hurricanes hitting Florida this September, many unfortunate
businesses disappeared overnight. To compound these losses,
standard business income (BI) insurance policies exclude time-element
losses caused by off-premises power failures not affecting
covered losses within 100 feet of covered property. Utility
providers were exempt from tariff liability issued by the
Public Service Commission, because the power outages were
not caused by the providers’ own negligence but rather
were caused by Acts of God. Only the rare insurance contract
would have contained the specific endorsements to make the
too often, business owners rely on their insurance broker
as a risk manager, paying premiums with little understanding
of how indemnity coverage relates to their particular needs.
Reading the language in the policy is an essential first
step. The insured is often aware of the need to insure its
asset replacement value, which covers real and personal
property, but has little understanding of business income
(BI) indemnity for asset loss resulting from peril.
insurance is intended to compensate the insured for income
lost during the “period of restoration,” a defined
term during which BI coverage applies. It begins when the
direct physical damage occurs and ends on the earlier of
the date that the damaged property should be repaired, rebuilt,
or replaced, or at such time as stipulated in the policy
principle of BI insurance is to put the insured in the position
she would have been had the peril not occurred. Without
specific endorsements, physical damage to the insured’s
property must occur for properties listed in the declarations.
BI insurance pays for the anticipated net profit and ongoing
expenses during the period of restoration. While the standard
BI policy limits the period of restoration to 30 days, this
period can be extended to 360 days by endorsement.
concept of underinsurance with respect to real and personal
property is self-evident. Not so with BI insurance. A business
purchases BI coverage by completing a worksheet forecasting
net income and expenses for the future period and selecting
the amount of BI required for the anticipated period of
restoration (the maximum indemnity period). Deductibles
are an option. Unfortunately, hindsight can prove the business
owner’s selection unsatisfactory. To avoid the coinsurance
trap, policies can be written with reporting forms or agreed
value. With the use of reporting forms, premiums can be
at year-end, avoiding payment for overinsurance.
policy pays for only the “actual loss of business
income sustained” during the period of restoration.
A restaurant was denied BI payment because none of the continuing
expenses had been “earned” prior to the fire;
the fire served to reduce continuing losses. A men’s
retail clothing chain that shifted inventories from other
stores was found by a court not to have sustained BI losses.
standard BI policy will pay for restoration expenses only
if they reduce loss; the contract will not cover additional
expenses. A rider for extra expense coverage will pay for
restored telephone service, substitute space, the expense
of moving, additional advertising, purchase or rentals of
computers, and more.
exclusions for BI policies include power failures that occur
outside covered buildings, losses arising from direct physical
damage to radio or television antennas, and interruption
of computer operations. If a computer crash causes suspension
of operations, the additional coverage endorsement provides
for payment of up to $2,500. This limited payment is restricted
to any one policy year for all losses sustained and expenses
incurred, but not beyond the period of restoration. Additional
endorsements can be purchased to insure these exclusions.
are the consequences in the event civil authority requires
discontinuance of operations for buildings that are left
undamaged? Standard indemnity policies provide coverage
limited to loss of BI for periods extending to three weeks
should ingress to premises be denied. A recent case, 54th
Street Partners L.P. v Fidelity Guarantee Ins. [Co.
App. Div. (June 10, 2003)], resulted in a decision unfavorable
to the plaintiff. Although the street where the restaurant
was located was closed to vehicular traffic for a full two
weeks, access to pedestrian traffic was reopened after two
days. The court ruled that access to the restaurant had
not been denied after the restriction for pedestrian traffic
calamity at the World Trade Center illustrates the issue.
ABM Industries was responsible for the cleaning and maintenance
of 97% of the World Trade Center. ABM claimed BI indemnity
for damage to real and personal property, including property
owned, controlled, used, or intended for use by ABM. The
United States District Court, Southern District of New York,
opined: “ABM cannot recover under the Policy for any
business interruption loss as a result of the destruction
of the World Trade Center premises it served but did not
otherwise occupy.” ABM had paid its insurer an annual
premium of $224,591, which included coverage for extra expense,
off-premises utilities, civil authority, and leader locations.
Leader locations are those that attract customers to the
for ABM, endorsement coverage did not include dependent
properties, formally known as contingent BI insurance. Dependent
property coverage expands BI coverage to the following circumstances:
Key suppliers that cannot produce goods or services on
which the business depends;
Key customers that cannot receive the business’s
goods or services; and
that cannot provide products for delivery to customers
under contracts for sale.
almost certainly understood the errors and omissions coverage
carried by the broker. One can only speculate as to how
the lack of time-element coverage affected proximate businesses.
Schechter, CFE, CPA, is a partner of Brock Schechter
& Polakoff, LLP, and a member of the NYSSCPA’s Litigation