Is this business interruption claim covered?
Was the damage that occurred damage to insured property so as to trigger the business interruption coverage?
Traditionally, this was a rather straightforward question, except for the occasional issue involving coverages for newly acquired property or property located within 1,000 feet of insured premises. The advent in recent years of insurance forms more broadly defining insured property has made this a more complex issue. Some of the claims under policies containing broader definitions of insured property have stretched the concept of insured property, so far as to draw the courts into the question.
One example is Zurich American Insurance Company v. ABM Industries, Inc., 01 Civ. 112011 (S.D.N.Y May 28, 2003). In this case, ABM was insured under a Zurich policy that included in its definition of insured property "property. owned, controlled, used, leased, or intended for use" by ABM. Following the World Trade Center loss on Sept. 11, 2001, ABM claimed that, as the janitorial service provider for the tenants in tire WTC towers, it had sustained a loss of the common areas and customer premises that, in turn, entitled it to a business interruption recovery for its lost business. ABM argued that it "used" the WTC's common areas and customer offices when it conducted janitorial services in those areas and, thus, hail sustained a loss of insured property causing business interruption. The court rejected such a broad interpretation of what constituted ABM's insured property, and denied recovery for business interruption, except where directly related to the destruction of ABM's own office and equipment.
In Zurich v. ABM, the court agreed that the policy's definition of insured property included property used by an insured. The court sought to give this principle context by explaining that the common areas and customer premises in the WTC were not "used" to accomplish business objectives, lint merely were the locations of ABM's work. The implication is that the courts will stretch the concept of insured property only so far. Even broad language could not render the entire World Trade Center "insured property" for the janitorial service working in the towers.
Depending on the policy's definition of insured property, the question of damage to insured property" may not always be an easy' one. Because business interruption coverage in a sense insures "operations," the relationship of the property to the business' operations must be considered.
Was there a denial of access to insured property so as to trigger business interruption coverage?
Many policies provide a measure of business interruption coverage for loss of access to insured property. One common form provides business interruption coverage when, "as a direct result of a peril not excluded, ingress to or egress from real and personal property insured is denied." Policies also may provide a measure of business interruption coverage for losses caused by orders of civil authority prohibiting access to properties. One common form provides coverage when an "action of civil authority ... prohibits access to the described premises due to direct physical loss or damage ... caused by or resulting from a covered cause of loss."
Holding aside the sometimes close question of whether there has been an order of civil authority, the most common question here is whether access actually has been "denied" or "prohibited." A recent New York case reminds us that the answer often is in the negative.
The case of 54th Street Limited Partners, I.P.v. Fidelity & Guaranty Ins. Co., 2003 WL.21321880 (App. Div. June 10, 2003), involved the Madison Ave. area in New York City. On Dec. 7, 1997, pieces of brick facade began falling from a building at 540 Madison Ave. The city. Of New York closed the area, including the plaintiff's restaurant a block away, and prohibited pedestrian and vehicular traffic from entering the area. The restaurant itself sustained no physical damage. On Dec. 9, the city lifted the prohibition against pedestrians, but kept the prohibition against vehicular traffic until Jan. 4, 1998 (except New Year's Day).
The policy provided coverage for loss of business income sustained "if an act of civil authority prohibits access to insured locations ... [but only] while access is denied." "The insured sought the policy limit of two weeks of business interruption coverage, as opposed to the two days allowed by the company. The court held for the insurance company because, after Dec. 8, 1997, "although vehicular and pedestrian traffic in the area was diverted, access to the restaurant was not denied." See also Bienville Partners Ltd. v. Assur. Co. of'America, (E.D.La. 2002), in which the Sept. 11, 2001, grounding of airlines did not constitute loss of access to the insured's hotels.
Often, what is presented as a denial of access in a claim may turn out to be a circumstance, such as in the 54th Street case, in which access was impeded, but neither denied nor prohibited. In cases of this .type, coverage may not be available.
Does the policy cover a partial interruption of the business?
Some policies expressly cover loss of income from a partial interruption of an insured's business operations caused by a covered loss to insured property. This may not always be the case. One common form covers business interruption "due to the necessary suspension of your operations ... caused by direct physical loss of or damage to [insured] property." A number of courts have interpreted this provision as providing business interruption coverage only when a covered loss causes a complete shutdown or cessation of the insured's business.
In 54th Street, the court emphasized that, by its own language, file policy's business interruption coverage required a "necessary. suspension" to trigger coverage. Drawing on the policy language, the court observed, "The language of the subject policy clearly and unambiguously provides that for business interruption coverage to be triggered, there must be a necessary" suspension, i.e., a total interruption or cessation."
The reasoning of 54tb Street is ill accord with several earlier decisions on similar policy language. In Buxbaum v. Aetna Life & Car. Co., 103 Cal. App. 4th 434, 444, rev. den. 2003 LEXIS 2215, the court ruled, "If the insured continues to operate despite physical damage, business interruption coverage does not apply" when the form required a "necessary suspension." The court in Keetch v. Mutual of Enumclaw, 831 P.2d 874 (Wash. App. 1992), found that the "business was not interrupted as provided for in the loss of earnings" coverage when all insured motel remained open with virtually no customers during volcanic ash storms from Mount St. Helens. In Home Indemnity, Company v. Hyplains Beef L.C., 895 F Supp. 987 (D. Kan. 1995) aff'd 89 E3d 850 (10th Cir. 1996), the court found that necessary suspension policy language required that "physical loss of or damage to property result in the cessation of Hyplains operations."
If the policy at issue requires a "necessary suspension" or even an "interruption" of operations, and does not expressly cover partial interruption, a claim for a partial interruption of operations may raise a coverage issue.
Is the insured property damage really the cause of the business interruption?
Tiffs is an important question to ask, particularly when a large catastrophe has struck and a number of causal factors must be sorted out to account for the interruption of the insured's business. An instructive case on this topic is Harry's Cadillac-Pontiac-GMC Truck Co. v. Motors Ins Co., 486 S.E. 2d 249 (N.C. App. 1997).
In Harry's Cadillac, a major snowstorm damaged the roof of a car dealer ship. At the same time, due to road conditions, the car dealership was inaccessible for one week. It was determined that the roof damage would not have interrupted the dealer's operations. The court held that there should be no recovery because the insured physical loss or damage did not cause the business interruption and the resulting loss of income.
If a claim is presented with a small property damage amount and a large figure for business interruption, a close look at the ca use of the chimed loss of income may he justified.
Many additional questions also may be relevant to the analysis of a business interruption claim. Was there actually a physical loss or damage? Do any property coverage or business interruption exclusions apply? Does the claim include indirect, remote, or speculative losses? Is there an idle-period clause that may come in to play? Does the business interruption claim contain expenses that were unnecessary or expenses that belong in file building or personal property section of the claim? Does the claim assume the marketplace that existed before the loss or after the loss?
Asking these questions will identify important coverage issues early on when they" can be investigated more thoroughly. The process of asking questions allows the claim to be evaluated actively against the policy's coverage--the first step in successful adjustment of the claim.