Power Failures, Floods, and Earthquakes: Business Interruption and Extra Expense Coverage From the Policyholder s Perspective

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1 Power Failures, Floods, and Earthquakes: Business Interruption and Extra Expense Coverage From the Policyholder s Perspective Erica J. Dominitz Carl A. Salisbury 2013 Kilpatrick Townsend

2 Overview Preliminary Concepts Rule Number 1 Overview of Business Interruption Coverage Overview of Extra Expense Coverage Burden of Proof Issues Causation Issues Coverage for Losses Caused by Power Failure Coverage for Losses Caused by Flood Coverage for Losses Caused by Earthquake or Earth Movement 2

3 PRELIMINARY CONCEPTS 3

4 Rule No. 1 Always Read the Policy The so-called standard form is not necessarily standard 4

5 Preliminary Concepts -- Business Interruption Coverage Designed to pay the policyholder the revenues or profits it would have earned during the period of recovery had no loss occurred. Period of Recovery: Begins on date of loss (or following a waiting period of 48 or 72 hours), and ends on the date on which when, using due diligence and dispatch, the property should be, or actually was, repaired or replaced. Extended Period of Recovery: Extends Period of Recovery to include time needed to ramp up operations after repairs are completed. 5

6 Preliminary Concepts Business Interruption Coverage Typical BI Claim Requirements: Direct physical loss to property; By a covered cause of loss; Resulting in an interruption of your business; Resulting in revenue/profit losses; During the period of recovery. 6

7 Preliminary Concepts -- Business Interruption Policy Language Business Interruption: 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 of or damage to property at the described premises, including personal property in the open or (in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss. 7

8 Preliminary Concepts -- Measuring a BI Loss Proof problems/disputes tend to arise. Actual past profits and reasonable estimates of future earnings had no interruption occurred. Only reasonable degree of certainty required. Consideration of post-loss economic conditions? Was the policyholder able to make up lost production or lost sales within a reasonable period of time? 8

9 Preliminary Concepts -- Interdependent BI Losses Lost profits of undamaged policyholder locations that depend on the damaged location. Policies commonly expressly provide coverage for interdependent losses. If there is a loss at an Insured Location that involves interdependency at one or more other Insured Locations, the loss, including any resulting interdependency loss, will be adjusted based on the TIME ELEMENT coverage that applies at the Insured Location where the physical loss or damage insured by this Policy occurred. Some cases have endorsed this concept in the absence of interdependency clause. (Studley Box & Lumber Co. v. Nat l Fire Ins. Co., 154 A. 337 (N.H. 1931)). 9

10 Preliminary Concepts -- Extra Expense Coverage Extra Expense Coverage: Coverage for reasonable and necessary extra expenses incurred to continue business operations to the extent practicable during the period of recovery. Typical Extra Expense Claim Requirements: Direct physical loss or damage to property; By a covered cause of loss; Reasonable and necessary expenses incurred to continue business operations; and Total cost incurred during Period of Recovery above the total cost that normally would have been incurred had no loss occurred. 10

11 Preliminary Concepts -- Extra Expense Coverage (cont d) Expenses that typically qualify as Extra Expense: Additional utility costs needed to resume business operations. Additional costs to store business equipment. Costs to relocate to temporary alternate facilities. Costs to rent temporary replacement equipment. Costs expended for the temporary repair or replacement of property. 11

12 Preliminary Concepts -- Extra Expense Coverage (cont d) Typical Extra Expense Clause: Extra Expense We will pay necessary Extra Expense you incur during the period of restoration that you would not have incurred if there had been no direct physical loss or damage to property at the described premises, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from a Covered Cause of Loss. Extra Expense means expense incurred: (1) To avoid or minimize the suspension of business and to continue operations : (a) At the described premises; or (b) At the replacement premises or at temporary locations, including: (i) Relocation expenses; and (ii) Costs to equip and operate the replacement or temporary locations. 12

13 Preliminary Concepts Coverages Similar to Extra Expense Coverage Coverages Similar to Extra Expense Expense to Reduce Loss Coverage Expediting Expense Coverage Common law duty to mitigate/coverage for mitigation costs 13

14 Preliminary Concepts Burden of Proof Issues What Peril Caused the Property Damage Giving Rise to the BI/EE Loss? All-Risk Policies -- burden typically on insurance carrier Named Perils Policies burden typically on policyholder Causal Link Between Property Damage and the Claimed BI/EE Loss? Policyholder typically bears this burden 14

15 Preliminary Concepts Causation Issues Causation Issues and Questions to Consider: Did multiple perils cause your loss? Is at least one peril covered? Is at least one peril excluded or subject to a lower sublimit or a higher deductible? Which peril is the legally relevant cause? Common law doctrines Efficient proximate cause doctrine Concurrent causation doctrine Does the policy have an anti-concurrent causation clause? If so, is it enforceable in your jurisdiction? Does the policy have an ensuing loss clause? 15

16 Preliminary Concepts Causation Issues (cont d) Causation Analysis -- Practical Concerns Very fact-intensive analysis Typically requires experts Don t overlook Loss Adjustment Expense/Professional Fees coverage! Disputes typically are not resolved on summary judgment Lack of predictability cases can be hard to reconcile with one another 16

17 LOSS OF UTILITIES CLAIMS LOSS OF UTILITIES COVERAGE 17

18 Loss of Utilities Claims Policy Provisions Utility Service Interruption. Loss arising from off-site utility failure is usually an excluded peril. The coverage typically provided as an extension of coverage. Special ISO Coverage Forms: Utility Services Direct Damage" form CP (food, medical supplies, heating and cooling of water) Utility Services Time Element" form CP (loss of sales, lost income, increased operating expense) 18

19 Utility Loss Time Element ISO Form CP Your coverage for business interruption and/or extra expense is extended to apply to a suspension of operations at the described premises caused by an interruption of utility service to that premises. Must be a from a Covered Cause of Loss Damage to electronic data not included Usually sub-limited. 19

20 Loss of Utilities Claims Review of special cases Power loss exclusion is unconscionable: Pressman and Jerry s Supermarkets (R.I.) Interplay with other exclusions: Spece v. Erie Ins. Co. (PA) The ambiguity of physical damage : Wakefern v. Liberty Mutual (NJ) 20

21 FLOOD CLAIMS 21

22 Flood Claims -- Hurricanes and Other Storms Significant Disputes and Developments Wind versus flood disputes Applicability of Named Storm or Named Windstorm deductibles to Sandy losses Application and stacking of sublimits Wider effects of the catastrophe cases and policy language 22

23 Flood Claims Hurricanes and Other Storms Wind v. Flood Disputes Enforceability of anti-concurrent causation clauses? Statutory provisions and legislative developments Evidentiary issues Slab cases no evidence remains Storm surge tends to mask pre-surge wind and wind-driven rain damage 23

24 Flood Claims Hurricanes and Other Storms Applicability of Named Storm or Named Windstorm deductibles to Sandy losses Governor pronouncements Policy language arguments 24

25 Flood Claims Hurricanes and Other Storms Application and Stacking of Sublimits Scope of Flood sublimit Mark Andy, Inc. v. Hartford Fire Ins. Co. (8 th Cir. 2000) Stacking of sublimits and related issues Fisker Automotive, Inc. v. XL Ins. America, Inc. (N.Y. Supreme Court) 25

26 Flood Claims Hurricanes and Other Storms Wider Effects of the Catastrophe Cases Should the BI calculation should consider the wider effects of the catastrophe on the surrounding area? Relevant policy language: Due consideration shall be given to the experience of the business before the date of the damage or destruction and the probable experience thereafter had no loss occurred. The same analytical approach can be propolicyholder or pro-carrier depending on the facts. 26

27 Flood Claims Hurricanes and Other Storms Can the policyholder recover lost profits that would have been earned as a result of the catastrophe s effect on competitors? Levitz Furniture Corp. v. Houston Cas. Co. Catlin Syndicate Ltd. v. Imperial Palace of Mississippi Can the BI loss be reduced because of the catastrophe s effect on the local economy? Consolidated Cos. v. Lexington Ins. Co., Penford Corp. v. Nat l Union Fire Ins. Co. of Pittsburgh, PA, Courts have split on this issue. 27

28 The Wider Effects of the Catastrophe (cont d) Some policies now expressly address this issue -- can lead to some interesting results. Berk Cohen Assocs., LLC v. Landmark Amer. Ins. Co. (5th Cir.) Lost income includes [t]he likely Net Income of the business if no physical loss or damage had occurred, but not any Net Income that would likely have been earned as a result of... favorable business conditions caused by the impact of the Covered Cause of Loss... Policyholder could recover lost income due to increase in customers demand or reduction in competitors supply caused by (excluded) flood damage. Policyholder could not recover lost business income as a result of [covered] wind damage suffered by customers and competing businesses. 28

29 The Wider Effects of the Catastrophe (cont d) Heads, I Win; Tails, You Lose! Policy Language BI/EE Form -- Loss Determination Clause: The amount of business income loss will be determined based on the... [l]ikely net income of your business if no loss or damage occurred, but not including any business income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the covered loss on customers or on other businesses.... Conditions Form -- Period of Restoration Definition:... In determining the business income amount that would have existed if no direct physical loss or damage occurred, we will reduce such amount to the extent necessary to reflect unfavorable economic conditions attributable to the impact the covered peril had in the geographic area where the lost or damaged property is located. 29

30 EARTHQUAKE AND EARTH MOVEMENT LOSSES 30

31 Earthquake and Earth Movement Losses Definitions Scope of Earth Movement and Earthquake definitions Legal and Factual Disputes 31

32 Earthquake and Earth Movement Losses Sample Earthquake Definition Earthquake: This policy insures physical loss or damage caused by earthquake. The term physical loss or damage caused by earthquake includes all physical loss or damage caused by and resulting from an earthquake, regardless of any other cause or event contributing concurrently or in any other sequence of loss. However, physical damage by fire, explosion or sprinkler leakage water damage, theft, vandalism, malicious mischief or civil commotion resulting from earthquake will not be considered to be loss caused by earthquake within the terms and conditions of the policy. 32

33 Earthquake and Earth Movement Losses Sample Earth Movement Definition Earth Movement Coverage: This policy insures physical loss or damage directly caused by or resulting from Earth Movement. Earth Movement Definition: Any natural or man-made earth movement including, but not limited to earthquake, landslide, subsidence, or tsunami, regardless of any other cause or event contributing concurrently or in any other sequence of loss. However, physical damage by fire, explosion or sprinkler leakage resulting from Earth Movement will not be considered to be loss caused by Earth Movement within the terms and conditions of the policy. All earth movements within a continuous 96 hour period will be considered a single Earth Movement. 33

34 Earthquake and Earth Movement Losses Analysis of Earthquake and Earth Movement Definitions Earth Movement typically encompasses, but is broader in scope, than Earthquake. Breadth of interpretation of Earth Movement definition may vary depending on whether that peril is covered or excluded. Effect of anti-concurrent causation language in Earthquake and Earth Movement definition. 34

35 Earthquake and Earth Movement Losses Questions/Potential Disputes Does the earth movement need to be sudden? Interplay between covered and excluded perils Fact disputes/evidentiary challenges Burden of proof issues Strubble case 35

Greater Effects of Hurricanes in Business Interruption Claims

Greater Effects of Hurricanes in Business Interruption Claims In the classic film Forrest Gump, after Forrest returned from the Vietnam War, he honored a wartime promise he had made to his deceased friend