Over the years, insurance companies and policyholders have been arguing in courts over how to calculate business interruption losses during catastrophes.
This is the type of coverage that is often ignored until there is a loss. But once there is a loss, some companies realize their lost profits may be more than the amount of property damage they suffered.
Insurance companies, of course, have figured this out as well, according to Finley Harckham, an insurance attorney at the New York law firm Anderson Kill & Olick.
Clash Over BI Claims
The more insurers get hit with $100 million business interruption claims, the harder they work at restricting this coverage, either through exclusions or asking the courts to interpret the existing language in a way that narrows the scope of coverage, according to Harckham.
He spoke at his firm’s recent policyholder advisor conference in New York. The goal of the event was to help risk managers and corporate general counsels maximize their companies’ insurance recoveries.
Both policyholders and insurance companies have been trying to interpret wider effects of catastrophes to their own respective advantage.
Profits Would Have Soared, If They Remained Open
This issue came to the forefront with claims by hotels in areas devastated by hurricanes and other storms. Policyholders that owned hotels argued that the business interruption loss should be calculated using projected higher profits they would have made from the increased demand for shelter in the aftermath of hurricanes.
“The entire neighborhoods were destroyed, there were lots of displaced people, there were workers who had to come in and had to be housed somewhere to rebuild the area,” Harckham told corporate risk managers and general counsels.
“This created a strong demand for shelter. If hotels had been spared in the hurricane, they would have done a fantastic business. They would have done better than they would have done had there been no catastrophe.”
The courts listened to the policyholders’ argument and decided, “well, there is some logic to that, but we are not going to rule that way. That would be a loophole for policyholders.”
The Case of Flooded Carpet Store
However, the courts did agree with some policyholders using this approach. Harckham pointed out a Louisiana case involving a carpet store in the wake of a massive flood. Everybody’s carpets were flooded and had to be thrown out. The store could have sold out its inventory and done fantastic business if its own stock of carpets had not been ruined during the flood. The policyholder asked that the business interruption loss be calculated using this higher profit.
“And the court agreed. The court said, you know what, you are right. But that was the only case where the court has really gone that way,” the attorney said.
He said that it resulted in a backlash from insurers. Insurance Services Office (ISO) and others changed their policy forms to state that coverage would not be provided for the potential beneficial effects that a catastrophe would have had.
Negative Impact of Wider Effects of Catastrophes
Some insurance companies have also tried to interpret coverage to their advantage.
He said there were stores in the World Trade Center, in the mall in the lower level, that were destroyed on 9/11. Fortunately everybody got out. Stores had high-dollar limits of business interruption insurance.
But insurance companies took the position that stores really aren’t entitled to any business interruption coverage whatsoever because if the stores had survived, at ground zero in the lower level, they wouldn’t have been able to do any business anyway because the area was blocked off and occupied by rescue workers, followed by construction crews.
Case Involving Stores at Ground Zero
“They said who’s gonna shop at those stores? Insurers tempered it by saying, ‘Well, we are nice guys so we are not gonna hold you to that standard we are entitled to,'” Harckham told conference attendees.
“‘We are gonna’ assume instead that your stores survived but in the area of ground zero, not in the middle of ground zero. And so you would have done a little bit of business but not much. We are nice guys so we are gonna give you a little bit of business interruption coverage.'”
The court rejected the insurers’ argument. The court ruled that business interruption losses should be calculated with the assumption that policyholders continued to do business in a world in which Sept. 11 never happened.
This issue persists, he said. Even after that case, some insurance companies have raised this argument again.
So far, he said, odds are strongly in favor of policyholders. But he warned risk managers and corporate counsels that while many policies now protect insurers from their own downside risk on this issue, there is no corresponding provision for policyholders.
Many policies remain silent on whether policyholders can lose some or all coverage. So businesses have to be aware, he said.