|
RISKVUE ARCHIVE | FEATURE STORIES
Business Interruption:
Coverage for Terrorist Related Losses
By Irene C. Warshauer
The recent terrorist attacks on New York City and Washington have resulted and will continue to result in massive business losses. Insurance companies have estimated that they will incur well over $100 billion dollars in losses, and that number seems to be rising.
Commercial property and business interruption policies are likely to be the hardest hit with claims arising out of the attacks. Such claims will not only be presented by businesses directly damaged in the attacks themselves, but also by businesses that were indirectly damaged. In most cases, companies that have their operations interrupted or impaired should be able to recover their resulting lost profits, rent, utilities and other ongoing expenses.
Potential Sources of Income Loss
Businesses may be impacted by the terrorist attacks in many ways. For example, those in the immediate vicinity of the World Trade Center may sustain direct property damage caused by falling steel beams or other debris, dust or windows broken from the explosions. Businesses not at ground zero, but still in the restricted-access areas may find their employees and/or customers denied access to their premises by official policy or order of civil authority. These businesses may have to be shut down and prevented from operating for a period of a week or more.
While many businesses may be able to operate at a reduced capacity from off-premises locations such as satellite offices or home computers, access to the business premises and necessary paper records may be restricted. Telephone service and Internet access can be interrupted, meetings cancelled, and income diminished while employee salaries and other expenses may continue.
Even businesses in other parts of the country have been impacted by the attacks. Business travel was at a standstill for several days due to the grounding of commercial flights. Increased security precautions and restricted flight schedules caused travel time and airline down time to increase. Businesses dependent upon travel such as convention centers, hotels, restaurants and tourist areas have had cancellations of existing and future events.
Most commercial business interruption insurance should cover most or all of these losses. But for coverage to apply, there are several prerequisites that must usually be met.
Coverage Prerequisites
The first and foremost requirement for business interruption insurance to apply is a loss of business income that results from a covered peril. In some cases, such loss must be accompanied by actual property damage. In other cases, direct damage to insured property is not required for the policy to respond.
One key question that may have to be asked and answered is this: Is a loss of business income in a remote location resulting from the bombings covered? Another question is how close must the nexus be? Court interpretations vary (as does policy language) on the issue of proximity. In one property policy that included business interruption coverage, the insurance company successfully argued that loss of income to a restaurant adjacent to a physically-damaged motel was not covered because there was no property damage to the restaurant.1 Other courts, however, have deemed coverage to apply in such situations.
A second prerequisite is that coverage for the claim must not be subject to any relevant policy exclusions, such as one which precludes coverage for loss of income absent direct damage to property or for damage arising out of terrorist acts.
Most property insurance is subject to a war risk exclusion. The exclusion typically precludes coverage “ “property damage due to war, whether or not declared, or any act or condition incident to war. War includes civil war, insurrection, rebellion or revolution.”
In some policies, the exclusion specifically includes terrorist acts. Given President Bush’s statement that the terrorist attack was an act of war, insurance companies writing policies that contain a war risk exclusion could rely on the exclusion to deny coverage for both resulting property and business interruption losses. Whether insurers will attempt to stand by the exclusion, or will ignore it out of public relations concerns remains to be seen. Depending upon the language of the terrorist-acts exclusion, policies with that exclusion may not apply.
Even if the war risk exclusion does not preclude coverage for terrorist acts, there has been significant litigation over the exclusion in connection with the hijacking of several airplanes by terrorist groups. The principal decision, Pan American World Airways, Inc. v.Aetna Cas. & Sur. Co.,2 holds that the war risk exclusion does not preclude coverage for damage caused by the hijacking of an airplane by members of a Palestinian terrorist organization.
Coverage for Similar Types of Claims
As respects business income loss resulting from interruption by civil authority, will the closing of Manhattan south of 14th Street be sufficient to trigger the policy or must a business located in the access-prohibited area incur physical property damage itself?
The case law is split as to whether actual physical damage to the premises is required or whether the loss of income as a result of the lack of access is sufficient. In the District of Columbia, for example, physical damage is required. In Michigan, however, physical damage is not necessary.3 Given the size of the World Trade Center, the entire area south of 14th Street in Manhattan may be covered as adjacent property even under the Two Caesars’ rationale.
Many business interruption policies specifically provide for insurance coverage when access is restricted by order of a civil authority. Typical policy language states:
“This policy is extended to include the actual loss As covered hereunder, during the period of time, not exceeding two consecutive weeks, when as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority.”4
The closing of lower Manhattan to all but emergency personnel should come under this provision. Note that coverage is limited to two consecutive weeks and note also that the loss must be as a result of the perils insured against. If the business interruption endorsement is attached to a property policy and there was no direct damage (such as a broken window) to covered property, business interruption coverage may not be triggered. This may be true even though access to the premises was precluded by order of civil authority.
Steps To Maximize Recovery
Several steps should be taken to maximize your chance of obtaining an insurance recovery following a business income loss.
First, read your insurance policy carefully, paying particular attention to the wording of the “property damage” definition as well as the war risk exclusion to ascertain if coverage applies. Make note of the policy’s claim reporting provisions and what documentation is or may be required to support a claim.
Then, take both still and video pictures to document any property damage. Show broken windows, cracked ceilings, fallen walls, dust, etc. Also, damage to any cable or phone lines should be documented as a lack of phone or internet service may qualify as property damage at remote locations.
Document any and all business income lost. Accounting records and a comparison of income to the same period in the prior year will often be required to support a claim. If possible, also document reduced or limited services that impacted the business operations, such as reduced utility service or failure to receive overnight deliveries, merchandise or parts needed for manufacturing.
Keep a record of ongoing or continuing expenses, such as rent, salaries paid to employees on days when they could not get to work and utilities paid while access to the premises was denied, etc. Also keep a record of any additional expenses incurred, such as the leasing of and cost of moving to a temporary location. Any reduction in expenses also should be recorded. These costs all are potentially recoverable under a business interruption policy.
Give notice of the loss to the insurer as soon as possible, even if you cannot immediately identify the full extent of the loss. While the initial notice should be as detailed as possible, the final submitted Proof of Loss will contain more specific information. Most policies require notice to the insurer “as soon as practicable.” While many states excuse late notice if the insurance company has not been prejudiced, a court might find prejudice from the inability of a claims adjuster to look at the damaged premises in a timely manner. (Prompt notice is especially important in the state of New York, where even very short delays in reporting have been held to be prejudicial to the insurer.)
Conclusion
Businesses both directly and indirectly affected by the recent terrorist attacks in New York and Washington may have insurance coverage for business income lost as a result of the disasters. The coverage provided under property and business interruption policies are the most likely sources of recovery. While such recovery is not guaranteed, there are many steps insureds can take to maximize the potential for recovery. 
Notes
1 Ramada Inn Ramogreen, Inc. v. Tavelers Indem. Co. of America, 835 F.2d 812 (11th Cir. 1988).
2 Pan American World Airways, Inc. v.Aetna Cas. & Sur. Co., 505nF.2d 989 (2nd Cir. 1974).
3 Compare Southlanes Bowl, Inc. v. Lumbermen’s Mutual Ins. Co., 46 Mich. App. 758, 208 N.W.2d 569 (Ct. App. 1973) (“Southlanes”) no property damage required] with Two Caesars Corporation v. Jefferson Ins. Co., 280 A.2d 305 (D.C. Ct. of App. 1971) (“Two Caesars”) [no coverage without physical damage to the policyholder’s or adjacent property].
4 Allen Park Theatre Co., Inc. v. Michigan Millers Mut. Ins. Co., 48 Mich. App. 199,204, 210 N.W.2d 402, 404 (1973) (“Allen Park”).
ABOUT THE AUTHOR
Irene C. Warshauer, Esq. is an attorney who represents policyholders in insurance coverage disputes. Her practice involves many areas of insurance coverage, including business interruption, first party property, CGL, directors and officers liability and indoor air quality. She is Of Counsel to Fried & Epstein, LLP in New York. She can be reached by e-mail at iwarshauer@fried-epstein.com or by phone at 212-268-7111.
riskVue | The webzine for risk management professionals
December 2001
|
