There Must Be Tangible Damage
A restaurant ran into a serious loss under the worst set of circumstance. Berries restaurant had the poor luck of having a long-term, roadway construction project located near their location. While the project did not physically block customers from coming, the restaurant owners argued that it did cause serious loss to their property and on their bottom line. Berries claimed that the construction created a high volume of dust and debris. It filed a claim asking for reimbursement for the cost of extensive cleaning expense. The claim also included substantial loss caused by having to repair its moveable wall, roof, and awning system.
Its insurer did not accept Berries’ claim. It denied the loss, based on a bedrock element of its policy. In its view, there was no evidence of actual damage taking place at the restaurant. Absent tangible damage, its position was that Berries’ loss did not qualify for insurance protection. Berries sued.
Here are details on the manner in which a court viewed Berries’ painful business loss.
Mamma Jo’s Inc., d.b.a Berries (Berries), is a restaurant located in Miami, Florida. It has an adjustable awning, wall and roof system that allows for partial open-air dining. From December 2013 to June 2015, roadway construction took place in the restaurant’s general vicinity. In December 2014, Berries submitted a claim to their insurer, Sparta Insurance (Sparta), for damage to their property and loss of income caused by dust and debris from roadway construction.
During construction, the restaurant remained open, and access was not impeded. The damages claimed included the cost to clean the restaurant of $16,235.58 and loss of income of $292,550.84. Sparta denied the claim stating no physical damage was incurred, and therefore coverage did not exist.
Berries filed suit and presented new damages for an additional $319,688.57. Replacement of the restaurant’s awning and retractable roof system, HVAC repairs, and replacement of the audio and lighting system were included in the additional damage.
Three witnesses testified on behalf of Berries, but the court found them unreliable and their testimony speculative. It stated that without expert testimony, there was no proof that the road construction caused the damages claimed. Further, since cleaning the restaurant is necessary regardless of road construction, it found no direct physical loss. Direct physical damage is described as tangible damage to property that causes it to become unsatisfactory for use or requires repair. Further, for the business income claim, since direct physical loss was not established for the suspension of operations, there was no coverage. Therefore, the court issued summary judgment to Sparta. Berries appealed.
The appellate court agreed with the district court, ruling that it properly granted Sparta summary judgment. Berries failed to provide proof of direct physical loss or damage to their building. Additionally, the higher court agreed that business income coverage does not apply since any suspension of operations must be caused by a direct physical loss to covered property, which creates a period for making repairs. The lower court ruling in favor of Sparta was affirmed.
Editor’s Note: It’s important to understand that for coverage to apply, tangible and eligible damage must be present.
United States Court of Appeals, Eleventh Circuit. Mama Jo’s Inc., d.b.a. Berries, Plaintiff – Appellant, v. Sparta Insurance Company, Defendant – Appellee. No. 18-12887. August 18, 2020
Not All Interruptions Are Eligible
The lifeblood of eat-in food establishments is, obviously, diners. When events occur that prevent customers from entering an eating locale, that is definitely an interruption of business. It is also definitely a direct source of serious income loss which may contribute to whether a business survives.
While many personal and commercial property policies routinely cover business income/interruption loss, there is a major requirement. The interruption has to be triggered by a source of direct and physical loss; additionally, that source must be one that is eligible for the coverage under the applicable insurance policy.
Here is an excerpt of wording regarding coverage found under the Time Element Section of Gordis on Business found in Advantage Plus.
Most commercial property coverage forms insure buildings and/or business personal property against direct physical loss or damage by a cause of loss. Direct physical loss is the damage actually done by the covered cause of loss and any other damage where a covered cause of loss is the proximate cause of the loss.
However, these forms provide no coverage for indirect or consequential losses which can result in significant coverage gaps. A fire that causes only minor physical damage at a dairy products manufacturer might also cause an indirect loss when the dairy must cease operations to repair and clean the operations, and then wait for the health authorities to inspect the premises and conduct the necessary tests before it can reopen. The commercial property coverage form does not cover the loss of income to the dairy products producer during the time the plant is closed.
When a newspaper’s printing presses are damaged by fire the newspaper will incur significant extra expenses to continue printing the paper at another facility. The commercial property coverage form pays for the damage to the presses and building but not for those extra expenses. These are consequential or indirect losses specifically excluded under the direct damage commercial property coverage form.
Every business may find itself unable to operate for some period of time after a direct loss. There is a total or partial loss of business income or earnings when this occurs. The commercial property coverage form pays for the damage to real and personal property, including stock, but not for the interruption of operations and the consequential loss of income or extra expenses incurred to continue operations elsewhere.
The examples above may appear specialized, but almost all businesses will sustain a loss of income and added expenses in order to continue operations following a direct damage loss. Any time normal business operations are suspended, the business loses the profits it otherwise would have earned. A business will also be required to continue paying certain ongoing expenses such as taxes, interest on mortgages and other indebtedness, salaries of executives and employees under contract, maintenance expenses, rent, advertising fees, and minimum or fixed charges for services and utilities.
If a fire damages or destroys a building leased to others, the owner usually receives full reimbursement for the actual damages sustained from the commercial property coverage form. However, it loses the rental income from the building until it is restored to a tenantable condition.
The amount of loss caused by the interruption of the business is frequently much larger than the amount of direct damage to the real or personal property. A comparatively small fire can shut down a business for an extended period. In some cases, a fire that causes virtually no damage to the insured’s property creates a bottleneck that brings operations to a complete halt.
In addition to the damage or destruction of physical property and the subsequent loss of income or earnings, the business’s credit rating may be affected by an extended period of time with neither earnings nor income. Even businesses that operate with few, if any, credit requirements may be forced to borrow funds to continue operations and meet continuing expenses. Obtaining credit when a business is not operating is difficult, if not impossible.
The time element coverage forms were developed to fill these coverage gaps so that the business can remain viable throughout the downtime and can return to full operations after the building and personal property have been repaired. It is called time element because time is a major component of any loss settlement.
The business income coverage form is part of the Commercial Property Program and is the most commonly used time element form. The common policy conditions, commercial property conditions and causes of loss forms described in the Features Common To Commercial Property Forms And the Property- Insurance for Buildings and Personal Property topics apply to this coverage.
WHAT IS COVERED
The business income coverage form indemnifies the insured for the actual loss of business income during the period of restoration, as defined below. In order for coverage to apply, the interruption of business must be caused by direct physical loss or damage by a covered peril or cause of loss to covered property at the location listed on the declarations or within 100 feet of it.
Period of Restoration
The period of restoration defines when coverage applies. It begins 72 hours after the direct physical loss or damage occurs and ends on the date the property is repaired so that normal business operations can resume. Coverage applies to the loss of business income during the period of restoration and includes certain defined supplemental benefits. It also offers a number of other specific optional benefits discussed below. The 72-hour waiting period acts in a way similar to a deductible. The waiting period does not apply to any extra expense coverage.
Period of Restoration
Business income is the net profit or loss before income taxes that would have been earned or incurred, including continuing normal operating expenses, if no loss had occurred. Payroll is included but other charges and expenses that do not necessarily continue after a loss are not. It covers the loss of a landlord’s rents and also the rents a tenant must pay if a lease requires that rent payments continue even when the premises is untenantable due to a loss at the location. This measure of loss is discussed more fully later in this topic.
Coverage does not apply for loss for the entire period until the property is actually restored. It applies only for the amount of time the repairs should take. The insured may decide not to repair the damage or restore the property to the way it was before the loss. In any event, the liability of the insurance company ends when the business should resume operations if repaired with reasonable speed using materials of similar kind and quality.
The insurance company’s obligations end when the business is restored or should be restored, even if the insured needs additional time to restore its sales volume or production back to pre-loss levels.
There is no coverage for any continuing reduction in sales, loss of customers, good will, contracts, or valuable employees. This is the case even if any of these cannot be recovered, except for the limited extended period of indemnity coverage specifically provided and explained below.
The measure of loss is the estimated future earnings beginning on the date of loss and ending on the date the damaged building, machinery or equipment is restored or should be restored. While past earnings of the business are used as guidance in determining the value of the loss, it is the value of the estimated future earnings that are covered.
The period of indemnity is not limited by the coverage expiration date. If the insured peril or covered cause of loss occurs while coverage is in force, the insured can collect for the length of time needed to repair the damage, even if it goes past the expiration date.
Protection Has Its Limits
In this restaurant’s situation, the considerable cost caused by the roadwork project was like a special bomb, causing devastation to the business but having no impact on its insurance policy. Certainly, we wish to look for opportunities to serve existing and potential clients, often by expanding or adding to their coverage. However, service does have a broader meaning that includes making sure that insureds have a strong understanding of what they have purchased.
In a world of dynamic change and emerging exposures, gaps do exist and, while often new products are created to fill them, even the best insurance situations include exposures for which no coverage exists. It is important to advise those you serve of limitations too.
Here is an example of a letter that may be modified to reach out and educate clients found under Business Building Letters found in Advantage Plus.
For many years, insurance companies have tried to revise and tweak their policies in order to make them easier to understand. Regardless, insurance remains a subject with many special words and meanings. Most policies have separate definition sections that try to explain words and phrases that have special meaning. Still, the wording can be confusing, especially when you’re trying to understand things after a loss.
We at the [agency name] want to make sure that you’re comfortable with the protection you bought through us. If you are not sure about the meaning of wording you read in any of your policies, please contact us by phone, letter, or email, and we’ll take the time to clarify things. You may also find it helpful to look at the valuable information we provide at [agencywebsite.com].
The [agency name] prides itself on making sure that our clients understand their coverage. Please contact us and we’ll show you what we mean.
Reinforcing Exposures Faced By A Business
Insurance professionals are in a position of great responsibility. Taking steps to educate clients is an opportunity demonstrate your value and credibility. In most instances, we don’t seek out to deal with shortcomings of the products and services we supply. However, some of the most tangled problems encountered by agents and brokers involve losses occurring and there’s a misunderstanding over coverage.
Insurance professionals serve clients best when they use their knowledge to align customer expectations with the protection they have selected. It certainly can be a difficult task, but commercial clients are familiar with the complexity of their businesses. It is an additional and valuable service to provide complete information on the world of risk in which they operate.
Below is a narrative on various coverages and exposures faced by restaurants, which is available to logically lay out what may be addressed within an insurance program. It’s from The Commercial Risk Survey found in Advantage Plus.
Description of operations: Restaurants serve a full menu of food items which are served by a waitperson and consumed on the premises. They may serve beer, wine, or other alcoholic beverages. Others offer take-out or delivery services. A restaurant may specialize in a specific type of cuisine or may serve a general menu. Some entertain customers with contests, music, or other live entertainment, or promotions such as “happy hour” with discounts available during non-peak hours. Some have small dance floors.
Property exposures are substantial from cooking equipment, electrical wiring, refrigeration units, and heating and air conditioning systems. All wiring should be current, up to code, and well maintained. All grills and deep fat fryers must have automatic fire extinguishing protection, hoods, and filters. There should be fuel shut offs and adequate hand-held fire extinguishers. The kitchen must be kept clean and grease free to prevent the spread of fire. Filters should be changed frequently. Ammonia used in refrigeration units can explode. Spoilage exposure is very high. A small fire or a power outage of even moderate duration can cause all fresh and frozen goods to be condemned as unfit for consumption or sale due to the potential for contamination. If alcoholic beverages are served, the liquor should be stored in areas inaccessible to customers. Business income with extended time period coverage should be purchased. Losses can be minimized if there is an alternative location to continue operations and not lose customers. Returning to normal operations after a loss is difficult due to the lag time between reopening and returning to full income as regular customers may have moved to a new “favorite” restaurant.
Equipment breakdown exposures can be high as operations are dependent on refrigeration and cooking equipment.
Crime exposures are from employee dishonesty and money and securities. Criminal background checks should be conducted on any employee handling money. If the restaurant uses expensive cuts of meat or serves alcohol, theft of stock could be a problem. Cash receipts may be high. There must be consistent rules on cash drawer management and job assignments. Money should be regularly stripped from the cash drawer and irregular drops made to the bank during the day to prevent a substantial accumulation of cash. Closing time is the most vulnerable time so security procedures should be in place to prevent hold-ups. There must be a separation of duties between employees handling deposits and disbursements and reconciling bank statements.
Inland marine exposures include accounts receivables if the restaurant offers credit to customers, computers for tracking inventories and payrolls, and valuable papers and records for supplier and employee information. Duplicates of all records should be kept off-site. Cash registers, cooking equipment, and office equipment may have computer applications. There may be a bailees exposure from offering coat check services to customers or from storing entertainers’ property. Some establishments will have paintings, statues, or other fine arts on premises.
Premises liability exposures are high due to public access to the premises. Serving of alcoholic beverages can impair customers’ motor abilities and increase the likelihood of trips, slips, or falls. Servers move throughout the premises with trays of food and beverages, generating spills that can result in slips and falls. Spills should be cleaned up promptly. Temperatures of hot beverages must be limited to reduce injuries due to scalding. Lists of ingredients should be posted to prevent allergic reactions. Customers may become ill from ingesting contaminated food or beverages. Cleanliness standards must be monitored. Floor coverings must be in good condition with no frayed or worn spots on carpet and no cracks or holes in flooring. Dance floors must be clean, smooth, and free of debris. Steps and uneven floor surfaces should be prominently marked. All fire exits should be plainly visible from any part of the premises and kept unlocked from the inside during business hours. Backup lighting should be automatically activated in the event of a power outage. Parking lots and sidewalks need to be in good repair, with snow and ice removed, and generally level and free of exposure to slips and falls. Outdoor security and lighting must be consistent with the area. All employees must be instructed in proper customer handling, including how to deal with disgruntled or intoxicated customers.
Products liability exposure is due to food poisoning, contamination, and allergic reactions from food and beverages carried off premises for consumption. Monitoring the quality of food received, posting lists of ingredients, and maintaining proper storage temperature can reduce this exposure.
Liquor liability exposure can be very high in states that hold restaurants liable for injuries resulting from alcohol consumption. The type and amount of alcohol served, and the type of clientele directly impact this exposure. Failure to comply with state and federal regulations can result in the loss of a liquor permit. There must be a set procedure to check ages of anyone attempting to purchase alcohol, as well as monitoring so customers purchasing alcoholic beverages do not then give them to patrons who are underage or intoxicated. All employees who serve alcohol should be trained in recognizing signs of intoxication. A procedure should be in place to deny serving underage or intoxicated patrons. Programs that encourage designated drivers or offer free taxi service can be useful.
Automobile exposure may be limited to hired or nonownership liability exposures from employees running errands. If the restaurant offers delivery services, all drivers must have appropriate licenses and acceptable MVRs. Company vehicles should be used for all deliveries. Maintenance should be documented. If employees use their own vehicles, the vehicles should be checked for maintenance and upkeep. Because most personal auto policies do not provide coverage when the vehicle is used for commercial purposes, requiring proof of insurance will be of little assistance. If the restaurant offers valet parking, garagekeepers coverage should be purchased to cover damage to customers’ vehicles. MVRs and driving records should be obtained for any employee driving or parking customers’ vehicles. If valet parking services are contracted to another firm, the restaurant should be named as additional insured on the contractor’s policy.
Workers compensation exposures come from slips, falls, cuts, puncture wounds, burns, foreign objects in the eye, hearing impairment from noise, heavy and awkward lifting, and interactions with customers. Employees must be trained on the carrying of heavy dishes between the kitchen and the serving areas. Food and beverage handling can result in passing bacteria or viruses, resulting in illness. While smoking is prohibited in bars in many states, others still permit this. In those states, workers can incur occupational disease from the ongoing inhalation of secondhand smoke. As with all retail businesses, hold-ups are possible, so employees should be trained to respond in a prescribed manner. Cleaning workers can develop respiratory ailments or contact dermatitis from working with chemicals. The employees in many restaurants tend to be minimum wage and turnover may be high. Company incentives to encourage long-term employment are positive signs of management control.
Minimum recommended coverage:
Business Personal Property, Business Income and Extra Expense, Spoilage, Equipment Breakdown, Employee Dishonesty, Money and Securities, Computers, Valuable Papers and Records, General Liability, Employee Benefits, Umbrella, Hired and Nonownership Auto, Workers Compensation
Other coverages to consider:
Building, Earthquake, Flood, Leasehold Interest, Real Property Legal Liability, Accounts Receivables, Bailees Customers, Fine Arts, Cyber liability, Employment-related Practices, Environmental Impairment, Liquor Liability, Business Automobile Liability and Physical Damage, Garagekeepers, Stop Gap Liability