Business Interruption Coverage: Maximizing Coverage or Limiting Liability Exposure Resolving Disputes Over Period of Indemnity, Contingent Business Interruption, Civil Authority Coverage, and Physical Loss or Damage
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WEDNESDAY, MARCH 14, 2012
Presenting a live 90-minute webinar with interactive Q&A
Scott G. Johnson, Partner, Robins Kaplan Miller & Ciresi, Minneapolis
Nicholas M. Insua, Partner, McCarter & English, Newark, N.J.
Bernard P. Bell, Partner, Jones Day, Washington, D.C.
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Period of Restoration
Business Interruption Coverage Protects: From the date of loss (after the requisite waiting period has elapsed) To the end of the “period of restoration”
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Period of Restoration
End of restoration period is the date the damage should be repaired or replaced with due diligence and dispatch
Notably, it may take time for the business to reach pre-loss revenue levels. Thus, although the Period of Restoration has ended, business interruption coverage might be extended for some period of “ramp-up” time “extended BI”
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Period of Restoration
Pursuant to the “Period of Restoration,” coverage ends on the date when the property at the described premises “should be repaired, rebuilt, or replaced with reasonable speed and similar quality;” or the date when business is resumed at a new permanent location, whichever is earlier.
Some policies cap the end Period of Restoration, called
the Maximum Period of Indemnity
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Period of Restoration
In general, the Period of Restoration is a hypothetical, rather than an actual, period
That said, some cases will cut short the hypothetical
Period of Restoration based on actual events
Can be impractical to await actual reconstruction to determine the Period of Restoration and, thus, the amount of time-element covrage.
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Period of Restoration
The Period of Restoration requires the repair or replacement to be accomplished with “due diligence and dispatch”
But, must be replaced with property of “similar quality”
Thus, the end date might not be when actual replacement is accomplished if the replacement is not of “similar quality” Amerisure Ins. Co. v. Roll Serv., Inc., 2002 WL 31101269, at *2, *5 (N.D. Ill. Sept. 19, 2002)
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Code Upgrades
By Scott G. Johnson (612) 349-0687 [email protected]
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Building Laws or Ordinances (“Code Upgrades”) Many building laws and ordinances require
that repairs to or reconstruction of damaged buildings comply with current building codes.
Examples – Installation of a sprinkler system – Building retaining walls or deeper pilings – Raise the building above flood level – Installation of fire-retardant roofing – Making entire building physically accessible for disabled
persons.
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Code Upgrades
The additional time required to comply with building laws and ordinances after a loss may cause an additional business income loss.
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Code Upgrades
Many business interruption forms exclude or limit coverage for the additional time required to repair or reconstruct damaged property in accordance with any law or ordinance.
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Code Upgrades
Some forms, like the ISO business interruption forms, incorporate the exclusionary language in the “period of restoration” definition.
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ISO Business Interruption form “Period of restoration” does not include any increased period required due to the enforcement of any ordinance or law that: (1) Regulates the construction, use or repair, or requires the tearing down, of any property; or (2) Requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of “pollutants”. ISO Business Income (and Extra Expense) Coverage Form CP 00 30 06 07, at 9.
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Code Upgrade Exclusions
Courts generally enforce code upgrade exclusions. – Prytania Park Hotel v. Gen. Star Indem.
Co., 896 F. Supp. 618 (E.D. La. 1995) (no coverage for costs associated with installation of a sprinkler system required by building code after fire).
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Code Upgrade Coverage
Many commercial property policies specifically provide coverage for code upgrade costs either as part of the basic policy or by endorsement.
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Code Upgrade Coverage
ISO’s Ordinance or Law—Increased Period of Restoration endorsement is used to add coverage for the business interruption and extra expense coverages.
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ISO Endorsement A. If a Covered Cause of Loss occurs to property at the premises described in the Declarations, coverage is extended to include the amount of actual and necessary loss you sustain during the increased period of “suspension” of “operations” caused by or resulting from the enforcement of any ordinance or law that: 1. Regulates the construction or repair of any property; 2. Requires the tearing down of parts of any property not damaged by a Covered Cause of Loss; and 3. Is in force at the time of loss. ISO Ordinance or Law - Increased Period of Restoration CP 15 31 04 02.
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Coverage for the Additional Time Required to Correct Pre-Existing Code Violations
Many policies include specific language that precludes coverage for the costs of complying with pre-existing code violations.
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ISO Endorsement G. Under this endorsement we will not pay for loss due to any ordinance or law that: 1. You were required to comply with before the loss, even if the building was undamaged; and 2. You failed to comply with.
ISO Ordinance or Law Coverage CP 04 05 04 02, at 5
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Enforceable
Celebrate Windsor, Inc. v. Harleysville Worcester Ins. Co., No. 3:05CV282, 2006 WL 1169816 (D. Conn. May 2, 2006).
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What if no specific policy language?
Two federal district courts have found coverage for the cost to comply with pre-existing building code violations that were discovered after a loss. – Commonwealth Ins. Co. v. Benihana of Tokyo, Inc, No. 3:96-CV-
0826-R, 1997 WL 361617 (N.D. Tex. 1997) (finding coverage for cost to replace 16 undamaged ventilation hoods that were not in compliance with current code pre-fire)
– Davidson Hotel Co. v. St. Paul Fire & Marine Ins. Co., 136 F. Supp. 2d 901 (W.D. Tenn. 2001) (finding coverage for cost of hotel to comply with pre-existing building code violations discovered after water damage loss).
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What if no specific policy language?
Three federal district courts have reached the opposite conclusion, holding that there was no coverage for the cost of complying with pre-existing code violations.
– St. Paul Fire & Marine Ins. Co. v. Darlak Motor Inns, Inc. No. 3:97-CV-1559, 1999 WL 33755848 (M.D. Pa. Mar. 9, 1999) (no coverage for cost of complying with the pre-existing code violations in hotel discovered after fire)
– 61 Jane Street Tenants Corp. v. Great Am. Ins. Co., No. 00 Civ. 1049 (GEL), 2001 WL 40774 (S.D.N.Y. Jan. 17, 2001) (no coverage for cost of complying with pre-existing building code violations relating to building’s gas distribution system).
– Chattanooga Bank Assocs. v. Fid. & Deposit Co. of Md, 301 F. Supp. 2d 774 (E.D. Tenn. 2004) (no coverage for the cost of remedying pre-existing code violations to non-damaged portions of a building after fire).
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Post-Loss Market Conditions During Period of Recovery
Bernard P. Bell [email protected]
202.879.3727
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Post-Loss Market Conditions • Sharp differences among US courts re whether to consider
actual post-loss market conditions when measuring actual loss sustained during period of recovery
• Different market conditions may result from: • Insured peril (e.g., hurricane); or • Reasons unrelated to peril (e.g., recession)
• Margin/demand may be higher or lower
• Consideration of post-loss market is not inherently either coverage-maximizing or minimizing
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Post-Loss Market Conditions • Common language: Court must give “due consideration” to
probable earnings during period of recovery “had no loss occurred”
• Does “loss” mean financial result to policyholder of peril
insured against? • As if property had not been damaged by peril • Undamaged property in damaged market
• Or does “loss” mean peril itself, or effect of peril on market
conditions? • As if no peril occurred • Undamaged property in undamaged market
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Post-Loss Market Conditions • Prudential LMI v. Colleton Enterprises, Inc., 1992
U.S. App. LEXIS 25719 (4th Cir. Oct. 5, 1992) • Motel owner claims that, had hurricane occurred but not
damaged its motel, owner would have enjoyed greater profit from increased demand caused by hurricane
• Divided panel frames issue • Majority:
– “had no hurricane occurred” – otherwise a “windfall”
• Dissent: – undamaged hotel in damaged market – rejecting “windfall” argument
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Post-Loss Market Conditions Cases Disregarding Post-Loss Conditions
• Finger Furniture Co., Inc., v. Commonwealth Ins. Co., 404 F.3d 312 (5th Cir. 2005) (maximizing recovery because no offset given for higher margins after re-opening)
• Catlin Syndicate Ltd. v. Imperial Palace of Mississippi, Inc., 600 F.3d 511 (5th Cir. 2010) (minimizing recovery because no consideration given to increased post-loss profit opportunity resulting from reduced competition)
• Consolidated Cos., Inc. v. Lexington Ins. Co., 616 F.3d 422 (5th Cir. 2010) (maximizing recovery because no consideration given to Katrina’s adverse effect on insured’s overall market)
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Post-Loss Market Conditions Cases Considering Post-Loss Conditions
• Stamen v. Cigna Prop. & Cas. Ins. Co., No. 93-1005-CIV-DAVIS (S.D. Fla. June 13, 1994) (maximizing recovery because greater profits were available if stores had been open after hurricane)
• Levitz Furniture Corp. v. Houston Cas. Co., 1997 U.S. Dist. LEXIS 5883 (E.D. La. Apr. 28, 1997) (maximizing recovery because of greater profit margin after flood) (but, different policy language)
• Penford Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2010 U.S. Dist. LEXIS 60083 (N.D. Iowa June 17, 2010) (minimizing recovery because of lower demand for insured’s products during post-loss recession)
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Contingent Business Interruption (and Contingent Extra Expense)
Insurance
Nicholas M. Insua, Esq.
What is Contingent Business Interruption (“CBI”) Insurance?
Type of first-party property insurance
Reimburses lost profits resulting from an interruption of business at the premises of a customer or supplier (i.e., a dependent or “contingent” property)
Follows many of the same principles that apply to Business Interruption (“BI”) insurance
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CBI Clause
CBI Coverage:
Insures for loss of income caused by damage to or destruction of property owned by others, usually identified as “contributing” or “recipient” locations (i.e., suppliers and customers).
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“Dependent Property”
Most policies do not use the term “contingent” but instead, use the terms “dependent property,” “leader or attraction property,” and “recipient property” to better identify the protected risk.
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CBI “Trigger”
Damage to property that directly or indirectly prevents a supplier of goods and/or services to the policyholder from rendering its goods or services, or
Damage to property that prevents a receiver of goods and/or services of the policyholder from accepting its goods and/or services.
CBI coverage is generally triggered when there is . . .
It is not necessary that the customer or supplier property be completely shut down, but…
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CBI Coverage
Some typical situations in which CBI coverage may be triggered are: When the policyholder depends on a single supplier or a few
suppliers for materials
When the policyholder depends on one or a few manufacturers or suppliers for most of its merchandise
When the policyholder depends on one or a few recipient businesses to purchase the bulk of the policyholder’s products
When the policyholder counts on a neighboring business to help attract customers, known as a leader property
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In the event of: 1. Physical damage to property of a type
insured under the policy 2. To a supplier’s or customer’s property,
either specified or blanket 3. By a peril covered under the
policyholder’s policy 4. Which causes an interruption to the
policyholder’s business operation Then the policy insures: 5. The contingent business interruption
loss under the provisions of the policyholder’s contingent business interruption coverage,
6. For the defined indemnity period.
The CBI Chain Rule
Daniel T. Torpey, Contingent Business Interruption: Getting All the Facts, May 2003, available at http://www.irmi.com/expert/articles/2003/torpey05.aspx
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Situations That Do Not Trigger CBI Coverage
Utility service interruption of an off-premises power interruption
Civil or military authority interruption
Lack of ingress egress interruption
Interdependency or downstream business interruption, when damage at an owned location causes of loss of revenue to another owned location
Loss which results from a change in temperature due to damage to heating or cooling equipment
BUT, some of these losses may be insured under separate coverage parts
Daniel T. Torpey, Contingent Business Interruption: Getting All the Facts, May 2003, available at http://www.irmi.com/expert/articles/2003/torpey05.aspx
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Period of Restoration
As with BI, CBI insures the time it “should” take the dependent property to affect repairs or restoration “with reasonable speed and similar quality” and resume normal operation
Does not insure Repair delays (e.g. because of decisions to improve, relocate, etc.)
Time for policyholder to resume normal operations
Typically there is a time deductible
Daniel T. Torpey, Contingent Business Interruption: Getting All the Facts, May 2003, available at http://www.irmi.com/expert/articles/2003/torpey05.aspx
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CBI Sublimits and Exclusions
CBI may be subject to its own sublimits and/or exclusions
A recent Ernst & Young survey of risk managers done in conjunction with Risk & Insurance found
54% had a defined amount CBI sublimit
36% had a CBI duration sublimit
31% had CBI specific exclusions
33% had a CBI limit by identified locations
Matthew Brodsky, Beware of the Spike, Risk & Insurance, July/August 2011, at 22. 41
Identifying Dependent Properties
Dependent properties may either be
Specifically named (i.e., in a schedule); or
The coverage may blanket for all customers and suppliers
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Archer Daniels Midland Co. v. Phoenix Assurance Co. of N.Y., 936 F. Supp. 534 (S.D. Ill. 1996)
As a result of Midwestern floods in the summer of 1993, barge traffic was halted on the Mississippi, forcing ADM to transport raw materials via more expensive rail transportation
ADM filed a CBI claim for increased transportation costs
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Archer Daniels Midland Co. v. Phoenix Assurance Co. of N.Y., 936 F. Supp. 534 (S.D. Ill. 1996)
Southern District of Illinois held that Army Corp of Engineers, Coast Guard, and farmers who grew crops processed by ADM all qualified as suppliers
Distinguished Corp and Guard from strictly regulatory FAA and DOT on the basis of their significant physical improvements to the Mississippi River system
Absence of direct contractual privity between farmers and ADM did not preclude coverage because policy did not limit coverage to direct suppliers
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Pentair, Inc. v. American Guaranty & Liability Insurance Co.,
400 F.3d 613 (8th Cir. 2001)
Earthquake struck Taiwan, disabling an electrical substation that provided power to factories, preventing them from supplying products to Pentair
When production resumed 2 weeks later, products were shipped via air freight to meet needs for Christmas season
Pentair submitted a CBI claim for the increased costs of the air shipments
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Pentair, Inc. v. American Guaranty & Liability Insurance Co.,
400 F.3d 613 (8th Cir. 2001)
Eighth Circuit held
Electrical substation was not a supplier to Pentair
The power outage did not cause any physical damage at the factories
Zurich American Insurance Co. v. ABM Industries, Inc.,
397 F.3d 158 (2d Cir. 2005)
ABM provided janitorial and engineering services to WTC tenants and sought BI coverage from Zurich after the 9/11 attacks destroyed the buildings
Zurich argued that ABM’s loss constituted CBI and was thus, subject to a $10 million CBI sublimit (v. the blanket limit of $127,396,375 applicable to the BI coverage)
Second Circuit held that ABM had coverage under BI provisions and was not subject to CBI sublimit
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Zurich American Insurance Co. v. ABM Industries, Inc.,
397 F.3d 158 (2d Cir. 2005) Although ABM did not own or lease the common areas or tenants’
premises, it did “control” and “use” them as required by the BI coverage “[T]he existence and configuration of the common areas and tenants' premises
were vital to the execution of ABM's business purpose” and were the means by which ABM derived its income
“To deny ABM’s loss-of-income coverage simply because its income is derived from labor that occurs outside of its own cubicles and offices artificially excludes service providers when the contract itself does not limit coverage is such a manner.”
CBI coverage applied only to properties “not operated by the insured” By directing and maintaining the WTC’s physical plant, ABM operated the
properties
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CII Carbon, LLC v. National Union Fire Ins. Co. of Louisiana, Inc.,
918 So.2d 1060 (La. App. 4 Cir. 2005)
CII owned and operated a coke plant in a complex that also included
A Bayer plant and a powerhouse owned by Kaiser
A chemical plant owned by La Roche
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CII Carbon, LLC v. National Union Fire Ins. Co. of Louisiana, Inc.,
918 So.2d 1060 (La. App. 4 Cir. 2005)
CII contracted to sell steam produced by its coke plant to Kaiser for use in its Bayer plant
The boiler that produced the steam was located on the grounds of CII’s coke plant but CII subleased certain equipment in Kaiser’s powerhouse necessary to operate the boiler
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In July 1999 a massive explosion occurred at Kaiser’s Bayer plant, causing extensive damage
The subleased equipment was restored by November 1999
But the Kaiser Bayer plant did not resume normal operations until December 2000
Only on the latter date could CII resume selling steam to
Kaiser
CII Carbon, LLC v. National Union Fire Ins. Co. of Louisiana, Inc.,
918 So.2d 1060 (La. App. 4 Cir. 2005)
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CII Carbon, LLC v. National Union Fire Ins. Co. of Louisiana, Inc.,
918 So.2d 1060 (La. App. 4 Cir. 2005)
Holdings BI coverage ended in November 1999 when “such part of the
property… as [had] been damaged or destroyed” was repaired
CBI coverage then picked up and covered the period until December 2000 when the “recipient property” was restored
$500,000 CBI sublimit applied
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Arthur Andersen LLP v. Federal Insurance Company, 3 A.3d 1279 (N.J. Super. 2010)
Andersen filed a CBI claim for $204 million in lost earnings in the 3.5 months following the 9/11 attacks
Andersen had 3 levels of insurance
Primary - $5 million – Federal
First Layer Excess - $20 million – London (follow form)
Second Layer Excess - $275 million – Federal
Andersen and Federal settled as to both Federal layers
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Arthur Andersen LLP v. Federal Insurance Company, 3 A.3d 1279 (N.J. Super. 2010)
Court affirmed summary judgment for London, dismissing Andersen’s claims The business-interruption clause covered losses “caused by property
damage that prevented the flow of goods or services to or from the insured and necessarily interrupted the insured's business”
Andersen's claim could not fall within this provision because the firm failed to identify any interruption of its business or any client that was prevented from receiving services as a result of property damage to the WTC or the Pentagon
Andersen's evidence of a generalized revenue shortfall was “a rather transparent attempt to skirt criteria for coverage that it cannot satisfy”
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Contingent Extra Expense (“CEE”) Coverage
Coverage for extra expenses incurred because of a contingent loss
Another extension of property insurance
Like ordinary extra expense coverage, contingent extra expense insurance may be issued in one of two basic forms: Extra expense to reduce loss
“Pure” extra expense
The more common coverage insures only against extraordinary costs incurred to minimize or prevent a contingent business interruption loss
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Follows many of the same “rules” as CBI coverage
Applies where there is interruption of business at the premises of an policyholder's customer or supplier
Sometimes the term “contingent time element” is used when discussing both CBI and CEE coverage
Contingent Extra Expense (“CEE”) Coverage
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Coverage for CEE is available with similar provisions as those found in CBI coverage The coverage grant provides:
We will pay for the necessary Extra Expense you incur due to the direct physical loss of or damage to property at the premises of a "dependent property" described in the scheduled caused by or resulting from any Covered Cause of Loss.
The seventy-two hour waiting period found in the definition of "period of restoration" in the ISO CBI endorsement is not included in the CEE coverage
Contingent Extra Expense (“CEE”) Coverage
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Aon was ADM's broker
Aon failed to include CBI and EE coverage in $50 million excess layer
ADM suffered losses as a result of flooding
ADM sued Aon seeking damages, including those ADM alleged were based on Aon's failure to procure CBI and EE coverage
Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota,
356 F.3d 850 (8th Cir. 2004)
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Aon argued ADM could not recover CEE because it suffered no business interruption loss Maintained ADM had to show that it "actually ceased production" in
order to recover
The Court of Appeals disagreed Found provision in underlying layers did not require cessation of
business to trigger coverage "[t]his policy covers against loss of earnings and necessary extra expense
resulting from necessary interruption of [ADM's] business... caused by damage to or destruction of real or personal property..."
Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota,
356 F.3d 850 (8th Cir. 2004)
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Documenting a CBI or CEE Claim
Policies rarely define the exact documents required to support a claim
Insurers typically request
Monthly profit and loss statements
Monthly and daily production reports
Monthly inventory
Monthly cost accounting reports
Invoices and purchase orders
Meet with the adjuster and their accountants – ask for a written document request
Consider hiring an independent accountant to help prepare the claim
Daniel T. Torpey, Beyond the Policy: Documenting a Business Interruption Claim, February 2001, available at http://www.irmi.com/expert/articles/2001/torpey02.aspx
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Civil Authority Coverage
By Scott G. Johnson
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What is Civil Authority Coverage?
Business interruption coverage – compensates for losses that result when a covered event damages the insured’s property. Civil authority coverage - compensates
for losses that result when a civil authority prohibits access to the insured’s property.
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Applications
Weather-related (e.g., hurricanes, floods) Civil disturbances (e.g., riots) Terrorist attacks (e.g., 9/11)
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How is it provided?
Typically provided as an additional coverage in the business interruption coverage form. Sometimes as a separate
endorsement.
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© 2011 Robins, Kaplan, Miller & Ciresi L.L.P.
ISO Business Income forms 5. Additional Coverages a. Civil Authority In this Additional Coverage – Civil Authority, the described premises are premises to which this Coverage Form applies, as shown in the Declarations. When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply: (1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and (2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
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Another common form We will pay for your actual loss of Bus- ness Income you sustain and necessary Extra Expense caused by action of civil Authority that prohibits access to the de- scribed premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss. Dickie Brennan & Co. v. Lexington Ins. Co., 636 F.3d 683, 685 (5th Cir. 2011).
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Action vs. Order of Civil Authority -- Some policy forms require an “order” of civil
authority Coverage is provided when access to the described location is prohibited by order of civil authority. This order must be given as a direct result of physical loss or damage from a peril of the type insured by this policy. The company will be liable for the actual amount of loss sustained at such location for a period of up to 30 consecutive days from the date of this action.
Penton Media, Inc. v. Affiliated FM Ins. Co., 245 F. App’x 495, 498 (6th Cir. 2007).
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Elements of coverage 1. Business income loss caused by an action
or order of civil authority; 2. The action or order of civil authority must
prohibit access to described premises; 3. The action or order of civil authority must
be caused by direct physical loss or damage to property other than at a described premises; and
4. The loss or damage to property other than at a described premises must caused by a covered cause of loss.
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Element no. 1 -
Business income loss caused by an action or order of civil authority
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What is an “order” of civil authority?
“Order” - requires something authoritative or mandated. – Execution of a lease agreement between FEMA
and Javits Center so FEMA could use Center for base of operations for 9/11 disaster relief efforts, even under the threat of condemnation, was not an order of civil authority. Penton Media, Inc. v. Affiliated FM Ins. Co., No. 1:03 CV 2111, 2006 WL 2504907, at *6 (N.D. Ohio Aug. 29, 2006), aff’d, 245 F. App’x 495, 498 (6th Cir. 2007).
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What is an “action” of civil authority? “Action” – does not require a formal order.
– Stopping people from entering a road and instructing businesses to halt operations were “actions.” Narricot Indus., Inc. v. Fireman’s Fund Ins. Co., No. 01-4679, 2002 U.S. Dist. LEXIS 19074, at *12-13 (E.D. Pa. Sept. 30, 2002).
– Advisories by Louisiana State Police and local government officials to remain off the streets are actions. Kean, Miller, Hawthorne, D’Armond, McCowan & Jarman, LLP v. Nat’l Union Fire Ins. Co., No. 06-770-C-M2, 2007 U.S. Dist. LEXIS 64849, at *9 (M.D. La. Aug. 2, 2007).
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Who is a “civil authority”?
“Civil Authority” – “civil officers in whom a portion of the sovereignty is vested and in whom the enforcement of municipal regulations or the control of the general interest of society is confided.” Princess Garment Co. v. Fireman’s Fund Ins. Co., 115 F.2d 380, 382 (6th Cir. 1940).
Civil Authority includes essentially any governmental official. – Includes police officers, highway patrol officers,
and lower-level city employees. Narricot Indus., Inc. v. Fireman’s Fund Ins. Co., No. 01-4679, 2002 U.S. Dist. LEXIS 19074, at *13 (E.D. Pa. Sept. 30, 2002).
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Element no. 2 -
The action or order of civil authority must prohibit access to described premises
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What are described premises?
Described premises refers to insured’s premises. – Penton Media, Inc. v. Affiliated FM
Insurance Co., 245 F. App’x 495 (6th Cir. 2007) (no civil authority coverage where order of civil authority prohibited access to premises of customer or supplier).
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What does it mean to prohibit access? Must be complete prohibition of
access. – Narricot Indus., Inc. v. Fireman’s Fund Ins. Co.,
No. 01-4679, 2002 U.S. Dist. LEXIS 19074 (E.D. Pa. Sept. 30, 2002) (civil authority coverage applied where town, after Hurricane Floyd, prohibited industrial facility from operating and sent police officers to bar access to road on which insured’s plant was located).
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What if access is made more difficult? Hindering access is not enough to trigger
coverage. – Ski Shawnee, Inc. v. Commonwealth Ins. Co.,
No. 3:09-CV-02391, 2010 U.S. Dist. LEXIS 67092 (July 6, 2010) (state’s closure of one of several roads leading to ski resort did not trigger civil authority coverage).
– Abner, Herrman & Brock, Inc. v. Great N. Ins. Co., 308 F. Supp. 2d 331 (S.D.N.Y. 2004). (civil authority coverage lasted for the four days when access to the insured’s premises in lower Manhattan was prohibited after 9/11 but not thereafter, even though other restrictions made it difficult to access insured’s premises).
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What if access is made more difficult? Hindering access will not trigger coverage.
– FAA ground stop order issued after 9/11 did not prohibit access to:
• Hotels. S. Hospitality, Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137 (10th Cir. 2004); Bienville Partners Ltd. v. Assurance Co. of Am., 67 F. App’x 248 (5th Cir. 2003).
• Airport parking facilities. Philadelphia Parking Auth. v. Fed. Ins. Co., 385 F. Supp. 2d 280 (S.D.N.Y. 2005).
• Airports. County of Clark v. Factory Mut. Ins.Co., No. CV-S-02-1258-KJD-RJJ, 2005 WL 6720917 (D. Nev. Mar. 28, 2005); The Paradies Shops, Inc. v. Hartford Fire Ins. Co., No. 1:03-CV-3154, 2004 WL 5704715 (N.D. Ga. Dec. 15, 2004).
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Element no. 3 -
The action or order of civil authority must be caused by direct physical loss or damage to property other than at a described premises
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What causal link is required?
Must be a direct causal link between the action or order of civil authority and damage to other property.
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What if an order or action of civil authority is issued because of impending damage? No civil authority coverage where order
or action of civil authority was issued in anticipation of future damage. – Kushner Lagraize, LLC v. Phoenix Ins. Co., No. 09-3376,
2009 U.S. Dist. LEXIS 81576 (E.D. La. Sept. 9, 2009) (mandatory evacuation order issued prior to Hurricane Gustav making landfall).
– Jones, Walker, Waechter, Poitevent, Carrere & Denegre, LLP v. Chubb Corp., No. 09-6057, 2010 U.S. Dist. LEXIS 109055 (E.D. La. Oct. 11, 2010) (same).
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What if an order or action of civil authority is issued because of previous damage? Remote or previous damage will not trigger
civil authority coverage. – County of Clark v. Factory Mut. Ins.Co., No. CV-S-02-1258-KJD-
RJJ, 2005 WL 6720917 (D. Nev. Mar. 28, 2005) (FAA ground stop order issued on 9/11 after WTC damage).
– Dickie Brennan & Co. v. Lexington Ins. Co., 636 F.3d 683 (5th Cir. 2011) (mandatory evacuation order issued as Hurricane Gustav approached New Orleans where Gustav had already damaged property in several Carribean islands).
– S. Tex. Med. Clinics, P.A. v. CAN Fin. Corp., No. H-06-4041, 2008 U.S. Dist. LEXIS 11460 (S.D. Tex. Feb. 15, 2008) (mandatory evacuation order issued as Hurricane Rita approached Galveston where Rita had already damaged property in Florida).
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One exception
Civil authority coverage if there is evidence that the order or action of civil authority was in fact issued because of previous damage. – Assurance Co. of Am. v. BBB Serv. Co., 593
S.E.2d 7, 8 (Ga. Ct. App. 2003) (mandatory evacuation order in advance of Hurricane Floyd where government official testified that the order was issued because “the storm had been causing damage in its path, the forecast that the storm was headed to Brevard County, and the anticipated impact of the storm if it reached Brevard County.”)
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Where must the direct physical loss or damage occur?
Some policies include a geographic limitation for the direct physical loss or damage. – Jones, Walker, Waechter, Poitevent, Carrere & Denegre,
LLP v. Chubb Corp., No. 09-6057, 2010 U.S. Dist. LEXIS 109055 (E.D. La. Oct. 11, 2010) (policy required damage within one mile from insured’s premises).
– Kushner Lagraize, LLC v. Phoenix Ins. Co., No. 09-3376, 2009 U.S. Dist. LEXIS 81576 (E.D. La. Sept. 9, 2009) (policy required damage within 100 miles of the described premises).
– United Airlines, Inc. v. Ins. Co. of the State of Pa., 385 F. Supp. 2d 343 (S.D.N.Y. 2005) (policy required damage to “adjacent premises”).
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Element no. 4 -
The loss or damage to property other than at a described premises must caused by a covered cause of loss
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What if damage is caused by a non-covered cause of loss? No civil authority coverage where order
issued because of non-covered cause of loss. – Narricot Indus., Inc. v. Fireman’s Fund Ins. Co.,
No. 01-4679, 2002 U.S. Dist. LEXIS 19074 (E.D. Pa. Sept. 30, 2002) (policy excluded coverage for damage caused by flood so no civil authority coverage where civil authority actions in prohibiting road travel and closing the insured’s facility were taken because of flood damage).
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How long is civil authority coverage available? Some policy provisions limit coverage to a
certain time period, typically 30 days. Termination of coverage can be earlier. Civil authority coverage is provided only for
the length of time order or action of civil authority prohibits access. Magee v. Nat’l Fire Ins. Co. of Hartford, 977 So. 2d 304 (La. Ct. App. 2008) (no civil authority coverage after civil authority lifted evacuation order and allowed re-entry to insured’s premises).
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Business Interruption Insurance: Physical Loss or Damage Bernard P. Bell
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Business Interruption Insurance
• General Purpose: “to do for the insured in the event of business interruption…, just what the business itself would have done if no interruption had occurred....” Nat’l Union Fire Ins. Co. v. Anderson-Prichard Oil Corp., 141 F.2d 443, 445 (10th Cir. 1944).
• Coverage is triggered by physical loss or physical damage to property.
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Physical Loss or Damage
• “Physical loss” or “physical damage” often not defined
• Dictionary definition of “physical”: • “of or relating to that which is material” Random House
Dictionary of the English Language 1087 (1996)
• Courts often interpret “physical” to require tangible loss or damage to the property. • E.g., “physical alteration to the property” or
“physical manifestation of loss or damage” Hartford Ins. Co. of the Midwest v. Mississippi Valley Gas Co., 181 Fed. Appx. 465 (5th Cir. 2006)
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Physical Loss or Damage
• Meaning of “loss” or “damage”
• “Loss” = deprivation, and “damage” = impairment
• “There was an initial satisfactory state that was changed by some external event into an unsatisfactory state.”
– Hartford Ins., 181 Fed. Appx. 465 (5th Cir. 2006)
• Physical loss or damage = deprived of something material, or the usefulness of a material thing is impaired
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Physical Loss or Damage Common Disputes: • Insured property remains intact, but is:
• Rendered unfit for intended purpose; and/or • Contaminated by foreign substance.
• Destruction of Electronic Data
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Physical Damage: Property Rendered Unfit for Intended Purpose • Many courts have found property to be physically
damaged when it has been rendered unfit for its intended purpose even when the property’s physical integrity has not been affected.
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Physical Damage: Property Rendered Unfit for Intended Purpose • LLOG Exploration Co. v. Certain Underwriters at
Lloyd’s of London, No. 635-262 (La. 24th Jud. D. Ct. Jan 22, 2009). • Plaintiff’s subsea oil/gas flowline was plugged by a material
obstruction (hydrate plug) and could not function.
• Plaintiffs argued that flowline was physically damaged because it was unfit for its intended purpose.
• Court granted plaintiff’s motion for summary judgment; subsequently vacated by settlement
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Physical Damage: Property Rendered Unfit for Intended Purpose • Abbey Co. v. Lexington Ins. Co., 289 Fed. Appx.
161 (9th Cir. 2008) • Shipping channel filled with debris by a storm was
physically damaged even though channel itself was intact.
• “[I]ts value or usefulness as a navigable waterway…was impaired.” Id. at 164.
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Physical Damage: Property Rendered Unfit for Intended Purpose • Morrison-Knudsen Co. v. Phoenix Ins. Co. of
Hartford, 172 F.2d 124 (8th Cir. 1949) • Siphon culvert filled with debris was physically damaged.
• Widdows v. State Farm Florida Ins. Co., 920 So. 2d 149 (Fla. Ct. App. 2006) • Toilet system suffered a physical loss when the drain pipe
caused a blockage in the line.
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Physical Damage: Property Rendered Unfit for Intended Purpose • Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co.,
968 A.2d 724 (N.J. Super. Ct. App. Div. 2009) • Blackout caused by operator error was physical damage
even though the power grid and its components remained intact.
• “[T]he electrical grid was ‘physically damaged’ because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity.” Id. at 734.
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Physical Damage: Property Rendered Unfit for Intended Purpose • Hughes v. Potomac Ins. Co. of D.C., 18 Cal. Rptr.
650 (Cal. Ct. App. 1962) (abrogated in part on other grounds) • House was physically damaged because it was
uninhabitable after the soil beneath it had slid away even though building’s structure was undamaged.
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Physical Damage: Property Rendered Unfit for Intended Purpose • Other courts have found no physical damage when
there is only a loss of use. • Source Food Tech. v. U.S. Fid. and Guar. Co.,
465 F.3d 834 (8th Cir. 2006) – Court rejected argument that inability to import
beef was a direct physical loss.
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Physical Damage: Contamination by a Foreign Substance • Contamination of property by vapors, odors,
bacteria, asbestos, etc.
• Some courts have found physical loss or damage when contamination renders property unusable for intended purpose.
• • Leading Case: Western Fire Ins. Co. v. First Presbyterian
Church, 437 P.2d 52 (Colo. 1968) (en banc) – Property was physically damaged by gasoline odors.
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Physical Damage: Contamination by a Foreign Substance • Motorists Mutual Insurance Co. v. Hardinger, 131 Fed. Appx.
823 (3d Cir. 2005) (presence of e. coli in water supply was damage although property was intact)
• Sentinel Management Co. v. New Hampshire Ins. Co., 563 N.W.2d 296 (Minn. Ct. App. 1997) (contamination of building by asbestos was physical loss because function was impaired or destroyed)
• Farmers Insurance Co. of Oregon v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1993) (house was physically damaged by fumes and odors)
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Physical Damage: Contamination by a Foreign Substance • Other courts have found that contamination without
more was not physical loss. • Great Northern Ins. v. Benjamin Franklin Fed. Savings and
Loan, 793 F. Supp. 249 (D. Or. 1990) – Asbestos contamination causing tenant to vacate was
not direct physical loss.
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Physical Damage: Destruction of Electronic Data • One view: physical loss or damage where there is
loss of access to or use of the physical computer. • Am. Guarantee & Liab. Ins. Co. v. Ingram Micro, Inc., No.
CIV 99-185 TUC ACM, 2000 U.S. Dist. LEXIS 7299 (D. Ariz. Apr. 18, 2000).
• Another view: loss of data cannot be physical loss or damage unless corresponding damage to physical computer. • Ward Gen. Ins. Servs., Inc. v. Employers Fire Ins. Co., 7
Cal. Rptr. 3d 844 (Cal. Ct. App. 2003).
• Specific coverage now available for interruption of computer operations
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