Updated November 2018
California is facing increasing losses from wildfires, which create special insurance claim issues. Businesses are interrupted because of physical damage to their own facilities, as well as to their surrounding communities, transportation options or the operations of key suppliers and major clients.
These insurance claims are often complex, requiring the assistance of a forensic accountant. Fees for claim preparation are frequently covered by business interruption policies, subject to policy sub-limits. These claims require careful documentation and analysis to fully compensate for your business loss. Hire your own advisor, and do not rely solely on the carrier’s accountant who will not have your best interests at heart. See Business Interruption Best Practices for recommendations.
Business Interruption Claims
For most business interruption claims, there will be a waiting period (which will vary widely from policy to policy) before coverage begins. The waiting period serves as a type of deductible that is in addition to an explicit deductible that the policy specifies.
When your business is shut down, you will likely have coverage for more than the physical losses of your property. Generally, business interruption insurance will cover losses from:
- Lost customers and revenues, less the incremental cost of servicing such revenues;
- Reimbursement of fixed costs that continued in spite of the business shut-down, such as (i) rent, other occupancy costs and (ii) salaries of personnel who continued to be paid; and
- Additional expenses of operating your business on a temporary basis or otherwise minimizing the loss that would be incurred.
In the case of a complex and long-lasting loss, a business cannot quantify its full loss immediately. Nevertheless, your policy contains claim time limits, which may be as little as 30 days. It is imperative that the policy be reviewed immediately, and a claim submitted within the required limitation. Extensions are readily granted for major losses, but such extensions should be formally requested and granted.
Here are some of the less obvious claims that your business may have:
Contingent Business Interruption
If your business has key suppliers or customers affected by a disaster, your business could have insurance for this business interruption. This is true even though your own business property may not have sustained physical damage. This frequently occurs because of (i) strategic supplier and customer relationships, (ii) outsourcing agreements, and (iii) just-in-time inventory systems. If included in your policy, contingent business interruption covers losses caused when key suppliers or customers experience a disaster that also affects your business. Contingent insurance occurs when the physically-damaged property is NOT owned, operated or controlled by the insured. The contingent property may be specifically named, or the coverage may blanket all suppliers and customers. The type and cause of physical damage must be the same as insured under the controlling policy. The actual coverage will depend upon your policy language, which can vary considerably. An example of policy language is:
“We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss or damage to ‘dependent property’ at premises described in the Schedule caused by or resulting from a Covered Cause of Loss …”
a) Begins 72 hours after the time of direct physical loss or damage caused by or resulting from any Covered Cause of Loss at the premises of the “dependent property”, and
b) Ends on the date when the property at the premises of the “dependent property” should be repaired, rebuilt or replaced with reasonable speed and similar quality.”
“Dependent property” should be listed within the policy. If the “dependent property” causing your loss is not scheduled, then the coverage is limited to what is included in the “Additional Coverages”, as follows:
“Miscellaneous locations – We will pay for the actual loss of Business Income you sustain due to direct physical loss or damage at the premises of a “dependent property” not listed in the Schedule caused by or resulting from any Covered Cause of Loss. But we will not pay more than .03% of the Limit of Insurance for each day’s suspension of “operations” due to loss arising from any one location.”
Denial of Access by a Civil Authority
This is normally a component of business interruption insurance coverage. It provides coverage if business operations are suspended as a result of an order of a civil authority (such as an evacuation order) following a loss of the type that is insured for your property. These clauses vary greatly between policies. For example, policy restrictions may require (i) more limited coverage time periods than exists in the rest of the policy, (ii) the policy holder’s property be damaged, or (iii) physical damage occur within a specified distance from the insured premises.
These claims are predicated on the closure of roads, airports, bridges, tunnels, or other means of transportation. This coverage is similar to the civil authority coverage described above, but does not require that the problem be caused by a civil authority. Based on the policy wording and related court decisions, these claims must be based on a complete denial of access, rather than just more limited access than would otherwise be available.
Beware of overlapping coverage with different limits. Policies may provide coverage under the multiple provisions described above. However, each of these usually have different dollar and time coverage limits. Be careful that your insurance company does not minimize payment by classifying coverage under the most severe restriction(s).
If a check of your policy does not include coverages described above, this may be a good time to consider adding these policy provisions.
Possible Insurer Responses
In the make-believe world in which everything turns out well, the carrier will immediately pay your full claim. The rest will likely face some resistance from the insurance carrier. Here are some typical responses:
- The length of time pertaining to the claim is outside what is covered by the policy. This can become complicated as a consequence of possible different policy periods existing for direct losses, contingent business interruption, or the other types of claims described above.
- The business failed to mitigate its losses, causing a longer claim period that is covered by the policy. This becomes a factual question, but the determination needs to consider resources available to make repairs, and not ideal conditions that might exist if the insured business were the only company seeking repair-related resources.
- The losses have not been properly documented and supported by necessary accounting records. This is a compelling argument for retention of a full backup of accounting and other important business documents at an off-site location.
- There was no business interruption because there was not a complete cessation of the business. This usually involves a narrow reading of the policy by the insurance company.
- The shut-down was caused by some decision by the business rather than as a direct and sole cause of the insured event.