Insurance Law Center: Catastrophic Loss: Richard Lewis & Marshall Gilinsky on Business Income Coverage in the Post 9/11 World: How Insurance Companies Have Changed the Claims Handling Playbook Since 9/11 and Hurricane Katrina

Catastrophic Loss

3/31/2008 2:50:19 PM EST

Richard Lewis & Marshall Gilinsky on Business Income Coverage in the Post 9/11 World: How Insurance Companies Have Changed the Claims Handling Playbook Since 9/11 and Hurricane Katrina

Posted by Richard Lewis and Marshall Gilinsky

Partner, Reed Smith LLP; Shareholder, Anderson Kill & Olick PC

Richard Lewis and Marshall Gilinsky have provided an important commentary on the substantial shifts in the way business income interruption insurance claims have been handled as a result of the events of 9/11 and Hurricane Katrina. Prior to those events, business income and other time element insurance claims typically were resolved by negotiation or appraisal. But those cataclysmic events have set loose a torrent of litigation regarding the scope of coverage of business income interruption insurance. The stakes are enormous because those catastrophes gave rise to insurance claims that:

• were often individually large, a condition that by itself leads to disputes

• were collectively massive, placing a strain on the insurers and the insurance industry as a whole

• were similar to many other claims, making the creation of precedents especially significant and perilous

• involved insurance forms of recent vintage with little or no case authority for guidance, for example, for claims handlers

• involved policies that provide broad coverage, a result of the “soft” or “buyer’s” market of early 2001

• occurred when the financial markets, in which insurance companies are heavily invested, were in steep decline

The commentary surveys the most significant issues in the business income disputes between insurers and their policyholders since 9/11 with emphasis on the ways insurers’ claims handling approach has changed. It also provides advice to policyholders on ways to avoid coverage traps which the authors state have been recently instituted by insurers and their attorneys.

As to the issues involved, this commentary examines:

• The relevance of the Daubert exclusion to such business interruption insurance claims

• The period during which business income coverage is owed by the insurer

• The period of restoration for businesses with a substantial lag between the time they provide a service or sell a good and the time they are paid

• The “extension” of coverage when civil authorities take actions that affect customer access to a policyholder’s property

• The extent of business interruption insurance coverage available to lessees of premises inside damaged property

Lewis and Gilinsky first assert that the harder line now taken by insurers in negotiating the amount of business income lost has led to increased litigation where previously this was a matter for negotiations between each side’s accountants. Once in litigation, many an insurance company “sought to disqualify the policyholder’s forensic accountant ─ and thereby effectively undermine the policyholder’s case ─ by challenging the reliability and accuracy of the accountant’s Business Income loss calculation under Daubert’s ‘junk science’ standard.” The authors argue that Daubert has no place in the highly imprecise realm of calculating hypothetical income lost.

Most business income provisions promise to pay loss out from “suspension” of the policyholder’s operations due to the damage or destruction of property at the premises.

Insurers often contended that “suspension” means “total cessation” in resolving 9/11 business income claims. The authors argue on several grounds that partial suspensions of operations should be covered and advise policyholders to insist at point of sale that their insurance policies make that clear.

Historically, the “Period of Restoration” was defined as the hypothetical time needed to repair or replace damaged property at the original location. But the authors note, “In seven 9/11 cases, the insurance companies all argued that the Period of Restoration was not equivalent to the period needed to rebuild the World Trade Center (WTC) where the policyholders had been located, but was the period needed to restart operations anywhere.” The authors then describe the varying results this argument attained in court.

“Civil Authority” coverage is a Business Income “coverage extension” for loss when, in the wake of catastrophe, civil authorities take actions which affect customer access to the policyholder’s premises. Lewis and Gilinski analyze the arguments for a broad or narrow reading of Civil Authority coverage and advise policyholders to try to insist on the terms “hindered” or “impaired” rather than “prevented” or “prohibited.”

Some insurers sought to slash Business Income or Civil Authority compensation on the ground that business in New York was slow after 9/11 as a result of the catastrophe and the authors observe that this argument may be applicable to Hurricane Katrina cases. Here, the authors advise policyholders to respond that “the absence of any provision granting the insurance company the benefit of the wide effects of the loss means that the insurance company is not entitled to any such benefit.”

Lewis and Gilinsky also remark, “[M]any policyholders in the WTC were surprised to find that the insurance company took the position that their Period of Restoration was the period needed to replace their particular office suite and not the entire WTC.” This would deny compensation for business income losses caused by damage to the building impacting the policyholder’s operations. Here, the authors advise policyholders to beware of the policy’s definition of “insured premises” at the point of sale.

Access the complete commentary on lexis.com

Readers may also access the authors’ martindale.com law directory listings.

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Comments
WilliamT.Barker Last Post: 4/9/2008 11:21:13 AM	Subject: Richard Lewis & Marshall Gilinsky on Business Income Coverage in the Post 9/11 World: How Insurance Companies Have Changed the Claims Handling Playbook Since 9/11 and Hurricane Katrina Date Posted: 4/9/2008 11:21:13 AM
WilliamT.Barker Last Post: 4/9/2008 11:21:13 AM	I have to take issue with your arguments on the wider effects of the loss. I have addressed that issue in an article: William T. Barker, Business Income Insurance In a Disrupted Economy: New Orleans After Hurricane Katrina, 28 INS. LITIG. RPTR. 49 (2006). I will not repeat the caselaw discussion found in the article, but the essential analysis is as follows: The ISO definition of 1CNet Income, 1D one component of a business income loss, is as follows: Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred, but not including any Net 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 Cause of Loss on customers or on other businesses. [Emphasis added.] So, the question is what 1Cwould have been earned or incurred if no physical loss or damage had occurred. 1D Because the focus is on the 1Cphysical loss or damage, 1D that means the Net Income that 1Cwould have been earned or incurred 1D if the insured 19s business premises had been undamaged. It does not mean what 1Cwould have been earned or incurred 1D if there had been no hurricane (or other disaster). That point is emphasized by the rest of the definition, denying payment for 1Cany Net 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 Cause of Loss on customers or on other businesses. 1D Accordingly, the amount that 1Cwould have been earned or incurred 1D if there had been no hurricane or other Covered Cause of Loss is a limit on the insured 19s recovery, but there is no provision guaranteeing the insured payment at that level if unfavorable business conditions reduce or even eliminate the business necessary to generate Net Income. If a physically undamaged business would have had little or no volume due to destruction of the local market, then there would be little or no Net Income to replace. This analysis of 1CBusiness Income 1D is precisely consistent with the coverage for 1CExtended Business Income, 1D after completion of the 1Cperiod of restoration, 1D while the insured is rebuilding business volume. During that rebuilding period, payment is due for 1Cthe actual loss of Business Income [the insured] incur[s] 1D until the insured can restore 1Coperations 19, with reasonable speed, to the level which would generate the Business Income amount that would have existed if no direct physical loss or damage had occurred. 1D This is subject to a limitation: 1CExtended Business Income does not apply to loss of Business Income incurred as a result of unfavorable business conditions caused by the impact of the Covered Cause of Loss in the area where the described premises are located. 1D So, just as the discussion of Business Income has indicated, the insured cannot recover lost net income for pre-disaster business levels that could not be duplicated in the wake of the disaster. The coverage, viewed as a whole, is intended to cover the loss caused by the physical damage to the business, not any loss that would have occurred without any physical loss, from damage to the local economy. Insureds will likely argue that the failure to include in the 1CBusiness Income 1D definition language similar to that for 1CExtended Business Income 1D should preclude reaching the same result under both. But there is no reason why that should be so. In each case, specific language is necessary to limit the effect of general economic fluctuations in one direction, while the more general language produces appropriate results when the fluctuations go the other way. These limits on recovery of Net Income do not affect the insured 19s ability to recover continuing normal expenses incurred during the Period of Restoration. William T. Barker Sonnenschein Nath & Rosenthal LLP Create an account or login to post comments.
Marshall Gilinsky 4/16/2008 10:51:22 AM subject: response to WilliamT.Barker With regard to Mr. Barker''s comments, the authors of the above article offer the following: 1. Experience has taught policyholder lawyers, when evaluating insurance company arguments on Business Income, to remember the purpose of that insurance: to do for the policyholder what the business itself would have done had no interruption occurred. This purpose has repeatedly been expressed by courts. See Richard Lewis & Nicholas Insua, Business Income Insurance Disputes, 3.01 (2007). If, under an insurance company argument, the policyholder will not be put in the same position it would have been had no catastrophe occurred, that argument is likely wrong. Policyholders have had recent success holding insurance companies to this standard. See Zurich American Insurance Co. v. ABM Industries, Inc., No. 01 Civ. 11200, 2006 WL 1293360 at *3 (S.D.N.Y. May 11, 2006) ("Moreover, under [the insurance company 19s] theory, if all of the WTC tenants immediately relocated to other buildings that [the policyholder] did not service, [the policyholder 19s] business would remain interrupted, but it would be unable to recover damages under the Business Interruption provision of the Policy, a result the parties could hardly have intended."). 2. Similar arguments to those being run by Mr. Barker were put forward in the cases stemming from the destruction of the World Trade Center, although typically, the insurance companies cited "loss of market" exclusions and argued that Business Income recovery should be slashed because the market was "lost." The fact that insurance companies cited these exclusions, we submit, undermines Mr. Barker''s arguments that the results for which he lobbies are mandated by existing policy language framing the amount of loss. In any event, we are unaware of any decisions in which insurance companies prevailed on the issue. In ABM, however, the Court of Appeals rejected the District Court 19s conclusion that the destruction of the property of the policyholder - a janitorial firm servicing the WTC - did not support recovery because "the undisputed cause of the interruption here was the destruction of the" WTC: "We cannot agree with the district court 19s approach to the causation question because it artificially severs the chain of events occurring on September 11. Since the destruction of the WTC and the properties owned by [the policyholder] were obviously simultaneous, the destruction of [the policyholder 19s] occupied property was not "incidental to" the destruction of the WTC, as concluded by the district court, because this property was part of the complex. Accordingly, the ruination of the WTC, including the property at issue, was the cause of [the policyholder 19s] business interruption. Contrary to the district court 19s view, [the policyholder 19s] failure to have an interest in the entire WTC does not bar its claim for lost income due to the destruction of a portion of the WTC." Zurich American Insurance Co. v. ABM Industries, Inc., 397 F.3d 158, 167 (2d Cir. 2005). If Mr. Barker''s argument was correct, ABM should have received nothing because the market for its janitorial services at the WTC was reduced to zero after 9/11. 3. Let us remember why ISO drafted the clauses cited by Mr. Barker: policyholder claims for enhanced profits in the wake of early 1990s hurricanes. Insurance companies responded to these claims by stating flatly - and in contradiction to Mr. Barker - that Business Income recovery is based on the projections immediately prior to the catastrophe. The industry''s success on this was mixed, and ISO attempted to bar such claims in redrafting its form to state that a policyholder cannot increase its Business Income recovery where the wider effects of the loss would have created more favorable business conditions for the policyholder. Although it just as easily could have, ISO did not state that the wider effects of catastrophe could serve to decrease Business Income recovery. Yet Mr. Barker seeks to have it both ways, allowing wider effects to be considered when it hurts the policyholder, but not when it helps. The pen is in the industry''s hand and although it would be manifestly imbalanced and unfair, it would be easy to achieve the result for which Mr. Barker lobbies. Absent a redrafted policy that clearly mandates the valuation approach espoused by Mr. Barker, a policyholder can frame its claim in any manner which maximizes its recovery. 4. Fundamentally, Mr. Barker is arguing that the worse the catastrophe, the less coverage policyholders have for it. This is absurd. If a policyholder was told at the time of purchase that they were being offered the insurance Mr. Barker sees, most policyholders would look elsewhere for their insurance. Indeed, if insurance companies secretly share Mr. Barker''s strained interpretation while touting the coverage they provide for catastrophic losses, it is not a stretch to expect that charges of fraud will follow the next hurricane. Other absurdities abound. Take, for instance, the not untypical case in which a policyholder''s plant is destroyed in the same catastrophe that damages a supplier''s neighboring plant. Under Mr. Barker''s rule, the policyholder would have: (1) Business Income coverage for an explosion which destroyed its own plant but not the neighboring plant; and (2) Contingent Business Income coverage for an explosion which damaged the neighboring plant but not the policyholder''s plant; but (3) neither Business Income nor Contingent Business Income coverage for an explosion destroying both plants. Given the rules of construction favoring coverage and requiring insurance companies to make exclusions clear, along with the ease by which Mr. Barker''s rule could be made express in the policyholder language, we do not believe most courts would agree with Mr. Barker''s interpretation of the ISO form. Richard Lewis Reed Smith LLP and Marshall Gilinsky Anderson Kill & Olick, P.C. WilliamT.Barker 4/16/2008 7:31:14 PM subject: response to Marshall Gilinsky The key point in my analysis is that the risk insured is interruption of the policyholder''s business by covered damage to insured (or contingently insured) property. It is not for the indirect consequences of the impact on others of contemporaneous catastrophic damage to property that is not insured (even contingently). The ISO language does indeed preclude claims for increased business volume that would have resulted had the policyholder''s business remained undamaged. That modifies the effect of the basic language in those circumstances. The basic language is not modified with respect to the effects of decreased demand. As yet, no court has been called upon to pass on this issue. So, our readers will have to make up their own minds. William T. Barker Sonnenschein Nath & Rosenthal, LLP

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