Business Interruption: Coverage, Claims, and Recovery, 2nd Edition

The National Underwriter Company

Business Interruption: Coverage, Claims, and Recovery 2nd Edition

By Daniel T. Torpey, Daniel G. Lentz, and Allen Melton

Highlights of the 2nd Edition

Business interruption and the resulting claims are some of the most challenging that insurance professionals, risk managers, and business owners face. Success requires an understanding of accounting principles as well as the ability to interpret coverage language that is indefinite. This edition is the definitive guide to both the insurance coverage that is necessary and the accounting information that is needed to successfully handle claims.

Case studies are drawn from the authors’ real life experiences and provide discussion from both the insurance carrier and claimant perspectives. It truly is the most comprehensive and practical book on business interruption coverage, claims, and recovery that exists.

The second edition includes a complete review and update of all information in the first edition, including the case studies. New case studies have also been added. There are three entirely new chapters:

• FEMA (Federal Emergency Management Act) claims and the Public Assistance Act claims process

• Recovery beyond First Party Property Coverage

• Liability claims and other avenues for recovery

• The Modern Corporation: techniques for handling claims in today's global technologically advanced environment

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Foreword

As a relative newcomer to risk management when our company suffered a major combined property damage and business interruption loss, I can only wish that I was in possession of such a comprehensive and well organized guidebook to the business interruption claim settlement process as the authors have provided here. Any risk manager will benefit from the thorough discussion of all the major principles of securing the most complete recovery possible under a business interruption loss—from establishing the appropriate business interruption limits, ensuring the most comprehensive policy language, resolving coverage issues with claims adjusters, developing effective claim documentation to negotiating the final settlement with the insurers...it’s all here. This level of advanced understanding and a well thought out road map to success would have been invaluable in developing both the claim resolution project plan and in better preparing the operating entities for their roles in the overall settlement process.

Business interruption losses are perhaps the most complex form of property losses to quantify and resolve between an insured and its insurers. When a business interruption loss occurs, it usually sends the policyholder scrambling for an understanding of how the policy reads regarding its business interruption terminology such as loss of gross profits or the reduction in gross earnings or some other fairly ambiguous descriptor. The difficulty with relying on such vague language is that loss of gross profits or reduction in gross earnings are not easily definable terms from an accounting records perspective and, as a result, the claims and documentation process becomes more difficult than it needs to be.

In this age of fairly accurate and readily verifiable accounting information, it is highly recommended that an insured utilize terms and conditions in its insurance policy that can be readily accessed through its accounting system. This will significantly reduce the amount of time required not only to retrieve the necessary information, but also the amount of time required to foster resolution among the claims adjusters, forensic accountants, and insurers. Having the appropriate terms and conditions determined up front in the policy language may take a while, but it will pay handsome dividends in the event of a major business interruption loss. The last thing the CFO wants to hear is that there are ambiguities in the policy language that will unnecessarily prolong the settlement process. Most CFOs are rightly not that interested in the how, just the when and how much.

Although I did not have this book as reference at the time of our loss, I was fortunate enough to have an outstanding team from Ernst & Young to help guide us through what became a very complex business interruption loss. By immediately establishing a team environment and leveraging the relative skill sets of Ernst & Young, the risk management department, the operating and functional group heads, and company analysts, we developed a detailed project plan that included regularly scheduled meetings and conference calls with claims adjusters, operating personnel, the insurance companies’ steering committee, and a timeline for finalizing all the claim documentation.

Of importance from the risk manager’s perspective, the project plan established specific dates for periodic claim payments, which helped ensure our company’s financial and operating community’s continuing support. Finally, the project plan provided us with an effective tool for clearly communicating our progress to the various stakeholders and team members and in keeping the team motivated and on track. And by team, I want to emphasize that we considered all the stakeholders and team members in the process—Ernst & Young, the claims adjusters, the insurers, the company financial community, the broker, the operating personnel, and risk management. It was a huge commitment by a lot of smart and dedicated people, but we managed to resolve this highly complex claim within the challenging timeline we had established within weeks of the loss. From the date of loss to complete settlement, including all cash received from twenty-two insurers, took eighteen months to the day. This could not have been achieved without a dedicated core project team, historically fair dealings with the insurance community, an absolute commitment to the project plan, and a general understanding among all stakeholders that fair and reasonable treatment of all issues would rule the day.

Risk managers today are pulled in many directions, especially those that have global responsibility and limited resources. A major property and business interruption loss could be just the catastrophic event that stretches the risk manager beyond his current staffing limits and capabilities. With the corporate visibility and expectations that come with a sizable property loss, it is important that the risk manager be ready with the knowledge and ability to successfully manage a large loss from its occurrence through final claim settlement. Reading and understanding this book is a great way to get started in building one’s confidence in this complex area of coverage and in knowing what to do when that inevitable day comes.

Alan G. Gier

Director, Global Risk Management & Insurance

Corporate Risk Management/Treasurers Office

General Motors Company

February 2011

Preface

Each day we deal with interruptions. Be it a surprise phone call, a sick child at home, or a last minute meeting we are asked to attend, we are usually able to handle these situations with or without help from others and get back to the day’s events fairly easily. However, when a business is interrupted as the result of a manmade or natural disaster, the impact is often widespread and long lasting; few are conducive to quick resolution by someone going it alone. Whatever your role in the business interruption chain of events, you will most likely be dealing with multiple people and often with a variety of concurrent issues. The corporate professional responsible for overseeing the claim, the claim adjuster representing the insurance company, and most outside advisers, like those of us serving as outside forensic accountants brought in to help assemble and evaluate losses for a claim, will in most circumstances be working together for a common purpose and for an extended period of time.

This book has been written for business professionals and others that are not familiar with the property and business interruption claim process to provide an overview of the myriad issues they will be facing after a loss. Our goal is to provide a point of view that fairly characterizes the interests of both the insured and insurers—an important balance to find in today’s increasingly risky and often litigious environment. Each chapter is designed to stand on its own. We expect most readers will access a particular issue and dive deep into that area, rather than reading the entire book in one sitting.

The cost of major natural disasters and other catastrophic events across the globe continues to escalate. In the decade since the terrorist attacks on September 11, 2001, we have experienced some of the most expensive disasters in U.S. history. Hurricane Katrina devastated New Orleans in August 2005. Katrina was indeed the first time in our lives that an entire city was shut down for an extended period of time due to a natural disaster. The storms continued to brew in October/November 2005 as Hurricane Rita also impacted the Gulf coast, followed by Hurricane Wilma, which slammed into Florida, making a trifecta of disaster in the fall of that unfortunate hurricane season.

You will see in Chapter 2 that six of the ten most expensive disasters in U.S. history have occurred since 2004. With big dollars come big issues, and each of these disasters brought to light multiple insurance issues that had to be addressed in new ways due to the scale of the events: flood versus windblown rain, multiple occurrences, concurrent causation, the allocation of losses by storm, and the list goes on.

This past decade has also shown a continued increase in the globalization of today’s Fortune 1000 companies, the changing workforce, and the ever increasing need for companies to do more with less. An earthquake in Chile, a volcano eruption in Iceland, or a civil uprising in Egypt are no longer considered nonissues for U.S. companies—they now impact their supply chains or customer bases. Those concerns, combined with an economic need to recover all losses and the increasingly prominent and important role that the Federal Emergency Management Agency (FEMA) plays in U.S.-based disasters has provided us with a wealth of material for an updated edition of this book.

This second edition of Business Interruption: Coverage, Claims, and Recovery contains expanded chapters, as well as new chapters to address the emerging issues previously noted. Chapter 10 discusses FEMA claims and the Public Assistance Act claims process. A discussion of recovery options beyond first-party property coverage is the focus of Chapter 11. Chapter 12 touches on techniques for handling claims in today’s modern corporation, such as the paperless claim and dealing with international losses. The book also includes new case studies throughout and an expanded section in Chapter 6 on the systematic gathering of data and documents.

In addition, we have sought the guidance of several well-known and respected professionals in the field such as David Goodwin of Covington & Burling LLP, David Barrett and Peter Rosen of Latham & Watkins LLP, as well as Peter Khan and Brad Ryden of Matson Driscoll & Damico, for additional perspectives on the business interruption claims process. Their contributions as additional writers certainly enhance the book.

We would like to extend our appreciation for the assistance of the executives of Ernst & Young’s Insurance Claims Services practice for their countless contributions to the book. Further we wish to acknowledge the logistical and creative support that Heidi Hueseman and Sara Brandfon have provided. It was a joy to work again with Diana Reitz and the rest of the team at the National Underwriter Company. Diana’s guidance and ideas helped to forge the second edition from concept into the completed project you hold in your hands. We would also like to thank Zurich American Insurance Company for allowing us to reprint the Zurich Edge—Global form and to discuss it in Chapter 1.

We hope this book provides you with the guidance you need in dealing with business interruption insurance, whether in thinking through your overall property insurance program or in attempting to resolve a challenging claim. Even if there are only a handful of insights that helped you think differently or enabled you to follow up on or challenge a troubling concept, situation, or idea, we hope you will find that the cost of the book and the time spent reviewing it will have been paid back in multiples.

Daniel Torpey

Daniel Lentz

Allen Melton

February 2011

About the Authors

Daniel T. Torpey, CPA, CFF, CITP

A partner with Ernst & Young LLP and former auditor with more than twenty-four years of public accounting experience, Dan has extensive experience investigating and preparing large multimillion dollar property, business interruption, fidelity, and product liability claims. Dan’s experience ranges from measuring the impact of recalling the worldwide supply of genetically modified corn to quantifying the loss of a prototype rocket for a defense contractor to being the designated expert and appraiser on the two largest property and business interruption insurance claims resulting from the September 11, 2001, terrorist attack on the World Trade Center and the destruction of businesses located within. He is a former co-leader of the Insurance Claims Services team and has served as an expert witness, an arbitrator, an appraiser, and has been sought by policyholders, insurance carriers, government entities such as FEMA, brokers, and reinsurers to help in the resolution of claims.

Dan also handles the data analysis and information gathering on some of the largest forensic investigations and claims in the industry, as well as assisting clients in developing anti-fraud programs, predictive modeling for claims, and other fraud programs. He has presented several times on fraud investigation, the use of predictive modeling in claims, and other forensic investigative topics to the FBI’s Accountants in Training program, including instructing sessions at Quantico, Virginia, the FBI’s training facility. Published or quoted in several nationally acclaimed publications, Dan has helped clients in the U.S. and abroad.

He is a co-author of The Business Interruption Book: Coverage, Claims, and Recovery, published in 2004 by The National Underwriter Company. Additionally, Dan has been an expert commentator for product recall/product liability and business interruption for the International Risk Management Institute (IRMI). He earned his B.S. in accountancy from St. John’s University and has completed the Kellogg School of Management Executive Program at Northwestern University.

Daniel G. Lentz, CPA, CFE

A partner with Ernst & Young LLP since 1993, Daniel Lentz plays a significant role on the insurance claims team and served as co-leader of the team for a number of years. Dan’s more than twenty-seven years of experience encompasses government contract matters, business interruption and lost profits claims; product liability; merger and acquisition disputes; reinsurance disputes; broker and agency disputes; contract disputes and other insurance-related litigation matters; fraud investigations; solvency analysis; class action lawsuits; and surety and fidelity bond claims.

He has assisted many companies with effectively investigating, documenting, analyzing, strategizing, and resolving disputes, regulatory matters, and fraud or misconduct.

Dan has served as coordinating partner on some of the practice’s largest and most complex dispute matters, including investigations, insurance claims, litigation, and alternative dispute resolution matters. He has testified numerous times in his career, and he has served as an independent arbitrator.

Dan is a certified public accountant and a certified fraud examiner. He holds a bachelor’s degree in accounting and economics from Roanoke College and a master’s of business administration in finance from Loyola College in Baltimore. He is a co-author of The Business Interruption Book: Coverage, Claims, and Recovery, published in 2004 by The National Underwriter Company.

Allen Melton, CPA, CFF

Allen is a partner and the Americas leader for Ernst & Young’s LLP insurance claims services practice. His responsibilities include providing comprehensive financial, economic, and strategic advice to companies with complex business problems and disputes. As a certified public accountant he has spent the majority of his career in the commercial insurance industry with an emphasis in business interruption, as well as working in litigation support and audit. Allen has also provided expert witness testimony at trial. He has assisted clients in the resolution of over $3 billion in insured claims across various fields, such as automotive, agribusiness, beverages, chemicals, commercial banking, consumer products, financial services, food and drug stores, food production, healthcare, higher education, hospitality, industrial and farm manufacturing, mining, oil and gas, pharmaceuticals, railroads, retail, sports and entertainment, and technology.

Over his career, Allen has supervised and performed numerous insurance claims procedures and tasks to calculate business interruption, property damage, and mitigating/extra expenses and other economic losses. He has handled claims on six different continents stemming from damages as a result of events such as hurricanes in the U.S. Gulf Coast, earthquakes in Asia, the September 11, 2001, terrorist attack on the World Trade Center, mudslides in Venezuela, ice storms in Europe, flooding in Australia and the U.K. Buncefield Oil Depot explosion.

Allen regularly provides industry thought leadership through presentations at the national RIMS Conference and other risk and insurance industry events. He is frequently requested to publish articles in Risk & Insurance, Risk Management magazine, and various other financial and insurance industry periodicals. In addition, he is a contributing author of The Business Interruption Book: Coverage, Claims, and Recovery, published in 2004 by The National Underwriter Company.

Contributors

David B. Goodwin

A partner with Covington & Burling LLP, David is a member of the law firm’s insurance coverage and appellate practice groups. With more than twenty-five years of experience representing corporate policyholders in insurance coverage disputes and litigation, his practice runs the gamut of insurance issues, including major property damage and business interruption losses, errors and omissions, fidelity, director and officer claims, mortgage and financial guarantee insurance disputes, and products liability and environmental matters. David is also a highly experienced appellate advocate and has argued more than fifty appeals. 

Peter K. Rosen

A partner with Latham & Watkins LLP, Peter is a member of the litigation department, the insurance coverage practice group, and the firm’s technology committee. He represents insurance policyholders in matters involving property disputes, professional liability, directors and officers liability, commercial general liability policies, environmental insurance, fidelity insurance, and surety bonds.

David A. Barrett

David is a partner with Latham & Watkins, LLP. His practice is focused on representing policyholders throughout the U.S. in major first- and third-party insurance coverage matters. Mr. Barrett co-authored The Business Interruption Book: Coverage, Claims, and Recovery, published in 2004 by The National Underwriter Company. In addition to his insurance coverage practice, Mr. Barrett has represented U.S. and foreign clients in a wide variety of commercial matters, including environmental, securities, contract, intellectual property, toxic tort, fraud, and subrogation matters.

Joseph A. Galanti, MBA, CFA, CFE

A principal with Ernst & Young LLP, Joe has more than seventeen years of experience working in the litigation environment. He focuses on resolving insurance claims and claim-related disputes, especially in the areas of real estate, multifamily housing, hospitality, and manufacturing. His responsibilities include managing the preparation of financial models, economic projections, and sensitivity analyses used in the determination of financial damages.

Nigel Henley, ME

Nigel is a senior manager with Ernst & Young LLP, Nigel has more than twenty years of experience in the commercial property insurance industry, including sixteen years as an insurance claims manager and adjuster. He specializes in assisting and advising clients on the preparation, presentation, and settlement of large property damage and business interruption insurance claims.

Brad McCloskey, CPA, CFF

Brad has assisted numerous clients on complex insurance claims resulting from hurricanes, the September 11, 2011, terrorist attacks, tornadoes, floods, fires, and other catastrophes. As a manager with Ernst & Young LLP, he has focused on FEMA claims, product liability, and recall for various industries.

Bradley (BJ) Nichols, MBA, CPA, CFE, CFF

Bradley has assisted companies with the preparation, presentation, and settlement of their claims resulting from catastrophic hurricanes, tornadoes, earthquakes, fires, floods, as well as product recall and other catastrophes. He has worked with both public and private companies in various industries. A senior manager with Ernst & Young LLP, he has had the opportunity to work closely with policyholders, adjusters, and attorneys in the resolution of these complex claims.

Drew Olson, CPA, CFF

A manager with Ernst & Young LLP, Drew has experience performing an array of forensic accounting services to clients in multiple industry segments. For the past five years, Drew’s main focus has been on the compilation and quantification of complex business interruption insurance claims.

Jill Powell, CPA, CFE

Jill has experience in managing complex insurance and litigation claims and the quantum of financial and economic damages as a result of business interruption, property damage, and catastrophic loss. A senior manager with Ernst & Young LLP, her experience includes working with both public and private companies in various industries, including retail, media/broadcasting, manufacturing, consumer products, food processing, and hospitality. She has had the opportunity to work closely with policyholders, adjusters, and attorneys in the resolution of complex claims.

Ryan D. Pratt, CFA

Ryan is a senior manager at Ernst & Young LLP, and a CFA charter holder whose expertise is managing complex insurance claims and litigation and preparing the quantum of financial and economic damages as a result of business interruption. Ryan has worked extensively with policyholders to develop claims management teams to respond to crises, including working with brokers, adjusters, and insurer’s consultants to facilitate the claims process for his clients.

Robert M. Reeves, CPA

A partner with Ernst & Young LLP, Robert has more than nineteen years of experience providing clients with comprehensive financial and strategic advice to resolve complex disputes. His experience includes assisting policyholders in reaching settlements on insurance claims, including property, business interruption, fidelity, and liability, along with working for insurance and reinsurance companies in arbitration and litigation matters.

Clark Schweers, CFE

As a senior manager at Ernst & Young LLP with more than twelve years of experience, Clark routinely assists clients on complex business interruption and property damage claims, third-party claims, strategic advising, data mining, financial and economic advising, intellectual asset management, and arbitration for a variety of industries.

Jason Trahan, CPA, CFF

Jason is a senior manager with Ernst & Young LLP. He has assisted numerous clients in reaching settlements on insurance claims, including property, business interruption, extra expense, and liability claims. He has also provided assistance to insurance companies regarding reinsurance disputes. His experience includes public, private, government, and not-for-profit organizations within a variety of industries.

Sheri Wilson, CE, MBA

She has more than eighteen years of experience working as a claims and risk management professional. Sheri is a senior manager with Ernst & Young LLP and handles claims for property damage, business interruption, extra expense, contingent business interruption, crime/fidelity, environmental, and liability matters.

About the Editors

Editor

Susan L. Massmann, CPCU, is an associate editor of FC&S®, specializing in commercial property and business income coverage. She has been with the National Underwriter Company since 1997.

Ms. Massmann has written for and edited various books and publications, including The Tools & Techniques of Risk Management and Insurance, Claims magazine, and National Underwriter Property & Casualty newsweekly. She manages the electronic FC&S® Online and edited a number of publications, including the Commercial Property and Condominium Insurance coverage guides.

Before joining the National Underwriter Company, she was a paralegal and worked for a court research firm. She is a graduate of Evangel University.

Editorial Director

Diana B. Reitz, CPCU, AAI, is the editorial director of the Reference Division of The National Underwriter Company. As such she is responsible for the overall integrity of all division publications. She previously was the Director of the Property & Casualty Publishing Department of the Reference Division.

Ms. Reitz has been with The National Underwriter Company since 1998, when she was named editor of the Risk Financing and Self-Insurance manuals and associate editor of the FC&S Bulletins®. She also is co-author of the National Underwriter publication, Workers Compensation Coverage Guide, and has edited and contributed to numerous other books and publications, including The Tools & Techniques of Risk Management and Insurance, Claims magazine, ProducersWEB, and National Underwriter Property & Casualty newsweekly. She contributed to both editions of the Business Interruption: Coverage, Claims, and Recovery publications.

Prior to joining The National Underwriter she was with a regional insurance broker, concentrating on commercial insurance. She is a graduate of the University of Maryland and St. Francis College.

Table of Contents

Foreword

Preface

About the Authors

Contributors

About the Editors

CHAPTER ONE

CHAPTER TWO

CHAPTER THREE

CHAPTER FOUR

Work Sheet Instructions

CHAPTER FIVE

Claim Scenario: The Developer

Claim Scenario: An Inferno of Losses

CHAPTER SIX

Claim Scenario: Hospitality Industry

Claim Scenario: Naviporte And Grisham Industries

CHAPTER SEVEN

Claim Scenario: Carmichaels Department Stores

Claim Scenario: Greater Mass Hat Manufacturing

Calculation Theories: Hindsight Versus Foresight

CHAPTER EIGHT

Claim Scenario: High Octane Refinery

Claim Scenario: Tulla Mulla Distillers

Claim Scenario: Night Eyes For Military Operators

CHAPTER NINE

CHAPTER TEN

CHAPTER ELEVEN

CHAPTER TWELVE

Appendix

CHAPTER ONE

Introduction and History

The Evolution of Business Interruption Coverage

R

egardless of which side of the table you are sitting on, business interruption insurance typically is one of the most misunderstood of coverages.

This is despite the fact that its genealogy dates back more than two centuries, to the late 1700s when court records show that insurance written specifically on income and profits was available.¹ This type of insurance—which indemnified insureds for the loss of rents or profits derived from property or operations—differed from typical property insurance, which even at that time was restricted to paying losses that arose from direct physical damage to the insured property. Legal records show that early standard fire policies would not pay for lost income or profits, with courts differentiating between the direct property loss covered by a fire policy and the subsequent, or consequential, loss of income that could result.² Specific insurance on profits and income had to be purchased.

Early forms of this insurance were developed to insure the profits that ship owners counted on through freight shipments or chartering activities. Income from the rental of property also was insured.

Advertisements that appeared in The National Underwriter newsweeklies in the early days of the Great Depression illustrate the importance of the coverage at that time. The America Fore Group of Insurance Companies—parent of the former Continental insurance companies—stressed the importance of business interruption insurance as a key element in a complete insurance package of protection for businesses. One of the ads speaks to the ability to include salaries of essential employees as well as lost profits and those expenses which continue during the suspension of business due to fire, explosion or windstorm.

Those words, though written in 1929, remain true to the importance of the coverage: the need to insure employee salaries, profits, and continuing expenses during a period of suspension. These are the same elements of loss that cost a business its survival today after it has been shut down because of damage from a covered cause of loss.

As Lord Peter Levene, chairman of Lloyd’s, stated in an October 2003 speech to a New York Risk and Insurance Management Society (RIMS) meeting:

Consider, for example, the impact of 9/11. It was not just felt by those businesses and people who were in the Twin Towers. Thousands of businesses were disrupted, some many miles, even thousands of miles away. If one office of an international company is destroyed or has to close, the company’s entire operations can grind to a halt. Typical estimates suggest that this cost, the cost of business interruption, accounts for 20-25 percent—or $10 billion—of the overall 9/11 loss.³

Information provided by the Insurance Information Institute (www.iii.org) illustrates the insurance costs of catastrophic property losses including business interruptions. The following chart outlines the most costly world insurance losses from 1970 to 2009. The chart does not include uninsured damage, nor does it include life and liability losses.

From the earliest origins to the extensive business income claims that resulted from Hurricane Katrina, insurance on lost income and profits has continued to be seen as critical to the survival of individual businesses.

Different Terminology through the Ages

Although the three basic elements of coverage stated in those ads from 1929—lost profits, salaries of essential employees, and other continuing expenses—remain at the crux of the business interruption insurance coverage grant, there have been many changes in the way coverage is arranged and in the terminology used to describe it.

Originally called use and occupancy insurance, the name evolved to business interruption insurance in the 1930s—even though use and occupancy forms still could be found. The term business income insurance was coined in the 1980s by the Insurance Services Office (ISO), when it introduced its simplified commercial property program. Today both Business Interruption or Business Income are conventional terms are known as BI coverage.

Regardless of specific name, it is generally accepted that the coverage is part of a broader category of time element coverage. It is triggered as a consequence of direct physical damage or physical loss, which gives rise to its being categorized as indirect or consequential coverage.

In lay terms, the coverage is to provide the capital needed to sustain the business while it is shut down and, in some cases, financially support efforts to regain market share after the property is repaired.

Evolution of Coverage Forms

Use and Occupancy Forms

As the original name—use and occupancy insurance—implies, business interruption insurance was designed to provide financial support to businesses when physical damage precluded their owners’ ability to use or occupy their property.

This terminology reinforces the requirement that coverage is triggered not by a loss of business income but, rather, by a suspension of business. In other words, mere loss of revenue after property is damaged is not enough to trigger the coverage—there typically must be an actual suspension of business, i.e., a loss of the ability to use or occupy the property.

Valued Use and Occupancy Policy

The advantage of the Use and Occupancy form was that values of loss per day were pre-established in the policy form each year, so there was little room to debate what sales or production would have been. However, there still was some vagueness in the terms used relating to values and attaching loss to use or a triggered event. Such is the case of an interpretation in a New York case that is more than 100 years old, Michael v. Prussian Nat. Ins. Co., 63 N.E. 810 (1902). The insurance policy in Michael was written on the use and occupancy of Buffalo Elevating Company property with a limit of $4.77 a day for each working day that the company was prevented from using the elevator and handling grain.

The owner of the grain elevator plant had entered into a pooling arrangement with other elevator properties. The purpose of the pooling arrangement was to establish uniform rates. Members placed all earnings into the common pool, which was distributed to members according to an agreed-upon formula. Each member’s share of the pool was not affected by an inability to use its elevator because of fire damage. Buffalo Elevating, therefore, continued to receive its percentage of the common fund despite that fact that it could not operate after the fire. The insurer, Prussian National, claimed that it was entitled to subrogate against the proceeds paid out by the association during the time of the fire.

The court disagreed, however, stating that the insurance policy in question insured the business use of the property and not the loss of earnings and profits. As stated in the court records,

The contract of insurance is quite exceptional in its nature. ...The insurance is neither specifically upon the building, nor upon the machinery which it contains. It is on the use and occupancy of the property and elevator building, with boiler and engine houses attached.

The peculiar feature of the contract is that it contemplates, as its subject-matter, not the mere material loss of the plant, or any part of it, but the loss to the owner of the ability to use it. ...The policy is in fact a valued one—where the parties intended, and have agreed beforehand, to estimate the value of the subject of the insurance.Had the Buffalo Elevating Company owners continued to collect rents from their contracts despite the fire there may not have been any income loss. In those terms, this is fair and adequate but still raises concern over the effectiveness of the policy wording. In other circumstances insurers may have been stuck paying losses on projected sales or production as established in the policy that was far greater than what may have actually incurred as a result of the loss. This may have been the reason for insurers to decide to revise the policy wording to more accurately reflect the actual loss incurred.

Actual Loss Sustained Use and Occupancy Policy

This valued use and occupancy policy may be contrasted with a policy that provides coverage on an actual loss sustained basis form that was litigated in the case of Goetz v. Hartford Fire Insurance Co., et al., 215 N.W. 440 (Wis. 1927). Hartford and five other insurers appealed a judgment of the circuit court, which directed them to pay equal shares of the expenses incurred by the A.H. Peterson Co. during a business suspension that was caused by a fire. The Peterson Co. was shut down for forty-nine days, during which expenses of more than $3,800 were incurred.

The company, however, would have operated at a loss of more than $4,000 during those forty-nine days had it been in operation. In reversing the circuit court ruling, the Wisconsin Supreme Court turned to the wording of the applicable coverage form which, while it was a use and occupancy contract, was written on an actual loss sustained basis. As the Supreme Court reasoned,

It is not questioned but that at least two separate and distinct elements are recognized in this provision of the contract which may go to make up the actual loss sustained to indemnify for which the defendants undertook; namely, one of net profits, and the other of fixed charges and expenses. The element of net profits drops from this case; the jury having found that none such would have been made during the same period if no such suspension had occurred.

The insured having suspended businesses [because of the fire], it avoided of course such loss of over $4,000, with its consequent [sic] depletion of assets or additional liabilities to that extent.

Because the net loss outweighed the continuing expenses, there was no actual loss sustained, and the court reversed the lower court ruling. Interestingly, although the use and occupancy form no longer is used, this 1927 interpretation of the two elements that must be met in an actual loss sustained form remains applicable to many coverage forms used today. It also illustrates the fact that two policies, both entitled use and occupancy forms, will be interpreted differently based on the details of the coverage form.

With the rise of the industrial age, the level of complexity of exposures rose and challenges to the language in coverage forms increased. It was in this environment that the business interruption forms in use today were born. Today, as it was in the early 1900s, it is important to read and understand the details of the coverage form being used.

The Business Interruption Forms

Two-Item Contribution Form

The next major development in form evolution was the two-item contribution form, which incorporated two insuring agreements: one covering net profits and continuing expenses and the other covering ordinary payroll. The form, which was introduced in the mid-1920s, originally required a 100 percent coinsurance clause, i.e., businesses had to insure 100 percent of their business interruption value or risk a penalty at the