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BUSINESS INTERRUPTION COVERAGE A PRIMER FOR BEFORE AND AFTER THE STORM Craig Russell Blackman Steven Burgess Davis1 Business interruption coverage has long been an important component of most commercial coverage programs. This specialized form of first-party insurance is designed to cover lost income arising from the inability to continue the normal operation and functions of a given business. To trigger business interruption coverage, a claimed loss (or "time-element" loss) generally must result directly from a specified peril which causes damage to a specified property at a particular location. In the wake of September 11, 2001 and Hurricanes Katrina and Rita in 2005, and as a consequence of increasing interdependence among businesses in our global economy, the numbers and types of claims for time-element losses have increased. This rise in claim number and variety has resulted in a growing number of court decisions, expanding and contracting the breadth of the coverage in various jurisdictions. Of course, business interruption coverage has limitations, and understanding those limitations will help risk managers or claims counsel manage losses and expectations. This primer is designed to provide an overview of what the coverage is ­ and what it is not. It will also provide an overview of some recent cases addressing the parameters of the coverage. I BUSINESS INTERRUPTION COVERAGE ­ IN GENERAL

Business interruption (BI) insurance is a group of coverages intended to compensate a company for income it would have earned had a covered loss event not taken place. The coverage is provided under most package policies for businesses, or as an endorsement to a property insurance policy. The types of loss commonly covered by BI insurance include: Business Income. This replaces income that would otherwise have been earned by the business had no loss taken place. Operating expenses, like electricity and phone, as well as employee salaries, may be covered; Extra Expense. This pays for necessary expenses incurred during the period of restoration for the property out of which the business interruption arises; Contingent Business Interruption. This is an extension of coverage designed to cover loss of income due to property loss at a key supplier or customer location; and

1

This composite appeared in the Spring 2006 PBI Insurance Institute Course Materials. The authors would like to thank their colleagues at Stradley Ronon Stevens & Young, LLP, and especially Andrew DeFalco and Craig Schroeder, for their invaluable assistance in researching and writing this article.

Civil Authority. This provides coverage for loss of business income and extra expense sustained as a result of governmental denial of access to the insured's property. As stated, the purpose of BI insurance is to indemnify the insured against losses arising from the inability to continue the normal operation and functions of the business or industry insured. William H. Danne, Jr., Annotation, Business Interruption Insurance, 37 A.L.R. 5th 41 (2005).2 Generally, the typical policy requires that the loss result: (1) directly from (2) a specified peril, which must cause damage or destruction to (3) specified property at (4) a particular location. Further, the interruption must be (5) reasonably limited in duration, and must (6) occur within a particular time frame. As goes almost without saying, virtually all policies require that the interruption of business be (7) necessary. David Polin, Recovery Under Business Interruption Insurance, 41 Am. Jur. 3d Proof of Facts 319, at § 3 (2005). BI insurance's limited purpose is to protect the earnings which the insured entity would have enjoyed had the event insured against not taken place. Id. at 45. It is not designed to place the insured in a better position than it would have been in had no BI occurred.3 Id. Under a BI policy, the insurer must provide coverage for the duration of the reasonable period of time needed for the insured to re-enter the business,4 plus any delay attributable to the insurer's failure to perform its duties under the policy. 5 BI policies do not provide coverage for the actual loss of or damage to physical property. Quality Molding Co. v. American Nat. Fire Ins. Co., 272 F.2d 779 (7th Cir. (Ill.) 1959); see also, Danne, supra, at 38 (noting that it has consistently been held that BI insurance does not cover a loss for which the insured has been reimbursed through property insurance).

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BI insurance is generally equated with the older concept of "use and occupancy" insurance, but some courts have drawn a distinction between the two types of coverage where a "valued" policy is involved. See Omaha Paper Stock Co. v. Harbor Ins. Co., 596 F.2d 283 (8th Cir. 1979) (applying Nebraska law).

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The hazard or peril insured against in a BI policy is a matter of contract, and thus may be whatever the parties agree upon, unless prohibited by law. Id. at 39. BI policies often involve fire loss or damage, explosions, accidental damage to equipment and machinery, riot and civil commotion, power loss, order of civil authority, and the elements. 43 Am. Jur. 2d Insurance § 519 (2005). The terms and conditions of the particular policy will ordinarily determine the insurer's liability with respect to both the peril insured against and the amount and computation of any loss. Id. at 40.

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"Interruption of business" will generally not include a work slowdown. Quality Oilfield Products, Inc. v. Michigan Mut. Ins. Co., 971 S.W.2d 635 (Tex. App. 1998).

5

Coverage will not include any period of delay to restoration caused by the insured's lack of due diligence or poor financial condition. Hampton Foods, Inc. v. Aetna Cas. & Sur. Co., 843 F.2d 1140 (8th Cir. (Mo.) 1998).

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II.

PROVING ELEMENTS OF A BUSINESS INTERRUPTION LOSS

Compensable claims under BI policies will typically require proof on several elements of coverage. The insured usually bears the burden of proof on each of these elements. A. Triggering Events: Physical Damage Must Cause The Interruption

As a general rule, in order to trigger BI coverage under virtually all policy forms, there must be some actual damage to or loss of covered physical property. The nature and extent of physical damage necessary to trigger BI coverage might be an area of controversy in a claim setting. 6 Also, depending upon the particular policy language, the courts generally limit BI coverage to losses resulting from damage or destruction to the particular location listed or described in the policy. Polin, supra, at § 6. This might include contingent BI coverage for physical damage occurring at property other than the insured's, such as an insured's supplier and/or customer location. Of course, whether the physical damage has occurred at the appropriate location to trigger coverage is sometimes debated.7 B. Extent of "Interruption"

Although some policies may extend coverage for partial interruptions, most policies require an actual "suspension of operations." There generally is no recovery under a BI policy where a covered peril merely causes the volume of the insured's business to diminish, rather than bringing about an actual business suspension.8 Moreover, the specified physical loss must be causally tied to the suspension of operations. 9 For example, the BI insurer is not liable for losses actually attributable to lack of demand for the insured's product, increased production costs that would not have been incurred absent the occurrence of the risk insured against, or unfavorable business conditions.

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For example, in Ward General Ins. Services v. Employers Fire Ins. Co., 114 Cal. App.4th 548, 7 Cal. Rptr.3d 844 (Cal. App. 4th Dist., Dec. 17, 2003), the Court held that no BI coverage existed arising out of the loss of data and computer programs because it was not a physical loss.

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For example, one court found a BI policy to provide coverage based on the mutual dependency for a BI arising out of a non-listed property. See Studley Box & Lumber Co. v. Natonal Fire Ins. Co., 85 N.H. 96, 154 A. 337 (N.H. 1931) (holding that designation of particular structures in the policy did not necessarily exclude other structures from coverage). But cf. Ramada Inn Ramogreen, Inc. v Travelers Indem. Co. of America, 835 F.2d 812 (11th Cir. (Fla.) 1988) (holding that even though the hotel and the restaurant were mutually dependent, a decrease in hotel occupancy due to loss of a restaurant is not a loss covered under the hotel BI policy).

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Although it has been acknowledged that if the insured, being under an affirmative duty to mitigate loss, resumes operations at a reduced level at a different location following the occurrence of damage or destruction at a covered location by a peril insured against, the diminution in business thereby sustained constitutes a recoverable BI loss. Danne, supra, at 39.

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See, e.g., Harry's Cadillac-Pontiac-GMC Truck Co., Inc. v. Motors Ins. Co., 126 N.C. App. 698, 486 S.E.2d 249 (N.C. Ct. App. 1997) (when a snowstorm caused a car dealership to be inaccessible for a week, mere fact that there was also some roof damage did not trigger coverage, inasmuch as the court found that it was the inability to get to the dealership that caused the interruption ­ not the roof damage).

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C.

Timing Provisions ­ "Period of Restoration"

An insured may recover only for losses sustained during a specified time. The usual policy provision that limits the period of time for which an insured can recover is called the "period of restoration." There may also be an extended period of indemnity specified. Under most policy forms, the period of restoration begins when the physical loss occurs and ends on the earlier of (a) "the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality"; or (b) "the date when business is resumed at a new permanent location." Thus, recovery is usually 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 of actual duration of the restoration period is a frequent area of dispute. D. Calculating Loss Sustained

BI insurance policies generally provide that the insurer is liable during the period of business interruption, usually, however, only to the extent that business income would have been "earned" if the contingency causing the interruption had not occurred.10 Calculating lost income is inherently speculative, particularly when components of loss are not expressly "valued" in the policy ­ or the policy is "open."11 Most policies expressly provide for consideration of the past history of the business and its profits had no loss incurred. Some include, while other exclude, ordinary payroll. Regardless of the calculation particulars specified in the policy, a company that has been losing money cannot improve its position with BI insurance. III. EMERGING BUSINESS INTERRUPTION COVERAGE ISSUES

There are a number of BI issues that are the subject of policy language reforms and ongoing litigation. Some of the issues arising in connection with the September 11, 2001 terrorist attacks or the 2005 hurricane losses include: * 9/11: When does coverage for BI end where the buildings are not rebuilt? What if some but not all are rebuilt, with a consequent reduction in customer base?

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For example, the standard ISO form defines "Business Income" as follows: (i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred, but not including any Net Income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses; and (ii) Continuing normal operating expenses incurred, including payroll expenses."

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BI coverage is generally either "valued" or "open." When the policy is "valued," the value of the loss is agreed upon in advance and fixed in the policy. Generally, in order to determine the limit on losses under a "valued" policy, parties will agree on a predetermined pay scale that takes into account the profits, losses and real value of the property before the policy is invoked. In an "open" policy, the amount of any loss sustained is not agreed upon but must be determined by competent evidence. The total is then limited to the sum or sums specified in the policy. When the BI insurance policy is "open," the burden is on the insured to prove the actual amount of the loss sustained. On the other hand, proving the losses in a "valued" policy is usually a non-issue, because the value of loss is predetermined.

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* 2005 Hurricanes: New Orleans floods and is closed by Order after Katrina, but then refloods a month later after Rita. One covered occurrence or two? * 2005 Hurricanes: City "reopens", but most of population still disbursed: when does period of restoration end? * 2005 Hurricanes: Insured premises lightly damaged by storm, but heavily damaged by emergency use (or how about looting) in aftermath of storm: covered loss? * 2005 Hurricanes: Insured premises not at all damaged by storm, but closed by Order. Covered loss? Or, not harmed by storm, but heavily damaged in aftermath due to loss of utilities. Covered loss?

IV.

RECENT BUSINESS INTERRUPTION CASES

· Duane Reade Inc. v. St. Paul Fire and Marine Insurance Co., 411 F.3d 384 (2nd Cir. (N.Y.) 2005): Insured sought a declaratory judgment to recover BI losses after the store's destruction on September 11. At issue in the appeal was whether the Restoration Period12 of the policy should be extended to when the store resumed operations that were "functionally equivalent" to its pre-9/11 operations, and whether the length of the Restoration Period should be tied to rebuilding a store at the specific WTC site where the former store was located. The Restoration Period clause established that BI coverage would last only for the time it would take the insured exercising `"due diligence and dispatch to rebuild, repair, or replace such property that has been destroyed or damaged."' The appeals court held that the district court's use of the term "functionally equivalent" relating to the Restoration Period effectively, and impermissibly, rewrote the policy because it created an irreconcilable conflict between the Restoration Period clause and the Extended Recovery Period ("ERP") clause,13 which would be rendered superfluous.14 The court further held that the district court had erred in tying the Restoration

12

This clause provides that recovery of BI losses "`shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace such property that has been destroyed or damaged.'" Id.

13

The ERP stated that: This policy is extended to cover the Actual Loss Sustained by [Duane Reade] resulting from interruption of business for such additional length of time as would be required with the exercise of due diligence and dispatch to restore [Duane Reade]'s business to the condition that would have existed had no loss occurred, commencing with the [later] of the following dates: a) the date on which liability of [St. Paul] of loss resulting from interruption of business would terminate if the [Extended Recovery Period] clause had not been attached to this policy or b) the date on which repair, replacement, or rebuilding of such part of the property as has been damaged is actually replaced, but in no event for more than twelve months from said later commencement date.

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The conflict arose because if the insured achieved "functionally equivalent" operations, the Restoration Period would terminate, but the ERP would not be triggered because the insured would have already met the criteria for terminating the coverage. Further, the court noted that if the insured required more than twelve months to achieve "functionally equivalent" operations, it would still continue to receive BI coverage after the ERP coverage expired.

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Period to the specific site of DR's former WTC store because the policy issued was a general one covering all 200 DR stores and did not reference the WTC site specifically.15 The court reasoned that: It is wholly unreasonable to think that the period of restoration should be tied to the rebuilding of real property over which neither the insured nor the insurer had any control, instead of tying it to a process that the plaintiff controlled: the acquisition of replacement office space and the installation of the plaintiff's personal property in that space. (quoting Streamline Capital, L.L.C. v. Hartford Cas. Ins. Co., 2003 WL 22004888 (S.D.N.Y. Aug. 25, 2003)). The court also held that the site-specific losses DR sought under the BI coverage were addressed in the policy's "Leasehold Interest" provision16 because this provision entitled DR to reimbursement for the loss of the WTC site's actual rental value less the rents and expenses DR would have had to pay up until the time the lease would have expired on its own. · United Airlines, Inc. v. Insurance Co. of the State of Pennsylvania, 385 F.Supp.2d 343 (S.D.N.Y. 2005), aff'd, 439 F.3d 128 (2nd Cir. 2006): UAL alleged that it was entitled to BI coverage for losses sustained as a result of the September 11 attacks. In contention was whether the policy required "physical" damages resulting in work stoppage before recovery. The court found the policy was unambiguous in the context of other policy clauses that similarly required actual "physical" harm. The court also held that UAL's contention that an accumulation of ash at the gates of Reagan Airport triggered $1.2 billion in damages was untenable because the amount of recovery sought bore no relation to actual damages. Moreover, the court noted that nothing in the record indicated that the UAL gates needed to be rebuilt, repaired, or replaced, which were policy requirements for coverage. Lastly, the court found that UAL's claim failed because the Pentagon (the actual scene of the accident) and Reagan Airport (where UAL had its planes) were not adjacent to each other,17 which was another requirement for recovery. · SR Intern. Business Ins. Co. v. World Trade Center Properties, LLC, 2005 WL 827074 (S.D.N.Y. Feb. 15, 2005): Insured sought to recover actual losses of the rental value of its space at the World Trade Center ("WTC") from the insurers, World Trade Center Properties, LLC

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The court referenced many cases where BI clauses provided coverage to specific subject property and that the properties covered were specifically referenced in the policy by address. By contrast, the court noted that the WTC was never specifically referenced in the present policy, and that only DR's headquarters was mentioned by address.

16

This policy provision provided coverage for "The ACTUAL LOSS SUSTAINED by [Duane Reade] resulting from necessary untenantability due to the cancellation of a lease by any party other than [Duane Reade] . . . when such untenantability results from direct physical loss or damage to or destruction of leased premises, by the perils insured against."

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As evidence for the conclusion that the Pentagon and Airport were not adjacent, the court noted that the Pentagon and Reagan Airport were at least 3.4 miles from each other and were separated by several intervening structures and properties.

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("WTCP"). The court held that a theoretical, not an actual, restoration period18 should be employed to determine the losses due to SR. Id. at 4-6. The court reasoned that the restoration period is theoretical because the policy never mentions the term "actual" in defining the restoration period. Id. at *6. Second, the court found that SR's cited cases had little precedential value, as they were decades-old, and were also factually distinguishable from the present case. Id. at *6. The court held that "the theoretical restoration period serves as the outer limit for which compensation may be paid as to a property, regardless of the actual replacement time and the stage at which the issue is presented to the court."19 Id. at *8. In conclusion, the court stated that it would be impractical and against prior cases analyzing restoration periods to wait the many years it would take to rebuild the WTC to determine a recovery allowance. Id. at *9. · Zurich American Ins. Co. v ABM Industries, Inc., 397 F.3d 158, 161 (2nd Cir. (N.Y.) 2005): Insurer sought a declaration as to the extent of coverage for losses that ABM, a janitorial contractor at the WTC, suffered as a result of the September 11 attacks. The BI policy in question defined the scope of coverage as `"[t]he interest of the Insured in all real and personal property including but not limited to property owned, controlled, used, leased or intended for use by the Insured."' Id. at 165. In granting summary judgment in favor of ABM for coverage under the policy, the court found that ABM did not need to own a property interest to recover under the policy. Id. at 166. The court concluded that ABM could recover because it "used" the WTC space it serviced and that the space "engender[ed] productivity." Id. at 166. The court further reasoned that the policy covered, and ABM maintained, an "indirect economic interest" in the WTC that allowed for recovery. Id. at 168. · New York Career Institute v. Hanover Insurance Co., 791 N.Y.S.2d 338, 6 Misc. 3d 734 (N.Y. Sup., 2005): New York Career Institute ("NYCI"), a paralegal and court reporter school, brought suit to recover loss of business income following the September 11 attacks. Hanover had issued NYCI an insurance policy that included BI coverage. NYCI's New York office was damaged in the September 11 bombings and was forced to close operations, amounting in an estimated loss of over $1.5 million. Although Hanover initially paid NYCI a partial sum under the policy, Hanover refused additional payment because the two companies disputed the total amount actually due under the policy. Id. at 339-40. The policy contained "coinsurance," which is a limitation on the liability of the insurance company. Id. at 342. The policy also contained a "civil authority" clause, which "refers to the situation when a civil authority prohibits access to the insured's premises resulting in a total loss of business income." Id. The crux of the argument was whether the coinsurance clause should be applied to the civil authority clause, thereby limiting the amount of money Hanover owed to NYCI due to the forced closing of NYCI's facility. Id. The court held that the policy language was clear and unambiguous because it applied coinsurance to "any" damages claim, thereby including civil authority loss. Id. As such, the court granted Hanover's motion for summary judgment for this issue, and returned the

18

The period of restoration is defined in the policy as beginning on "the date and time of direct physical loss or damage" and ending on "[t]he date when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality." Id. at *3.

19

The court also noted that, "[w]here an insured party rebuilds with `reasonable speed' and `similar quality,' as required by the policy here, the actual period should coincide with the theoretical period." Id. at *8.

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case for appraisal of the actual losses owed after the application of the coinsurance clause. Id. at 343. · City of Chicago v. Factory Mut. Ins. Co., 2004 WL 549447 (N.D.Ill. Mar. 18, 2004): The City of Chicago claimed that the FAA flying ban, which lasted for several days after the September 11 attacks, interrupted its business and therefore required compensation under the BI policy issued by Factory Mutual. Id. at *3. The court held that Chicago's claim failed because the indirect damage they were claiming was specifically excluded from coverage under the policy provisions. Id. at *3. The court also noted that Chicago's claim failed because the policy's territorial limitation requiring that the physical damage occur on or within 1,000 feet of the insured property was not met. Id. Finally, the court held that the "Protection and Preservation of Property" coverage did not apply because the FAA stoppage was not invoked to protect the insured airfields, but other terrorist targets like the Pentagon and the WTC. Id. at *5. · Admiral Indem. Co. v. Bouley Intern. Holding, LLC, 2003 WL 22682273 (S.D.N.Y. Nov. 13, 2003): The September 11, 2001, terrorist attacks had allegedly forced two of Bouley's restaurants to close. Nevertheless, in early October, 2001, Bouley entered into a lucrative contract with the American Red Cross to feed its workers. Id. at *2. Although Bouley claimed it had lost business because of the September 11 events and was thus entitled to money under its BI agreement, the court held that Bouley did not incur any "business loss" or "extended business loss."20 Id. at *4. The court reasoned that because Bouley claimed damages of only over $1 million, but had received over $4 million from their contract with the American Red Cross during its supposed down-time, there was no actual loss to recover. Id. at *3. · US Airways, Inc. v. Commonwealth Ins. Co., 2004 WL 1637139 (Va. Cir. Ct. July 23, 2004): US Airways alleged a breach of a BI insurance contract21 caused by the FAA grounding of airplanes in the wake of September 11. The court found that that FAA's civil authority order to ground planes invoked the BI policy, because the orders were issued as a direct result of the "peril" insured against22 and the order denied access to US Airways' planes. Id. at *5. · Continental Information Systems Corp. v. Federal Ins. Co., 2003 WL 145561 (S.D.N.Y. Jan. 17, 2003): Continental developed and provided software to securities companies, and with most of its business in New York, it had moved into an office in the WTC and had staffed another

20

The court also held that the "period of restoration," which was the period that the insurance would pay for while operations were down, ended on September 29, 2001, because Bouley Bakery, although it remained closed, shared its kitchen with the Danube restaurant, which reopened on September 28, 2001. Id. at *3.

21

Business interruption is defined in the policy as: "Loss resulting from necessary interruption of business conducted by the Insured and caused by loss, damage, or destruction to real or personal property by any of the perils covered herein during the term of this policy . . . ." Id. at *2.

22

The "Peril insured against" in the policy is defined as "all risk of direct physical loss of or damage to property described herein including general average, salvage, and all other charges on shipments covered hereunder . . . ." Id. at *5. "General average" is broadly defined as "the amount lost to the owner of the ship, cargo, freight, or other interest from any voluntary sacrifice made, or any extraordinary expense incurred, by one interest for the benefit of all." Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 183:114 (3d ed. 1998). "Salvage" means "a state of damage or disrepair such that the property is rendered unsuitable for original use, in absence of major alteration and repair, and is usable only for scrap or secondary purpose." Id. at § 175:81.

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office in downtown Manhattan to service these clients. Id. As a result of the terrorist attacks of September 11, Continental's WTC office was destroyed and its other office was temporarily shut down by civil authority. Id. at *2. The attacks also caused Continental to lose some of its contracts to build software systems, as many companies in the WTC were similarly shut down. Id. Continental notified Federal of these events and its desire to be paid under its BI policy. Id. Federal refused to pay. Id. Subsequently, Continental filed suit alleging that Federal had acted in bad faith in unreasonably denying payment of the insurance and that Federal's delay in payment caused further damages to Continental that were foreseeable at the time of the original contract. Id. The District Court, in granting the insurer's motion to dismiss, held that New York law did not recognize a claim for a bad faith denial of insurance and further that Continental had not sufficiently pled facts showing that their consequential damages were foreseeable. Id. · Globecon Group v. Hartford Fire Ins. Co., 434 F.3d 165 (2nd Cir. (N.Y.) 2006): Plaintiff Old Globecon was a financial services company that had BI insurance through Hartford. The policy stated that the "rights and duties of [the insured] under the policy may not be transferred without [Hartford's] written consent." After Old Globecon's office was damaged on September 11, 2001, Hartford established a claim file for Old Globecon's BI losses. Thereafter, Old Globecon filed for bankruptcy, and a new company, Starweaver, purchased Old Globecon's assets. Hartford did not consent. Thereafter, Hartford rejected Old Globecon's claim under the "no transfer" clause of the policy. The Second Circuit found that while an assignee could not generally present its own BI claim post transfer, an assignee could usually present a claim for property damage or lost rental value, damages that had "accrued" at the time of loss, notwithstanding a no-transfer clause. The Second Circuit remanded the case to the trial court, however, because it found that there was an issue of fact as to whether Old Globecon had properly "presented" its claim, and whether such a duty to present the claim was transferable. · Forestview The Beautiful, Inc. v. All Nation Ins. Co., 704 N.W.2d 773 (Minn.App. 2005): The insured resort, Forestview, was forced to close 4 of its 16 cabins due to a storm. Because the ordinary meaning of "suspension" did not include a partial suspension of the resort's business activities, the court granted All Nation's motion for partial summary judgment, and held that the resort was not entitled to BI coverage. The court found that the phrase "suspension of operations" in a business income policy required a "complete stoppage or cessation of business activities in order to trigger [business income] coverage," rather than a partial suspension. · CII Carbon, LLC v. National Union Fire Ins. Co. of Louisiana, Inc., 918 So.2d 1060 (La.App.4 Cir. 2005): The insured, a coke producer, sold steam to an adjoining plant owned by Kaiser, using a boiler. The boiler was powered by a powerhouse owned by Kaiser. The insured subleased certain equipment that was utilized in the powerhouse. After a massive explosion in Kaiser's plant, the subleased equipment in the powerhouse was damaged. Although the subleased equipment was repaired as of November 1999, the Kaiser plant was not able to resume operations until December 2000. CII argued that it should be entitled to BI coverage for as long as Kaiser was out of operation, because it was unable to sell its steam to Kaiser. National Union contended that the "repair" period for BI coverage consisted of only the time it took to repair the subleased equipment in the powerhouse. The court agreed with National Union. Noting that the policy provided coverage until "such part of the property . . . as has been damaged or destroyed is repaired," and that the evidence adduced indicated that had the Kaiser plant been operational

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in November 1999, the subleased equipment would have functioned properly, the court found that "such part" of the subleased equipment that had been damaged as a result of the explosion was repaired at that time. Thus, CII was only entitled to coverage until November 1999. · Mafcote, Inc. v. Continental Cas. Ins. Co., 144 Fed.Appx. 449, 2005 WL 1285637 (6th Cir. (Ohio) May 17, 2005): The plaintiff was a manufacturer of paper products. A subsidiary of Mafcote, Royal, purchased raw materials from a different subsidiary, Wabash. After Wabash's boiler failed, interrupting its production of paper, Wabash was forced to prioritize orders from outside customers, resulting in a loss to Royal. Wabash was fully indemnified for its loss under its CGL policy. The court found that the BI policy, which named Royal, Wabash and Mafcote as insureds, insured each subsidiary individually, not collectively. Therefore, with respect to BI insurance, Mafcote could not recover because it suffered no loss ­ Royal had suffered the loss. Wabash could not recover because it suffered a casualty loss for which it was fully compensated. Finally, Royal could not recover because its BI loss was not caused by an accident at one of its locations. · Lava Trading, Inc. v. Hartford Fire Ins. Co., 365 F.Supp.2d 434 (S.D.N.Y. 2005): The insured, Lava, sold computer programs. After the September 11 attacks, Lava moved into a back up facility. This office became operational on October 11, 2001. Lava's BI policy covered the "actual loss of Business Income you sustain due to the necessary suspension of your operations during the period of restoration." The suspension must have been "caused by the direct physical loss of or damage to property at the described premises." Lava contended that the phrase "property at the described premises" related to the entire WTC building, such that the "period of restoration" was the maximum twelve months. The court disagreed, and found that the "property at the described premises" meant the damaged business personal property at the insured's location. Therefore, citing Streamline Capital, LLC v. Hartford Cas. Ins. Co., 2003 WL 22004888 (S.D.N.Y. Aug. 25, 2003), the court found that the "period of restoration" ends when the property necessary to resume operations should have been repaired, rebuilt or replaced with reasonable speed and similar quality, and not when operations have been actually resumed. Lava, 365 F.Supp.2d at 442. In so holding, the court rejected Lava's alternative argument that the "period of restoration" ends when the policyholder is able to "resume functionally equivalent operations ­ whether at its former location or elsewhere."23 · National Union Fire Ins. Co. of Pittsburgh, Pa v. Texpak Group, N.V., 906 So.2d 300 (Fl.App.3rd Dist. 2005): After an upgrade to the insured's paper manufacturing facility, a design defect was discovered resulting in BI losses. Because defective design or specifications were not perils covered by the policy, economic damage or loss resulting from those causes were excluded from coverage as well.

23

The court also harmonized its holding with Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F.Supp.2d 235 (S.D.N.Y. 2003). In Duane Reade, the court found that the term "property" in the applicable period of restoration provision referred to the specific premises Duane Reade operated at its WTC store. Finding that the store's business was heavily dependant on foot traffic from potential customers, the court found that that location was entitled to the maximum BI coverage. However, the Duane Reade court rejected as "untenable" the very argument Lava attempted to make: that the period of restoration must be "coterminous with the time actually required to rebuild the entire complex that will replace the WTC."

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· Finger Furniture Co., Inc. v. Commonwealth Ins. Co., 404 F.3d 312 (5th Cir. (Tex.) 2005): The insured sold furniture. After Tropical Storm Allison hit the area, the store became flooded, the insured's employees could not access the store, and the store was closed for several days. The following weekend, sales soared after the store slashed its prices and customers could purchase discounted furniture. After the plaintiff sought BI coverage for the days it was closed, Commonwealth contended that any coverage should be offset by the huge profit the insured experienced the next weekend. The court rejected this argument, finding that the policy required only consideration of the sales figures before the date of the loss and the probable sales figures had the loss not occurred. · Pentair, Inc. v. American Guarantee and Liability Ins. Co., 400 F.3d 613 (8th Cir. (Minn.) 2005): The insured relied upon products supplied to its subsidiary by two Tiawanese factories. After an earthquake struck Taiwan, the Taiwanese factories became disabled and could not manufacture the products to sell to Pentair's subsidiary. Pentair was therefore forced to ship products at an additional cost of over $600,000. Pentair contended that it was entitled to contingent BI coverage because the Taiwanese suppliers' inability to function constituted direct physical loss or damage. The court disagreed, and found that the suppliers' inability to function was not "direct physical loss or damage" within the meaning of the policy, and therefore, the extra expenses were not covered. The court also found that a provision in the policy insuring against loss resulting from damage to power stations furnishing electricity to described premises did not cover the additional costs, because the Taiwanese suppliers' factories were not "described premises." · The Philadelphia Parking Authority v. Federal Ins. Co., 385 F.Supp.2d 280 (S.D.N.Y. 2005): The court found that an airport shutdown caused by the September 11 attacks, which caused a loss of business to a parking facility at a municipal airport, was not covered by the business income portion of the insured's policy because there was no "direct physical loss or damage" to the insured facility. The court explained that for BI insurance to apply, a "covered cause of loss must result in some direct physical loss or damage, which in turn must interrupt the insured's business operations." In this case, however, it was only the interruption of the business that caused economic damage. · Southern Hospitality, Inc. v. Zurich American Ins. Co., 393 F.3d 1137 (10th Cir. (Okla.) 2004): The insured's policy provided that it would pay for loss caused by action of civil authority that prohibits access to the described premises due to direct physical loss or damage to property. The insured contended that it was entitled to coverage under this provision because the FAA order preventing air travel also prevented customers from coming to its hotels by air. The court rejected this argument, agreeing with Zurich that the FAA order prevented air travel, but did not prohibit access to the hotels. The court explained: The FAA's order stopped airplanes from flying; it did not close hotels. Considering the policy as a whole, we agree with the district court's conclusion that the policy was intended to cover losses from an order directly affecting the hotels, not one tangentially affecting them as here. As we see it, the policy requires a direct nexus between the civil authority order and the suspension of the insured's business. That nexus is missing here. We hold that the civil authority

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provision does not apply because the FAA's order grounding flights did not itself prevent, bar, or hinder access to Southern Hospitality's hotels in a manner contemplated by the policies. Id. at 1141. · PMA Capital Ins. Co. v. US Airways, Inc., 626 S.E.2d 369 (Va. 2006): The Supreme Court of Virginia reversed a lower court finding in favor the insured and found that payments the airline received from the federal government pursuant to the Stabilization Act following the terrorist attacks of September 11, 2001, were "recoveries" within the meaning of the BI policy provision that reduced losses by all "salvages, recoveries and payments received prior to the loss settlement."

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