BUSINESS INTERRUPTION

Business Interruption policies compensate commercial property or business owners for damages and expenses incurred while the business is interrupted. There are various restrictions, however.

BUSINESS INTERRUPTION POLICIES ARE ONLY TRIGGERED UNDER THREE CIRCUMSTANCES:

(1) If there is physical damage to the premises so that the business must suspend its operations.

(2) If there is physical damage to other property caused by a loss that would be covered under the insurance policy, and that damage totally or partially prevents customers or employees from gaining access to the building.

(3) If the government shuts down an area due to property damage covered under the policy that prevents customers or employees from gaining access to the premises.

TYPICAL BUSINESS INTERRUPTION POLICY LANGUAGE

The policy may include language similar to this:

We may pay for actual loss of business income you sustain due to the necessary suspension of your “operations” during the “period of restoration.” The suspension must be caused by direct physical loss of, or damage to property… The loss or damage must be caused by or result from a “covered cause of loss.”

“Business income” may be defined to include “net income (net profit or loss before income taxes) that would have been earned or incurred” and “continuing normal operating expenses incurred, including payroll”

“Period of restoration” or “period of interruption” is usually defined to begin at a time of “direct physical loss or damage” and end on the earlier of “the date when the property at the described premises should be repairs, rebuilt or replaced with reasonable speed and similar quality” or “the date when business is resumed at a new permanent location.”

EXTENDED PERIOD OF INDEMNITY

Coverage is extended to cover the reduction of sales resulting from the interruption of business for such additional length of time as would be required with the exercise of due diligence and dispatch to restore the insured’s business to the condition that would have existed had no less occurred, subject to a maximum period of time after 180 days. This period commences on the date on which policy liability would terminate if this extension had not been included.

EXPERIENCE OF THE BUSINESS

In determining the amount of net profit, charges and expenses covered for the purpose of ascertaining the amount of loss sustained, due consideration is given to:

Experience of the business before the date of damage and the probable experience thereafter had no loss occurred
Budgets and forecasts versus a base period
Starting point for estimation
Accuracy of historical actual performance to the respective projections should be evaluated

Base period date should be compared to budgeted performance for the same time period to calculate the average percentage of budget typically achieved

The percentage attained is then applied to the loss period budget to determine the performance that could have been expected during the time of indemnity

INGRESS/EGRESS

This coverage provides insurance if the ingress or egress of a business is affected; however, the business must typically suffer a complete denial of access.

EXTRA EXPENSE COVERAGE

Extra expense coverage covers reasonable and necessary expenses for the policyholder in order to get the business back up and running.

Examples could be temporary office space, temporary computer systems or furniture for the temporary space, and overtime for workers who need to spend additional time outside of their normal workday due to the covered event. If employees were not able to bring their lunch to work, an extra expense claim could be made for feeding them during this time period. If employees are required to use cell phones to make business calls, those expenses can be reimbursed under the extra expense coverage.

Any such expenses must be deemed “reasonable, necessary and should minimize the suspension of operations,” so as to save the insurance company money on that portion of the claim.

An insured cannot be put in a better position after the loss but must be put in the same position as if the loss had not occurred. Thus, a court may not allow an insured to recover the costs to purchase a new building to conduct business after a leased premises is destroyed by fire.

QUESTIONS & ANSWERS

WHAT DOES BUSINESS INTERRUPTION USUALLY COVER?

Lost rents
Lost income from running the business
Fixed costs, like payroll or utilities
Temporary locations, and
Extra reasonable expenses to run the business while the property is being repaired.

WHAT IS BUSINESS INTERRUPTION BY CIVIL AUTHORITY?

Civil authority coverage provides coverage if the insurer’s business is suspended due to the invocation of civil authority. The act of civil authority must result from direct physical loss to property other than that of the policyholder, and it must prohibit access to the business and result in a loss.

WHAT ARE BAD FAITH DAMAGES?

If the insurer acted in bad faith, either before or during litigation, you may be entitled to bad faith damages as a separate tort. These damages can significantly increase the value of the case and may include attorneys’ fees. Louisiana has 2 bad faith statutes:

Louisiana Revised Statute Section 22:1892 prohibits:

Not paying “the amount of any claim due any insured within 30 days after receipt of satisfactory proof of loss
Not paying “any third-party property damage claim and any reasonable medical expenses claim due any bona fide third-party claimant within 30 days after written agreement of settlement
Failure to “initiate loss adjustment of a property damage claim and of a claim for reasonable medical expenses within 14 days after notification of loss by the claimant,” or 30 days after notification in a case of “catastrophic loss”
Failure to “make a written offer to settle any property damage claim, including a third-party claim, within 30 days after receipt of satisfactory proofs of loss of that claim

Louisiana Revised Statute Section 22:1973 prohibits:

Misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue
Failing to pay a settlement within 30 days after an agreement is reduced to writing
Denying coverage or attempting to settle a claim on the basis of an application which the insurer knows was altered without notice to, or knowledge or consent of, the insured
Misleading a claimant as to the applicable prescriptive [statute of limitations] period
Failing to pay the amount of any claim due any person insured by the contract within 60 days after receipt of satisfactory proof of loss from the claimant when such failure is arbitrary, capricious, or without probable cause
Failing to pay claims pursuant to R.S. 22:1893 when such failure is arbitrary, capricious, or without probable cause

WHAT IS CONTINGENT BUSINESS INTERRUPTION COVERAGE?

Contingent business interruption coverage applies when a supplier or a purchaser of goods sustains a loss and therefore the insured business cannot sustain its profits.

Dependent business interruption coverage is a type of contingent business interruption coverage that covers losses arising from acts of civil authority that prohibits access to dependent business premises

Types of dependent business coverage are: