Getting Down to Business

When does the business interruption restoration period begin?

A typical business interruption policy limits the period of time for which an insured can recover to the so-called “restoration period.” The applicable period is primarily determined by the terms and conditions of the policy. Although some policies provide for a specific fixed period during which the insurer’s obligation continue, the “restoration period” is generally limited to the time required to rebuild, repair or replace the destroyed or damaged property with the exercise of due diligence and dispatch.

The question arises, however, whether the commencement and length of the restoration period can be affected by the date when payments by the insurer are actually made. That issue is the crux of motions for a summary judgment now pending in a federal court in Florida in a case entitled The American Golfer’s Club Inc. v. Lexington Insurance Co. (S.D. Fla. Case No. 07-60166).

The Florida case illustrates a problem which frequently arises when the desire of an insurer to fully adjust a loss collides with the needs of the insured to have received the insurance proceeds necessary to complete the required repairs. Where this issue has arisen, courts have been extremely sympathetic to the arguments of the insured.

In The American Golfer’s Club Inc. case, a golf course owned by the insured was damaged by Hurricane Wilma in October 2005. Lexington Insurance Co. paid four months of business interruption coverage, claiming that was the full extent of the permissible restoration period. Lexington argued that the repairs should have been completed by February 2006, and the extended business interruption coverages were never triggered because the insured made no efforts to repair its course and never resumed its operations.

The American Golfer’s Club, however, disagreed with the theoretical restoration period that Lexington used in its calculation, and claimed that the appropriate restoration period was 11 months. Moreover, the Golf Club argued that Lexington delayed until March 2006 in making its first partial payment, by which time the condition of the course had deteriorated to the point that resumption of operations was economically unfeasible. The issue in American Golfer’s Club is thus whether the obligation of the insured to repair can be affected by the promptness of the insurer in making payments.

Courts generally recognize that business interruption losses experienced by the insured beyond the time needed to physically restore the destroyed or damaged property are not recoverable. (Penn Barr Corp. v. Insurance Co. of North America, 976 F. 2d 145 (3d Cir. 1992)). However, the courts have also ruled that mere ability to resume production activities prior to the full restoration of the destroyed or damaged property does not reduce the period of recoverable loss. (American Medical Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F. 2d 690 (3d Cir. 1991)).

The approach taken by most courts is to allow a reasonable extension of the period of restoration where any delay was due to actions of the insurance company. (Omaha Paper Stock Co. v. Harbor Ins. Co., 596 F. 2d 293 (8th Cir. 1979)). Thus, the restoration period will be extended by a delay caused by the insurer’s resistance to adjusting the insured’s claim under the policy, thereby depriving the insured of the funds needed to effect restoration.

For example, in United Land Investors Inc. v. North Insurance Co., 476 So. 2d 432 (La. 1985), a restaurant was damaged by fire in November 1981. The insurer paid $10,000 for lost earnings in December 1981, but repairs did not commence until March 5, 1982, when the insurer tendered the full sum necessary to make the repairs. The court in that case held that the 12-week period in which the insured was required to make repairs did not begin to run until March 1982 when the insured was tendered the full sum. The court ruled that until that time, the insured was in no financial position to contract for or to begin repairs to the building.

There was a similar result in Hampton Foods Inc. v. Aetna Casualty & Surety Co., 843 F. 2d 1140, 1143-44 (8th Cir. 1988). The court in Hampton Foods allowed a reasonable extension of the restoration period where the delay in completing the restoration was due to actions of the insurer. The court held that the insurer “should be liable for the duration of the reasonable period of time needed for [the insured] to re-enter its business, plus any delay attributable to [the insurer’s] failure to perform its duties under the policy.” The court observed that the insured required the money owed to it under the policy to obtain the financing necessary to restore the building. The court in Hampton thus ruled that “due diligence” did not require the doing of “useless acts,” and absent payment by the insurer, the premises had no chance of being restored.

In Eureka-Security Fire and Marine Insurance Co. v. Simon, 401 Pac. 2d 759 (Ar. 1965), an Arizona court extended the “prompt payment” rule to a delay experienced by the insured in negotiating a fire insurance claim with an adjustment company that represented two other insurance carriers as well as the defendant insurer. The court held that the delay occasioned by the joint adjustment efforts was within the reasonable anticipation of the insurer and was outside of the insured’s control.

The lesson for insurers is clear. In adjusting business interruption claims, the theoretical period of restoration does not exist in a vacuum. Courts are generally sympathetic to the perceived economic needs of the insured, and tend to resolve all doubts in favor of the insured. Prompt payment of the insurance proceeds is a critical consideration for the courts. It is not just when the insurer begins making payments, but when the insured receives sufficient payments to be assured that all required repairs can be completed.