insurance fell short in that area.

Difference between Executive and Ordinary Payroll

The differentiation between executive or managerial payroll and ordinary payroll, which was introduced in this form, continues to impact how business interruption insurance is written today. In general, ordinary payroll is comprised of the wages of employees whose services could be suspended in the event of a long-term shutdown without a harmful effect on the business's reopening. They are not considered essential to the business's future success.

Conversely, executive or managerial (at times referred to as extraordinary payroll) payroll is devoted to employees who are essential to the continuation of business. Often they are executives and managers, but they also may include highly specialized employees who are essential to the reopening whose payroll also should be insured. Examples of essential but non-executive employees are nurses in a healthcare setting, master craftsmen in a construction business, and journeyed trades people in a manufacturing setting. Businesses should take care that underwriters understand the types of employees that are essential to the business, and appropriate coverage should be arranged. Typically, the traditional executive payroll is automatically included in the amount to be insured, and ordinary payroll coverage typically may be either insured or excluded.

The current standard ISO business income coverage form continues to permit insured businesses to differentiate between these two types of payroll and insure either both or just the executive salaries. Coverage that is written on an actual loss sustained form still requires that the payroll expenses actually be incurred or the insurance will not fund them.

Gross Earnings Forms

Mercantile and Nonmanufacturing and Manufacturing or Mining

The gross earnings form was developed in the late 1930s in an effort to meet demands for simpler forms. It existed alongside the two-item contribution form for a number of years until the two-item contribution form gradually faded from general use. The gross earnings form was first offered to nonmanufacturing risks, with the manufacturing or mining edition following quickly.

The typical gross earnings form developed by ISO responded to loss that resulted directly from the necessary interruption of business caused by damage to described property from an insured peril (cause of loss). Thus, there had to be direct damage to property described in the policy that was caused by a peril covered by the policy. For example, a shut down and resulting loss of income that resulted from a fire at an insured business typically would trigger the coverage. However, if, for example, flood were excluded on the policy and the damage resulted from flood, neither the direct property damage nor the business interruption loss would be insured.

The difference between the manufacturing and mercantile forms essentially lies in how the "gross earnings" are calculated. "Gross earnings" is defined in the FM Global insurance policy reproduced in the Appendix of this book as:

* for manufacturing operations: the net sales value of production less the cost of all raw stock, materials and supplies used in such production; or

* for mercantile or non-manufacturing operations: the total net sales less cost of merchandise sold, materials and supplies consumed in the operations or services rendered by the Insured. (4)

The definitions reflect the differences in the nature of operations between a manufacturer and a nonmanufacturing operation.

The previously available Insurance Services Office (ISO) business interruption form for manufacturing operations defines "gross earnings" as:
   The sum of (a) total net sales value of production, (b) total net
   sales of merchandise, and (c) other earnings derived from operation
   of the business. Items that are subtracted from this are (d) raw
   stock from which production is derived, (e) materials and supplies
   directly consumed in the manufacturing process or in supplying the
   service sold, (f) merchandise sold, including packaging materials,
   and (g) services purchased from outsiders for resale which do not
   continue under contract.


This discussion of the gross earnings forms is couched in terms of the standard form that was offered by the Insurance Services Office (ISO). That form no longer is available from ISO, but individual insurance companies still may use a gross earnings format. Some forms, like the FM Global property and time element form reproduced in the Appendix of this book, offer a variety of time element coverages, among them gross earnings coverage. Many of the elements of the older forms are similar, or even identical, to the forms that are used today. However, subtle differences may have serious implications on how much coverage is available--or even whether coverage is triggered at all. Therefore, we devote some time to a discussion of the elements in the gross earnings forms.

Most important in this definition are the net sales value of production and the cost of raw stock. The other items are important for businesses that sell merchandise they do not manufacture or provide services in addition to their manufacturing activities. For most manufacturing businesses, the gross earnings form bases the amount of insurance on the sales value of the insured business's production minus the cost of raw stock used in the manufacturing process. A coinsurance percentage of 50,60, 70, or 80 percent then is applied to arrive at the limits of coverage.

ISO's definition of"gross earnings" in its mercantile gross earnings form, which no longer is used by ISO companies, is:
   The sum of (a) total net sales, and (b) other earnings derived from
   operations of the business, less the cost of: (C) merchandise sold,
   including packaging material therefore, (d) materials and supplies
   consumed directly in supplying the service(s) sold by the insured,
   and (e) service(s) purchased from outsiders (not employees of the
   insured) for resale which do not continue under contract.


In this definition, net sales are obtained by deducting discounts, returns, bad debts, and prepaid freight (if included in total sales) from total sales. Other earnings, such as commissions or rents from leased departments, are added to that figure before the cost of merchandise sold and materials and supplies used in providing the services or products being sold. For example, a service business such as a restaurant consumes many supplies--food, paper products, cleaning services, etc.--when selling its services. These would be subtracted from the gross earnings calculation because they are not needed when the business is not operating.

Both definitions provide that services purchased from others for resale that do not continue under contract are subtracted from the gross earnings figure. For example, the cost of utilities that no longer are needed during a period of interruption are subtracted unless the business is contractually obligated to continue payments. This reflects the general rule of thumb that costs that will not continue during an interruption should not be insured. Contractual agreements must be reviewed when the gross earning are calculated so that requirements to continue payments during a period of interruption are included in the figure.

Both the manufacturing and nonmanufacturing policy forms may be altered to exclude or limit ordinary payroll. One of the policy endorsements that previously was available excluded ordinary payroll completely and was used by operations that believed they would have access to the necessary employees to restart operations even after a suspension. The other endorsement that was available limited coverage for ordinary payroll to its estimated value for periods of 90, 120,150, or 180 days.

Importance of Coinsurance

Unlike the two-item contribution form, the gross earnings form covers the entire exposure under one coverage grant. There is no daily, weekly, or monthly limit on the recovery, but the standard gross earning form does include a provision for a coinsurance limitation. In other words, the insured business must carry a specified portion of the annual business interruption value, which is expressed in terms of the annual gross earnings (as defined previously) subject to the coinsurance limitation. Failure to conform to the coinsurance requirement will force the business into a position of sharing in (coinsuring) the loss with the insurance company.

The coinsurance percentage also should reflect the amount of time that the insured business believes would take it to repair or replace its property--the amount of anticipated down time. The current ISO business income work sheet develops a business interruption value that is 100 percent of the estimated exposure for twelve months. A coinsurance percentage of 50 percent, which results in halving that business interruption value developed through the work sheet, infers that the business anticipates no more than a six-month interruption. (The annual estimated gross earnings would be cut in half to reflect an anticipated six-month interruption.)

In addition to the coinsurance requirements, payments are limited by the amount of loss that the insured business actually sustains. They are not valued policy forms.

Another aspect of the gross earnings forms is that loss is covered only for the time required "with the exercise of due diligence and dispatch" to repair, rebuild, or replace the damaged property from which the interruption arises. This is called the period of indemnity. For example, if the operation is suspended for three months but the premises could have been restored to operating condition in six weeks with "due diligence and dispatch," the recovery would be limited to six weeks.

An endorsement was available to extend the period of indemnity to allow additional time for the business to reestablish itself and regain customers. This endorsement was entitled the "Period of Indemnity Extension Endorsement" It provides for a period of time after property is repaired or replaced and the business is reopened to regain customers and market share. This often is needed because competing businesses may take customers away while a business is shut down, and the affected business may greatly benefit from supporting business interruption insurance payments during this time.

Earnings Forms

The earnings form (at times referred to as the monthly limitation form) was introduced in the 1950s as a simplified form geared toward the needs of small to mid-sized businesses. The main difference between the earnings and the gross earning forms was that the former did not have a coinsurance requirement but, rather, limited recovery to a specific percentage of the limit for each consecutive thirty days of interruption. It was designed for use with businesses that had no more than a six-month potential period of interruption.

The business could choose a monthly limitation of 33 1/3 percent, which would provide a recovery period of three months; 25 percent, four months recovery; or 16 2/3 percent, six months recovery. The amount of insurance needed was the number of months indicated through the percentage listed times the maximum amount of earnings and continuing expenses that could be lost over a period of one month.

One of the potential drawbacks to this form was that the monthly amount of coverage was not cumulative. So, if a limit of $100,000 was carried with a 25 percent monthly limitation, only $25,000 could be recouped each month. If the interruption lasted only three months, with $40,000 incurred in the first month and $30,000 each in the next two months, the insured business would only be able to collect $75,000 in total, $25,000 less than the limit insured and the amount of the loss. The business would not be able to collect the total amount because the loss was not spread evenly over the four months.

ISO Business Income Form

The current standard form is ISO's CP 00 30, Business Income (and Extra Expense) Coverage Form. It was introduced as part of the simplified property program of the late 1980s to cover the loss of business income that is sustained because of the necessary suspension of business operations during a period of restoration. The suspension must be caused by direct physical loss of or damage to property at the premises described in the policy declarations that is caused by any of the covered causes of loss. Extra expense includes necessary expenses that the insured business incurs during the restoration period.

This form is discussed in detail in Chapter 2, and its main characteristics are only introduced in this chapter.

The change in name from business interruption to business income was made to reflect the fact that the insurance covers a loss of income and not merely an interruption of the business. Both a business interruption and a loss of income must be present before coverage is triggered.

Form CP 00 30 includes provisions for extra expense payments, which represent expenses that the insured business incurs in addition to normal operating expenses because of the loss. Alternative form CP 00 32 is virtually identical to it, except there is no coverage provision for extra expense. Conversely, ISO form CP 00 50 covers extra expense only.

When is extra expense coverage important? A computer store is shut down after a fire. In order to retain as many customers as possible, the management takes out large ads in local newspapers and magazines saying that orders will be filled from stock kept at a location not affected by the fire. The company also pays a premium to quickly lease space for a temporary sales floor in order to stave off competing computer stores that likely would try to take its customers away. Both the additional advertising costs and the premium portion of the rental payments may be covered as extra expenses. Taking this situation generally, these extra expenses would be covered on the combined Business Income (and Extra Expense) form CP 00 30 or the Extra Expense form CP 00 50. They would not be paid under the business income form that excludes extra expense, CP 00 32, unless the expenses reduced the total business income loss. This is similar to previous unendorsed business interruption forms, which only paid expenses that were could be shown to reduce the amount of the business interruption loss.

Business income is defined in the form as

a. Net Income (net profit or Loss before income taxes) that would have been earned or incurred; and

b. Continuing normal operating expenses incurred, including payroll.

In addition, coverage may be written to include or exclude "rental value," or it may be limited solely to "rental value" A defined term, rental value in essence means the amount of net profit or loss that the insured would have earned as rent from tenants occupying the described premises, including the fair rental value of any portion that the named insured occupies in the described premises. Added to this amount are the continuing normal operating expenses, such as maintenance expenses, that are associated with rental of the premises, including payroll and charges that tenants normally would pay that revert to the landlord if the premises are not habitable.

The current ISO business income coverage forms include a number of auxiliary coverage provisions that are discussed in Chapter 2. In addition, endorsements are available to customize the coverage to meet specific exposures.

Valued Business Interruption Forms

Valued policies, as introduced previously in the case of Michael v. Prussian Nat. Ins. Co., are still available and may be useful to insure specific types of exposures. They typically are written in the London and surplus lines marketplaces and by domestic insurers that have independently filed coverage forms in some states.

The basic difference between these valued forms and other business interruption and business income forms is that the latter are written on an actual loss sustained basis. Claim payments are based on how much the insured business actually loses because of the interruption of operations. On the other hand, valued policies feature a preselected agreed amount of coverage that is set per day, week, or month of down time.

There typically are provisions for a total and a partial suspension of operations, with the valued amount decreased proportionately to the percentage that business is decreased. An example of this is a food processor that is shut down for fifty working days after a fire. If its valued policy provides for $5,000 a day in business interruption payments, the company would be paid $250,000. The coverage usually would not be available for nonscheduled working days. The amount recovered for a partial suspension, such as two out of four assembly lines being shut down because of the fire, is determined by the percentage that production is reduced because of the loss. In the food processor example, if 50 percent of production is lost because two assembly lines are suspended because of a covered loss, the business could recoup half of the daily insured amount, or $2,500 per day, during the fifty days of suspension.

Some valued business interruption forms require that the company that insures the business's property first pay for the direct property damage before the business interruption coverage is triggered. These valued forms state that the insurer of direct physical damage coverage must first pay or "admit liability" for a loss to the insured property before the business interruption claim is validated. The intent of such a provision is to require that the suspension of operations results from a covered cause of loss or insured peril damaging property that is insured. The valued forms frequently require this because they do not list the insured perils but instead rely on the existence of direct damage coverage by reference to the policies that insure it.

This differs from the current ISO business income coverage form, which merely stipulates that the "suspension" of operations that gives rise to the claim be caused "by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss," but the damaged property does not have to be insured property.

The valued form--as is seen in the gross earnings and business income coverage forms--includes a resumption of operations clause that requires the insured to use other buildings, machinery, personal property, stock, etc., that it owns or controls to get back into business promptly. The insurer is permitted to base payments on the length of time it would have taken to resume operations as quickly as possible, which is a provision that may result in a dispute between the insured and the insurer over exactly what that length of time should have been.

The valued business interruption form typically permits reimbursement for expenses that the insured business incurs to reduce the amount of business interruption loss. The form may require that the insured business secure the insurer's consent and approval before spending money on such extraordinary expenses or risk the possibility that the insurance company will not reimburse them.

Much has been written about the advantages of valued business interruption forms as compared to standard business interruption forms that are written on an actual loss sustained basis, but no categorical statement can be made from an insurance point of view that one is superior to the other. Each has advantages in given situations. To illustrate, a valued form might better serve a new business that has no financial experience on production, turnover, or profits, while the standard form might better be recommended for a business with fluctuations in revenue and expenses.

Valued forms also may be useful for companies--such as biotech research operations--that are often operating at a net loss while conducting research or developing new products. These types of businesses in particular may benefit from a valued form because the typical calculation in the ISO business income form-net profit or loss plus continuing expenses--could result in a negative figure as was illustrated in the previously discussed court case from 1927, Goetz v. Hartford Fire Insurance Co., et al.

In Goetz, the court ruled that no business interruption payments were due because the company's net loss was more than continuing expenses, so recovery was denied. Companies that are in research and development mode may not be showing a net profit, but they still need to cover necessary continuing expenses while business is suspended. A valued form may be crafted to accurately address this type of situation.

Since the amount of potential recovery is agreed to before a loss occurs, a valued policy also may be easier to apply when handling a claim. Instead of having to calculate the loss of income, profit, or expenses at the time of loss, only the length of the period of recovery must be determined since the valued payments are established when the policy is written. There may be a substantial amount of work involved in setting the valued amount, however, when the policy is underwritten.

Because most businesses do not operate evenly from day to day throughout the year, a business that selects a valued policy form may be in danger of being underinsured or overinsured at specific times of the year. Because of this, the only safe way to provide adequate coverage under a valued form is to issue coverage equal to the total number of working days times the maximum possible loss for any one day. This is something that many businesses may be unwilling to do because of the premium that would be developed to cover this maximum possible loss.

The absence of a contribution or coinsurance clause is perhaps one of the greatest advantages of valued business interruption insurance. While it is true that valued coverage is not subject to a coinsurance clause, the fact that the coverage is limited to a fixed daily (or weekly or monthly) amount may also result in insufficient insurance. This essentially makes the insured business a coinsurer unless enough insurance is carried to cover the highest loss exposure for the insured's busiest period.

Optional Coverages

Extra Expense

As noted previously, extra expense coverage is designed to pay additional expenses that a business incurs because of a covered loss. There is no requirement that the expenses offset or reduce the rest of the business interruption loss, but the expenses are time-bounded by the period of restoration and must be used to avoid or minimize a suspension of the business. In considering the previous example of the computer store that is damaged by fire, spending money to advertise alternative sites where equipment is available would avoid a total suspension of business since operations could be continued elsewhere. The same is true of paying a premium to rent and equip sales space quickly--it would minimize the business's suspension of operations.

Both of these activities reduce the period of suspension, but they may not reduce the actual loss of income. When extra expense coverage is provided, the latter reduction is not required.

Rents

Landlords who depend on rental payments, as well as tenants who are benefiting from a favorable lease agreement, face rents exposures in the event that their properties are damaged or destroyed.

Coverage for these types of exposures typically was available in the older business interruption programs and continues to be insurable through the current renditions of coverage. The exposure that landlords face typically falls within the category of rental value coverage, which is included within the current definition of business income in the ISO coverage format and in many company-developed forms. Leasehold interest coverage currently is available from ISO as a separate coverage form (CP 00 60) and may be included within company-developed forms or added by endorsement.

Standardized and Company-Developed Coverage Forms

The ISO forms exist side-by-side with a number of coverage forms developed by individual insurance companies. Some company-developed forms mirror the current ISO wording, but others may pattern their coverage grants and exclusions after the gross earnings or valued business interruption forms. Because of this it is critical for professionals to study the specific language that is offered when the coverage is written before a loss occurs and a claim is filed. Subtle differences may mean the difference between claim payments and claim denials.

It is impossible to represent every coverage version that currently is available in the insurance marketplace. Differences are readily apparent in reviewing the form reproduced in this book's Appendix with those provided through ISO and other insurance carriers. A number of different types of forms are often used to write the coverage, but the manner in which they are crafted differs dramatically one from the other. There is, in fact, a great deal of flexibility on which

coverage grants are selected from the FM Global form to provide customized coverage for a business. The ISO forms are relatively broad, and endorsements may be added to them to provide additional choices that are built into the FM Global policy.

The Importance of the Historical Record

The evolution of business interruption coverage is important as more than a mere historical record. It illustrates how, from early on, courts have interpreted certain phrases and clauses as being significant to whether--or not--an insured business can draw on its business interruption insurance. Some of the issues considered by the courts hearing cases hundreds of years ago continue to be of critical importance in the interpretation of coverage today.

Although it is impossible to describe and discuss every nuance of coverage in any book, we concentrate on the wording and issues that typically play the greatest role in a determination of whether coverage is triggered or not. These include:

* The importance of carefully reading the insuring agreement(s), definitions, exclusions, and limitations when selecting coverage to be sure that it is appropriate for a specific business interruption exposure.

* The fact that two elements--a suspension of business and a loss of business earnings--typically must result as a consequence of direct physical damage to property before coverage is triggered.

* The requirement that the physical damage to property be caused by an insured peril before business interruption insurance may be collected.

* The difference between forms that are crafted around actual loss sustained and valued loss formats.

* The importance of the period of recovery or period of restoration to the length and, consequentially, amount of business interruption loss that may be recouped through the insurance policy.

* The difference between coverage for extra expense and expenses to reduce the business income loss.

* The implications for recovery in a partial suspension of business operations versus a complete suspension of operations.

One of the mantras of the insurance industry is that a majority of businesses fail to survive after sustaining major property damage. This is not because of a lack of appropriate property insurance but, rather, because of the consequential affects of a suspension of operations while the property is repaired or replaced. Many businesses are ill prepared to resume operations and regain customers even if they are able to rebuild the physical elements of the business.

This book explores the issues surrounding this phenomenon and illustrates methods that may be employed to better guarantee survival of these damaged businesses. Preparing ahead of time to prove a business interruption claim can go a long way toward ensuring good cash flow and complete claim recovery at the time of loss. It also helps to limit some of the distractions that occur when a large loss is suffered.

Endnotes

(1) Robert M. Morrison, et al, Business Interruption Insurance: Its Theory and Practice (Cincinnati: The National Underwriter Co., 1986), citing Grant v. Parkinson (1781) and other court records.

(2) Ibid., 4-5.

(3) Lord Peter Levine speech to Risk and Insurance Management Society (RIMS), New York City, October 24, 2003.

(4) FM Global coverage form, [C]2004 Factory Mutual Insurance Company. All rights reserved.
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Title Annotation:CHAPTER ONE
Publication:The Business Interruption Book: Coverage, Claims and Recovery
Date:Jan 1, 2004
Words:6356
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