BUSINESS INTERRUPTION: STRATEGIC CONSIDERATIONS FOR CATASTROPHIC LOSSES Jay W. Brown Hilary C. Borow...

BUSINESS INTERRUPTION: BUSINESS INTERRUPTION: STRATEGIC CONSIDERATIONS STRATEGIC CONSIDERATIONS

FOR CATASTROPHIC LOSSESFOR CATASTROPHIC LOSSES

Jay W. BrownJay W. BrownHilary C. BorowHilary C. Borow

Beirne, Maynard & Parsons, L.L.P.Beirne, Maynard & Parsons, L.L.P.1300 Post Oak Blvd., Suite 24001300 Post Oak Blvd., Suite 2400

Houston, Texas 77056Houston, Texas 77056Fax: 713.960.1527Fax: 713.960.1527

Telephone: 713.623.0887Telephone: 713.623.0887

March 2006March 2006

Business Interruption (BI) CoverageBusiness Interruption (BI) Coverage

• WhatWhat it covers? it covers?

• WhetherWhether it covers? it covers?

• WhenWhen it covers? it covers?


If the policy pays, what is the payment based on?

Huh?Huh?

The Concept:The Concept:

Gross Earnings CoverageGross Earnings Coverage (earnings before taxes)(earnings before taxes)

ISO’s business income coverage forms ISO’s business income coverage forms are essentially gross earnings-type are essentially gross earnings-type

forms.forms.

In the U.S., gross earnings coverage is In the U.S., gross earnings coverage is the most commonly encountered type the most commonly encountered type

of BI insurance.of BI insurance.

Gross earnings-type business Gross earnings-type business interruption insurance covers the interruption insurance covers the

reduction in the net income, reduction in the net income, plusplus continuing continuing

normalnormal expenses. expenses.

Compensation for reduced earnings.

Expenses no longer incurred during the interruption are not covered.

Continuing expenses, such as payroll, lease expenses, and expenses that continue to be incurred regardless of the business’ condition, are covered.

Result: Result:

Theoretical Goal:Theoretical Goal:

To protect the earnings an insured To protect the earnings an insured would have enjoyed had there been would have enjoyed had there been

no interruption. no interruption.

Rationale:Rationale:

To indemnify the insured for losses To indemnify the insured for losses sustained sustained fromfrom thethe inabilityinability to useto use

the premises.the premises.

• WhatWhat is paid? is paid?

An estimate is paid — How much income would have been received if no loss had occurred?

Basis for estimate:

The actual experience of the business prior to loss.

The probable experience during the period of interruption had no loss occurred.

• WhatWhat is paid? is paid?

The fundamental BI coverageThe fundamental BI coveragecalculus is a calculus is a projectionprojection . . . . . .

Ask: What if . . . ?Ask: What if . . . ?

provides a wonderfully fertileprovides a wonderfully fertilefield . . . .field . . . .

Business projections can vary widely. . . . room for Business projections can vary widely. . . . room for disagreement.disagreement.

Lurking not so far behind BI Lurking not so far behind BI claim negotiations . . .claim negotiations . . .

““The HammerThe Hammer.”.”

Article 21.55 — Prompt Article 21.55 — Prompt Payment Deadlines.Payment Deadlines.

WhetherWhether it is covered? it is covered?

3 Requirements for BI Coverage . . .3 Requirements for BI Coverage . . .

Absolutely, positively must have all Absolutely, positively must have all three.*three.*

* With one exception.* With one exception.

Core Coverage Grant:Core Coverage Grant:

3 Requirements:3 Requirements:

A. Must be direct physical damage to insured property caused by covered peril.



B. That physical damage must itself result in an interruption of insured’s business that causes actual monetary loss.



B. That physical damage must itself result in an interruption of insured’s business that causes actual monetary loss.C. The monetary loss must occur during the “Period of Restoration” — defined by the policy.

A Closer Look . . .A Closer Look . . .

A Closer Look:A Closer Look:


2 Causation Links:2 Causation Links:

covered peril covered peril physical property damage physical property damage

causescauses

physical damage physical damage business interruption business interruption

causescauses

BI must result BI must result directlydirectly fromfrom covered physical covered physical

damage — not simply from the covered peril.damage — not simply from the covered peril.

Example . . .Example . . .

Hurricane Wanda is bearing down on Galveston for the Labor Day weekend.

Dangerous hurricane causes hotel cancellations, exodus of tourists, but only minor property damage.

Wallis case — In property damage claims, an insured can recover only for damage from covered perils. The insured has BOP to segregate. If the insured is unable to meet this burden to segregate, no recovery.

Wallis v. United Services Automobile Ass’n., 2 S.W.3d

300 (Tex. App.–San Antonio 1999, pet. denied).

Practice pointer . . . Practice pointer . . .


With a catastrophic loss – the BI may be due to many factors. Some business loss may be caused by the peril itself, and some business loss is caused by the property damage.

Do not mix apples and oranges.


Do not “lump in” BI due to covered property damages with the concurrent

BI loss due to related factors.


The insured must show:


The physical damage, which must itself be covered property damage, caused the loss of income.

Consider a refinery or manufacturing facility . . . Time-consuming maintenance items are “saved up” for scheduled shut-downs. With your catastrophic loss, show the specific BI due solely to the down time for repairs for the covered property damage caused by the catastrophe – not for the other main-tenance items that lengthened the shutdown.


Total vs. Partial SuspensionTotal vs. Partial Suspension

Most policies require a “necessary suspension” of business.

The word “suspension” historically has not been a defined term in BI policies.

Majority Rule = Complete cessation of business Majority Rule = Complete cessation of business is required.is required.

Texas follows the majority.Texas follows the majority.


Royal Indemnity Insurance Co. v. Mikob Properties

Facts:

Lakeside apartment complex, one building destroyed by fire; other two buildings had minor damage.

Debris piles, ongoing construction, tenants leave.


Mikob Properties argued the value of their quiet picturesque lakeside location was diminished.

Court held:Court held:

Tenants’ voluntary exodus from other buildings was not a “necessary suspension of operations or tenancy,” b/c other buildings remained available for rent.

Many BI claims fail due to a lack of complete cessation of business operations.

Keetch — Mount St. Helen’s eruption


Complete cessation will no longer be required in many future claims.

Coverage Forecast:


Total vs. Partial SuspensionTotal vs. Partial Suspension

Most policies require a “necessary suspension” of business.

The word “suspension” historically has not been a defined term in BI policies.

Form CP 00 30 10 00 is a newer Form CP 00 30 10 00 is a newer ISO BI form. ISO BI form.

An old term now has a new definition: An old term now has a new definition:

Complete cessation of business is not Complete cessation of business is not required with the newest ISO forms. required with the newest ISO forms.

““Suspension” includes “slow down or Suspension” includes “slow down or cessation” of business activities. cessation” of business activities.

Caveat: Caveat: Newer ISO forms still not in Newer ISO forms still not in widespread use.widespread use.

C.C. The monetary loss must occur during The monetary loss must occur during the “Period of Restoration.”the “Period of Restoration.”

When is the “Period of Restoration”?When is the “Period of Restoration”?

““Period of Restoration” is a defined term, Period of Restoration” is a defined term, with a beginning . . .with a beginning . . .

Begins: Begins: 72 hours after physical 72 hours after physical loss (for BI claim).loss (for BI claim).

and an end . . .and an end . . .

Period of Restoration . . .Period of Restoration . . .


Ends: “The date when the property . . . Ends: “The date when the property . . . shouldshould be repaired, rebuilt, or be repaired, rebuilt, or replaced with reasonable speed replaced with reasonable speed and similar quality; . . . .”and similar quality; . . . .”


Not: The actual time required torebuild.

(Although the actual time to rebuild (Although the actual time to rebuild would be probative.)would be probative.)


is a hypothetical concept:is a hypothetical concept:

Assuming, hypothetically, the property Assuming, hypothetically, the property is rebuilt or repaired with reasonable is rebuilt or repaired with reasonable speed, by when will it be completed?speed, by when will it be completed?

Duane Reade, Inc. case:

A drugstore operated within the World Trade Center.


Drugstore contended the Period of Restoration was the actual time that would be required to rebuild the entire complex that would ultimately replace the World Trade Center.

The insurer argued the Period of Restoration ended when the drugstore could have been rebuilt at some other location.

For the insurer:

Obtain firm, bona fide bids from qualified contractors to rebuild the premises at a specific price by a time certain.


For the insured:

When rebuilding, document any and all reasons for any delays. The time actually required to rebuild will be strong evidence of the time it should have taken to rebuild.


Since the Period of Restoration is a hypothetical concept, the property does not have to be actually repaired or rebuilt to recover.

A business owner may wish to retire or permanently close the business at that time, but can still collect on the BI claim.


Actions By Civil AuthorityActions By Civil Authority

A typical provision:A typical provision:

Examine the Language . . .Examine the Language . . .

Covers:Covers:

Insured’s own property not damaged, but BI loss due to order of civil authorities b/c of damage to other property.

A tall building with the bottom floor completely burned out.

Order of Civil Authority: No one shall enter the building.

Insured is an upper-floor tenant whose own premises were not damaged.


Impairment of Ingress/Egress:Impairment of Ingress/Egress:

Provides coverage for BI due to insured peril preventing ingress or egress.

Requirements for Ingress/Egress Coverage:Requirements for Ingress/Egress Coverage:

Ingress or egress must be wholly impaired. Not sufficient that ingress or egress is simply more difficult.



The event preventing ingress/egress must be an insured peril.



The event preventing ingress/egress must be an insured peril.

Lack of ingress/egress must be the cause of the BI loss.

Physical damage may not be required – policies differ.

Extra Expense (EE) CoverageExtra Expense (EE) Coverage


• WhenWhen it covers? it covers?

• WhatWhat EE covers? EE covers?

Extra expenses necessary to remain in business or shorten down time, incurred because of the property loss.

Costs of renting temporary space to continue operations after the premises destroyed by fire.


Three key criteria for EE coverage:

Must be necessary

Timing: incurred during period of restoration

“but for” cause: but for a covered property loss, no EE incurred.

Conceptually EE rewards the insured for mitigating the BI loss:

EE avoid or minimize downtime

EE promotes continued operations of business.

Tropical Storm Allison floods basement of Bank of America building downtown.

Destroys electrical supply to entire building.

Law firm must relocate to continue functioning -- $ in EE.

Relocation EE covered?


No.

Reason: Property damage itself not due to covered peril – usual exclusion for flood losses.

Relocation expense covered?Relocation expense covered?

Auto Dealership Destroyed by Tornado

Costs to rebuild, repair dealer showroom? . . . No.

Clean up debris costs?

Security watches because of unsecured doors, windows?


Overtime for EEs to assist in restoring operations?

Hot meals brought in – reduced employee time away from job site?

Unusual Advertising Expenses: “We are still in business!”

In summary . . .In summary . . .

Consider actual claim. BI from a downtown Houston business due toTropical Storm Frances.

Facts:Facts:The flooding formed a virtual moat around downtown Houston, severely curtailing access.

A covered peril – a tropical storm.

Insured suffered covered property damage – two blown out upper story windows, soaked carpets.

Ingress/egress to downtown was severely hampered.

BI Coverage?BI Coverage?

No.

Reasons for no coverage:Reasons for no coverage:Ingress and egress were not completely impaired, just made considerably more difficult.

There was no loss of ingress/egress to “The premises” – once you were downtown you could get there easy and go right in.

No complete cessation of business – diminished operations continued.

Policy required the loss of ingress/egress to be caused by damage to the property.

BUSINESS INTERRUPTION: BUSINESS INTERRUPTION: STRATEGIC CONSIDERATIONS STRATEGIC CONSIDERATIONS

FOR CATASTROPHIC LOSSESFOR CATASTROPHIC LOSSES

Jay W. BrownJay W. BrownHilary C. BorowHilary C. Borow

Beirne, Maynard & Parsons, L.L.P.Beirne, Maynard & Parsons, L.L.P.1300 Post Oak Blvd., Suite 24001300 Post Oak Blvd., Suite 2400

Houston, Texas 77056Houston, Texas 77056Fax: 713.960.1527Fax: 713.960.1527

Telephone: 713.623.0887Telephone: 713.623.0887

March 2006March 2006

BUSINESS INTERRUPTION: STRATEGIC CONSIDERATIONS FOR CATASTROPHIC LOSSES Jay W. Brown Hilary C. Borow...

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Transcript of BUSINESS INTERRUPTION: STRATEGIC CONSIDERATIONS FOR CATASTROPHIC LOSSES Jay W. Brown Hilary C. Borow...