How Is Business Interruption Insurance Coverage Triggered?
Whether you are the insured, the insurer, the adjuster or a consultant, business interruption insurance is one of the most complicated coverages to write and interpret. Despite the fact business interruption insurance dates back more than two centuries, it is typically one of the most misunderstood of coverages.
Business interruption insurance compensates a business for a temporary interruption of its earnings stream. Such an interruption can result from natural or manmade disasters. This type of insurance can also cover ordinary payroll costs as well as costs for expediting and other extra expenses the insured incurs during the recovery of its operations.
Standard insuring agreements typically require three elements be present to trigger coverage:
- A covered cause of loss, as described in the policy declarations, must be behind damage or loss of property;
- Necessary suspension of operations during period of restoration; and
- Actual loss of business income.
Courts have consistently upheld the requirement for actual physical damage and that a mere slowdown of income because of uninsured causes is not sufficient to trigger coverage. Suspension of operations is typically defined as the slowdown or cessation of business activities, or that a part or all of the described premises is rendered untenantable if coverage for Business Income “Rental Value” applies.
Regardless of whether the term suspension is defined in the policy or not, it is normally time-limited by the period of restoration, which is typically defined as the period which begins on the date the direct physical damage occurs and ends on the earlier of:
- Date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
- Date when business resumes at a new permanent location.
ISO forms require that property must be repaired and operations restored “with reasonable speed.” Generally, delays caused by the insurer or general conditions typically do not adversely affect recovery. Non-ISO policies usually include a similar time boundary, such as a requirement to rebuild with “due diligence and dispatch.”
The third requirement is for an actual loss of business income, since the ISO form is written on an actual loss sustained basis. Conversely, commercial property forms use definite terms such as, we will “pay the value of lost or damaged property” or we will “pay the cost of repairing or replacing” the damaged property.
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