Q. Why does a company need Business Interruption coverage and what is the purpose?

To provide the capital needed to sustain a business while its operations are suspended as a result of damage caused by a covered peril. Business interruption insurance is intended to return the amount of profit the business would have earned, had there been no interruption or suspension of its operations as a result of a covered loss.
 

Q. Can a business recover under its Business Interruption coverage when there is a loss to a separate business?

It depends. For example, assume you own a hotel at a fabulous location on South Beach. The hotel has two suite-towers and a swanky three-star Michelin restaurant at the lobby. One day, the fine restaurant is consumed in flames and the hotel sustains a significant decrease in room occupancy after the fire. Can the hotel claim business interruption benefits as a result of the fire in the restaurant? Maybe.

In Florida, it has been held that the mere diminution in hotel occupancy as a result of a fire in a restaurant that it leased, as opposed to the actual closing and suspension of business, does not constitute an interruption of the insured’s business within the meaning of a policy. Hotel Properties, Ltd. v. Heritage Ins. Of America, 456 So.2d 1249 (Fla. 3rd DCA 1984).

However, under Ramada Inn Ramogreen, Inc. v. Travelers Indemnity of America, 835 F.2d 812 (11th Cir., 1988), the SoBe hotel may recover if it is able to present evidence pertaining to the relationship between the swanky entities and on the projections for future income under the “mutual dependency” doctrine

Q. What is the Period of Restoration?

Period of Indemnity or Period of Restoration is the period of business interruption recovery, which typically starts from the time of physical loss or damage, until with due diligence and dispatch the building and equipment could be made ready for operations under the same or equivalent physical and operating conditions that existed prior to damage.

Q. What is contingent business interruption coverage?

Contingent business coverage is a type of business interruption coverage that protects the “dependent business” from the external business income exposure. This type of coverage is crucial to businesses that have a symbiotic or depended relationship with other businesses, i.e., suppliers and manufacturers

There are four (4) types of dependent business ISO endorsements:

1) contributing premises, such as the businesses that deliver materials to the insured;

2) recipient premises, such as the businesses that receive the insured’s products;

3) manufacturing premises, such as businesses that make products for delivery to the insured; and

4) leader premises, such as businesses that bring the customers to the insured.

In lay terms, 1) suppliers, 2) buyers, 3) providers, and 4) drivers.

Q. What is extra expense coverage?

Extra expense coverage covers reasonable and necessary expenses for the policyholder in order to get the business back up and running.

Examples could be temporary office space, temporary computer systems or furniture for the temporary space, overtime for workers who need to spend additional time outside of their normal work day due to the covered event. If employees were not able to bring their lunch to work, an extra expense claim could be made for feeding them during this time period. If employees are required to use cell phones to make business calls, those expenses can be reimbursed under the extra expense coverage.

Any such expenses must be deemed reasonable, necessary, and should minimize the suspension of operations, so as to save the insurance company money on that portion of the claim.

Q. Can a business recover for anticipated future lost profits?

Courts often find such damages unrecoverable due to the inability to objectively quantify them. The argument is that such damages are too speculative and cannot be shown with reasonable certainty.

Courts typically require evidence of a profit history in order to obtain recovery for future profits. However, there are several exceptions to that rule where a court will allow a claim of future profits, even if no past profit history is demonstrated. In Twyman vs. Roell, 161 So.215 (Fla. 1936), even though there was no historical measure to provide a basis for the claim lost profits, the Florida Supreme Court found sufficient testimony was provided to support an anticipated loss of future profits and recovery was allowed. The court held that “if there is a yardstick or measure of damages by which prospective profits may be determined and they arise out of a contract in which profit is the inducement to making, they may be allowed if proven ….”

Other possible ways to prove anticipated future profits can include expert testimony, although this can be an uphill battle without evidence of profit history for the expert to analyze.

Talk to Michelle
Would you like to talk to Michelle about a business interruption issue? You can reach her in Merlin Law Group’s Coral Gables office at 305-448-4800 or via email at mclaverol@merlinlawgroup.com.