BUSINESS INCOME LOST AND FOUND
Prepare your clients for carrier methods used to reduce the amount of covered income losses
Producers may wonder how some adjusters can
utilize terms and concepts not expressed and
defined in a policy, but the terms mentioned
above have received some sanction from the courts.
By Joseph S. Harrington, CPCU
Explaining how business income insurance works is among the most challenging tasks facing commercial lines agents and brokers.
At least four determinations are required to trigger loss of income and extra expense coverage, otherwise known as business interruption insurance:
- That an insured’s operations had to be wholly or partially suspended due to damage by a covered cause of loss;
- The appropriate length of the “period of restoration” needed to re-establish operations;
- The amount of revenue lost due to the suspension of operations; and
- The level of expenses that continued through the period of restoration.
Except for the amount of continuing expenses, each of these determinations involves judgments and estimations about which reasonable people often disagree. Final recovery is then subject to a deductible, usually expressed as a period of time (say, 72 hours) and to periodic and aggregate limits.
These complicated calculations are at least based upon the actual language of typical business income policies. Things get even more complicated when company adjusters introduce factors not expressed in a policy that can reduce the amount of a covered loss.
Gains offset losses
There are at least three such non-explicit factors that crop up in business income loss adjustments.
“Makeups” generally refer to situations where sales made after a period of restoration spike to a level that essentially compensates for the revenue lost during the suspension. An example would be a home improvement center that is forced to close for several days due to damage by a natural disaster, but then profits from the surge in demand for building products.
“Offsets” refers to situations where a loss of sales due to a suspension of operations at one location is offset by increased patronage of another of an insured’s locations, increased sales of an insured’s products other than those affected by the business interruption, or increases in local prices for affected items. A retail chain forced to shut one of its locations will find that some customers go to other locations.
“Residual values” refers to assets (e.g., buildings, machinery and equipment) acquired during the restoration period (possibly through extra expense coverage) that will continue to provide value after the restoration period. The estimated amount of residual value may be credited against income loss to reduce the amount of business income insurance recovery.
Principle of indemnity
Producers may wonder how some adjusters can utilize terms and concepts not expressed and defined in a policy, but the terms mentioned above have received some sanction from the courts.
To cite one major example, the Superior Court of the District of Columbia ruled in 2021 that appraisers were entitled and required to consider sales at the insured’s unaffected locations in determining the income loss of a Houston-area grocery store chain during Hurricane Harvey in 2017.
In making its ruling, the court relied in part on the policy provision citing the “interdependent” nature of an income loss on different locations; thus, a provision designed to extend coverage was effectively used to limit it. The court also interpreted the policy’s condition for timely “resumption of operations” to encompass income from locations owned by the same insured.
How can courts support carriers in this fashion at a time when the judiciary relies heavily on the strict language of policies and interprets any ambiguities in favor of the insured?
The answer lies in the principle of indemnity, the bedrock legal principle which holds that insurance can only compensate an insured for what it has lost, not allow it to become better off. In some cases, strict interpretation of business income policy provisions would allow an insured to benefit from a windfall that results from the very event that caused the interruption.
Yes, there’s a logic to these limitations on income claims. But they make it even more challenging to explain an already complicated and contentious process. And they make it all the more imperative that producers help their clients establish thorough, accurate, and up-to-date estimations of potential income losses.
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
 ACON Investments LLC et al v. Arch Specialty Insurance Company et al, Superior Court of the District of Columbia, Case No. 2020 CA 004048 B; accessed at https://www.moundcotton.com/wp-content/uploads/Acon-v.-Arch-Order-Mandating-Appraisal-copy.pdf