February 25, 2013
Business interruption and extra expense coverage provides insurance for lost profits from an interruption in business and extra expenses incurred in getting operations back up and running. Of the $50 billion in estimated losses caused by Hurricane Sandy, the storm caused an estimated $30 billion in lost business or profits due to closed offices and factories, and shutdowns of transportation and power.
Direct Business Interruption
Typical or “direct” business interruption coverage reimburses the policyholder for revenue it would have received during the period of restoration had the damage to the insured’s property caused by a covered peril never occurred. The period of restoration is the period of time reasonably necessary to restore the damaged property or for the insured to resume business at a new location. The period of restoration also includes the period of time necessary to find, purchase, install and have operational new/replacement machinery and equipment, to replace or replenish stock, and to return to the level of “operational capability” existing just prior to the loss. Disputes often arise over the issue of how long a period of restoration is reasonable. In addition, disputes are typical over valuation of the loss—how much the business would have earned had no interruption occurred.
Contingent Business Interruption
While “direct” business interruption coverage applies when the policyholder’s own property has suffered physical damage, “contingent” business interruption coverage comes into play when the policyholder’s property does not suffer a physical loss. Contingent business interruption coverage applies when a policyholder’s key suppliers are unable to supply goods or materials to insured locations due to a peril covered under the policy. Hurricane Sandy caused shuttered ports and rail yards, as well as a bottleneck of shipments once those ports and rail yards were back in service. To the extent the inability of those shipments to reach the policyholder caused a shutdown of the insured’s business, contingent business interruption coverage may apply.
Civil Authority and Ingress/Egress
Business interruption coverage may also be available for Hurricane Sandy losses where access to the policyholder’s property was prevented or prohibited by “action or order of civil authority,” even where the insured’s own property did not suffer a physical loss. Mandatory evacuation orders were issued by the governors of New York, New Jersey, Delaware, and Connecticut. Under “civil authority” coverage, coverage may be available for business income losses suffered by businesses that did not sustain physical damage, but were inaccessible due to the orders. Policies may also contain “ingress/egress” coverage, which pays for business income losses when ingress or egress to the insured property is prevented as the result of a covered peril. Many businesses lost income because employees, suppliers, distributors, and customers were prevented from accessing the business premises after Hurricane Sandy. Like “civil authority” coverage, “ingress/egress” coverage generally does not require physical damage to the insured property.
Business interruption coverage often includes coverage for extra expenses the policyholder incurs in excess of normal operating expenses during the period of restoration that reduce the amount of loss—expenses incurred to mitigate damages. These expenses typically include generators, temporary office space and computer equipment, overtime wages, employee meals outside of normal workdays, and expediting expenses necessary to speed the replacement of machinery, equipment or other personal property.
Businesses that have incurred business interruption or extra expense losses due to Hurricane Sandy should review their policies and consult with coverage attorneys if payment of their claims has been delayed, low-balled, or denied outright. McGuireWoods LLP Insurance Recovery Team represents policyholders in insurance disputes across the country. For more information on how we assist policyholders in protecting their rights and maximizing recoveries, click here.