Attorneys Discuss Possible Triggers for Business Interruption Coverage

Superstorm Sandy devastated residents and businesses in the tri-state area. With a nearly unprecedented two-day closure of the New York Stock Exchange, as well as week-long closures of the metropolitan area’s mass transit system, New York’s financial services sector and other professionals were not spared from the wrath of Sandy, even if not directly damaged by the storm.

Many of downtown Manhattan’s major professional businesses — including Morgan Stanley, J.P. Morgan, Oppenheimer & Company and Standard & Poor’s — and several of the nation’s most profitable law firms were dislocated from their primary office locations.

Many professional service providers of all sizes located in and around the hardest-hit areas were unable to conduct business or faced increased costs of business because due to an inability to access their offices.

Losses for Major Professional Services Firms Post-Sandy

Professional service providers frequently purchase commercial property insurance that protects against damage to a business’s physical property loss of business income or increased costs as a result of an interruption of the business.

While many business people are aware that property insurance policies provide coverage for damage to “property,” this article focuses on the “time element” coverage (often referred to as “business interruption” coverage) of property policies.

Time element coverage protects against interruptions to business resulting in loss of income or extra expenses necessary to restore a business to its normal operations. Business interruption coverage can respond to the significant income losses suffered by those businesses affected by evacuation orders, transportation shutdowns, and utility outages.

“Business interruption” coverage typically reimburses the insured for the amount of gross earnings minus normal expenses that the insured would have earned but for the interruption of the insured’s business, or the profit that would have been earned plus continuing normal operations expenses during the period of interruption.

Business interruption insurance is designed to “indemnify the insured against losses arising from inability to continue normal business operation and functions” that result from damage caused by a covered peril.

This coverage typically applies even when an insured is forced to relocate in order to keep its business going, or to minimize its overall loss.

In addition, “extra expense” insurance, contained in many policies, covers “reasonable and necessary extra costs” incurred in excess of the normal operating costs necessary to keep a company’s business running after damage to its property.

When a policyholder ceases business activities and subsequently resumes operations to the extent possible, business interruption coverage ordinarily extends to cover the resumption period until business returns to normal (or until a stated period of time set forth in the policy).

This coverage often is found in separate provisions for “restoration” or an “extended period of indemnity.” However, coverage may be found even without a policy provision expressly providing for a recovery period.

Thus, there may be several potential triggers for business interruption coverage that may be applicable to professional businesses that experienced lost profits due to the inability of workers to get to the office, or extra expenses in setting up operations outside the affected zone.

Policy forms vary tremendously, and legal authorities interrupting policy language that find, or refuse to find, coverage for business interruptions may not apply to all policy wordings. This article provides an overview of some standard issues a business person should be cognizant of in order to maximize recovery from a property insurance program after business is interrupted.

Damage to Professional Service Providers’ Offices

Although this article does not focus on the coverage for property damage, thousands of businesses potentially sustained business income losses from the effects of Sandy in addition to physical property damage.

Policyholders should be aware that where there has been physical injury to tangible property, insurers still may deny time element coverage if the physical injury was not covered, or if the property did not belong to the insured.

Professional companies need to check their insurance policies carefully to determine the breadth of coverage when they have suffered damage to property, in addition to business interruption losses.

Businesses Affected by Evacuation Orders

Prior to the arrival of Sandy, low-lying areas of New York, New Jersey, and Connecticut were evacuated. This included a large portion of New York City’s financial district. Professional service businesses located in the areas subject to evacuation orders may look to “civil authority” coverage.

Civil authority coverage frequently applies when an insured loses business income because access to its premises is prohibited by an act of the government, even without physical damage to any property. This coverage reimburses an insured for the lost income and extra expenses incurred as a result of the evacuation orders.

The availability of civil authority coverage will depend upon the particular language in the particular policy. Additionally, policyholders need to be cognizant of the fact that civil authority coverage may only applies for a specific and limited period of time and only when the governmental order is in place.

Moreover, coverage issues exist in New York as some New York courts have strictly construed the requirement that access be prohibited and held that civil authority coverage is only triggered when access to all of the insured’s property is prohibited.

For example, one court found no coverage when limited access to an insured’s premises existed even though such access was restricted to levels below normal because of the acts of civil authority. Similarly, following the attacks of September 11, one New York court found that civil authority coverage only applied to the period of time when access to all of lower Manhattan was restricted.

The court held that it did not apply to the time period when police presence and roadblocks may have confused employees and others about their ability to access the insured’s premises.

A slowdown in business may not trigger the coverage because a policy only responds when “a civil authority prohibits access to the insured’s premises resulting in a total loss of business income.”

Employees Unable to Get to Work

Even without evacuation orders, many professionals found it impossible to commute to work before, during, and after the storm. All tri-state area public transportation systems were shut down before any storm made landfall.

In the aftermath of Sandy, many businesses were unable to operate because millions of tri-state area employees simply had no means to get to work.

Similar to civil authority coverage, ingress or egress coverage may be available when access to (“ingress”) or from (“egress”) an insured’s premises has been prevented or made more difficult because of a storm. Unlike civil authority coverage, no governmental act is required to trigger coverage.

Many insurance policies cover losses when ingress to or egress from insured premises is “prevented” because of a covered peril.

Frequently, an insurance policy will cover the loss sustained by an insured “due to the necessary interruption of the Insured’s business due to prevention of ingress to or egress from the Insured’s property, whether or not the premises or property shall have been damaged” if the interruption resulted from damage of a type insured against by the policy.

Other policies may provide ingress and egress coverage by protecting against an interruption of business “as a consequence or denial, prevention or, or reduction in access to or use of highways, bridges, causeways…or terminals…or the means of access thereto” caused by an insured peril. Some ingress and egress coverage will require that damage be in close proximity to an insured location.

For instance, a policy may cover an interruption when “as a result of loss, damage or an event not excluded…at an insured location or within two (2) miles of it, ingress to or egress from real or personal property is prevented.” Policies may also provide coverage for an interruption during the time period that “access to or egress from real or personal property is impaired” but only for “ingress/egress impairments…located within one (1) mile of the Insured’s premises.”

The availability of ingress or egress coverage for the impact of storm conditions will vary greatly depending upon the policy language.

The Loss of Power

Following Sandy, nearly all of downtown Manhattan (and other business centers throughout the region) found itself without power.

The disruption of utility service effectively prevents any businesses from operating. An insured must be careful to review its insurance policy as a whole in determining whether utility service, or any other coverage, may provide the insured with some recovery for losses caused by Sandy.

The lack of power may implicate time element coverage as certain policy forms provide coverage for “service interruption” such as a power outage. However, several commercial property insurance policies exclude coverage resulting from a utility service interruption that originates away from the insured’s premises.

Under this provision, unless an insured suffers a power loss because of equipment failure on its own premises, insurance companies likely will seek to disclaim coverage for a company’s inability to operate because it did not have necessary power or water.

Specific language involving utility service interruption coverage will trump any standard boilerplate form exclusion in the policy.

Making a Claim

A policyholder must provide its insurance company with immediate notice if the company suspects that it might suffer an interruption-related loss in order to avoid having its insurer reject the claim as untimely.

Property insurance policies also often require that the policyholder submit a proof of loss within a specific and relatively short period of time after a loss, although the policyholder may make written requests for extensions of time to submit a proof of loss as needed, which are routinely granted by insurance companies.

Quantifying interruption losses can be difficult, particularly for professional service providers.

Property insurance policies typically provide two different methods for calculating the loss as a result of a business interruption: (1) gross earnings–the net reduction in earnings less the expenses that do not necessarily continue during the interruption; or (2) business income–the profit that would have been earned plus continuing normal operations expenses during the period of interruption.

Proving an interruption-related loss in either case involves a complicated process of demonstrating how the policyholder would have performed had the event not occurred.

This difficulty of proof reemphasizes the need for thorough documentation of losses and expenses during the interruption so that any claim can be properly supported.

Further complicating matters for a professional service firm in assessing its damages may be the fact that its employees may have had access to work remotely.

The fact that a company may have mitigated its loss does not mean there was no loss of business for which insurance must pay.

To the extent that a professional service provider suffered an appreciable decrease in productivity due to the inability to access its offices, it likely suffered a compensable loss under its insurance policies.

Policyholders should be wary that internal analytical material may become a hurdle to its recovery. Insurance companies and the adjustors they retain have an incentive to reduce the amount of a claim, and they will use the policyholder’s own analytics against it, if possible.

A policyholder can effectively and thoroughly track the extent of its loss by immediately hiring experts to assist in adjusting the claim.

A policyholder may also retain coverage counsel early to place its own analytics in perspective and provide advice on the scope of the losses covered by the policy. These steps should be taken at the beginning of the process to maximize potential recovery.

Conclusion

Professional service companies that had their businesses interrupted by Sandy may be able to turn to their property insurance policies to offset the loss of income.

Many business saw their employees prevented from working, either by governmental decree, the destruction of public transportation, or power outages and, as a result, these business may have suffered interruption-related loss for which their insurance companies should be held liable.

Professional services companies that experienced an interruption in their businesses as a result of Superstorm Sandy should consult with experienced policyholder counsel, who can help navigate the coverage issues discussed above, as well as others, and then determine if their property insurance policies can help defray their losses.

Jared Zola is a partner and insurance coverage deputy practice leader in law firm Dickstein Shapiro’s New York office, where he is also a member of the firm’s property and business interruption insurance initiative.

Andrew N. Bourne is an associate in Dickstein Shapiro’s insurance coverage practice.