Business Interruption

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Many commercial property insurance policies require that policyholders submit a Sworn Statement in a Proof of Loss (also referred to as “Proof of Loss”) in order to receive benefits under the policy. A Proof of Loss provides the insurer with specific information about the incident giving rise to the claim, such as the cause, the nature of any damage sustained, and the financial impact to the business, if any. In the event a policyholder suffers a financial loss as a result of an insured event, it is essential that the policyholder understands how to calculate business income losses covered under its policy so it can attest to that amount in the Proof of Loss. Ultimately, the specific language in the policy will dictate the policyholder’s approach for calculating business income losses, but there are two general approaches typically used by insurance industry experts.

Top-Down or Gross Receipts Method

The first approach is referred to as the “Top-Down or Gross Receipts Method”.  Under this approach, the policyholder must (1) calculate the lost sales resulting from covered property damage and then (2) subtract expenses that were saved as a result of not achieving those sales.          

(1)        Projected Sales – Actual Sales = Lost Sales

(2)        Lost Sales – Saved Expenses = Business Income Losses

  • Projected Sales

“Projected Sales” (also referred to as “but for revenue”) is the revenue the policyholder would have earned between the date covered property damage forced the policyholder to suspend its operations and the date when the policyholder resumed, or reasonably could have resumed, normal operations (the “Period of Restoration”) if the insured event had not occurred. To develop a foundation for Projected Sales, the policyholder may consider:

(a) the history of sales in the years leading up to the incident;

(b) the pre-loss average monthly sales achieved in those years;

(c) actual purchase orders and/or contracts that could not be fulfilled/satisfied due to the covered event;

(d) the rate of inflation; and

(e) any other factors that could influence the expected sales volume or price offered for impacted products 

These other factors may include seasonality, growth, industry trends, and other outside factors (e.g., political changes, changes in industry regulations, competition, economic forecasts and conditions, etc.).Continue Reading Calculating business income losses for a business interruption claim

Recently, a California federal court issued a favorable decision for policyholders seeking coverage for losses arising from COVID-19 who paid significant premiums to purchase substantial coverage limits including “coverage for business interruption losses from a virus.”  Sunstone Hotel Investors, Inc. v. Endurance Am. Spec. Ins. Co., Case No. SACV 20-02185 (C.D. Cal., June 15, 2022).

The facts

In Sunstone Hotel Investors, Inc., the Boston Marriott Long Wharf (the “Marriott”) hosted a three-day conference in February 2020.  Following the event, the Boston Public Health Department informed the hotel that three attendees tested positive for COVID-19.  Sunstone, the operator of the Marriott, timely filed an initial notice of loss with Endurance under its environmental impairment liability policy for the losses stemming from the presence of COVID-19.

In exchange for the placement of the policy, Sunstone paid a significant premium for an aggregate maximum of $40 million limit of insurance to protect itself against all kinds of events, including $25 million for “business interruption losses from a virus.”

After receiving the notice, Endurance denied the claim in full.  Following the notice but prior to denial, the Boston public health authorities informed the Marriott that the City would force it to quarantine and close immediately if the hotel failed to suspend its operations.  The Marriott thereafter suspended its operations for a period of 14 days.  Prior to the hotel’s reopening date, the State of Massachusetts issued a governmental order mandating the closure of all non-essential businesses, which included the hotel.  The Marriott thus remained closed until July 7, 2020, when the State permitted it to reopen at limited capacity. Continue Reading A policyholder win: Court finds coverage for COVID-19 related losses

It’s no secret that businesses of all shapes and sizes have suffered tremendous losses during the COVID-19 pandemic. From closures to the “Great Resignation” to ever-changing consumer demands, businesses have dealt with one problem after another. One of those problems is the denial of insurance coverage under  “all risk” commercial property policies. For the last two years, courts across the country have found in favor of insurers, ruling that SARS-CoV-2, the virus underlying the COVID-19 pandemic, does not cause physical damage to property.

Enter Marina Pacific Hotel, LLC, et al. v. Fireman’s Fund Insurance Company, 2022 Cal. App. LEXIS 608 (2nd Dist. 2022), a case in which the California Appellate Court looked beyond the preliminary question of whether SARS-CoV-2 causes damage to property and got back to legal basics in its analysis of the plaintiffs’ complaint. With Marina Pacific Hotel, policyholders landed a major victory, and the case may provide a winning framework for plaintiff-insureds facing similar legal battles in the future.

The Marina Pacific Hotel Case

The policy at issue in Marina Pacific Hotel contained much of the standard coverage language which has been heavily debated over the last two years, namely, that the insurer will pay for “direct physical loss or damage” caused by or resulting from a covered cause of loss. This language has proven problematic for policyholders dealing with COVID-19 losses as judges have been reluctant to find that a virus physically alters property when viewed through the lens of what is traditionally considered “property damage.”

However, the Marina Pacific Hotel plaintiffs set out detailed allegations of physical damage, including the fact that SARS-CoV-2 can bond with the surfaces of objects it touches altering the cells and surface proteins of that object. Like insurers around the country, Fireman’s Fund argued that SARS-CoV-2 cannot physically damage property, and that the insured’s loss of use of a piece of property does not constitute physical damage.Continue Reading Looking beyond “Physical Damage to Property”: Is Marina Pacific Hotel a winning framework for policyholders?

One of the top issues facing business today is the risk of business interruption resulting from a cyber-related attack. Regardless of the form of attack – ransomware, denial of service, data theft, or other form of malware – any resulting failure of an organization’s network systems can have severe consequences, financial and otherwise. These may include loss of productivity, lack of or impaired access to websites, and, importantly, loss of sales or income.

Given the potential for significant losses, a strategy for calculating and minimizing losses, and maximizing insurance recoveries for damage from a business interruption should be part of every organization’s cyber incident response plan.  Because every business is unique, there is no “one size fits all” plan that will neatly apply to all businesses or to all business interruption claims. Nevertheless, certain best practices exist and can be applied and adapted to individual businesses to facilitate an efficient and effective response to a cyber-related business interruption.

1. Know your insurance coverage

The first step to maximizing recovery for business interruption is understanding the coverage provided under the applicable insurance policies. Many stand-alone cyber liability insurance policies provide coverage for lost net profits and mitigation costs, and may also cover continuing expenses, such as employee salaries, resulting from a cyber incident. However, there are also certain limitations to such coverage common in most cyber policy forms, even though they are far from standardized. For example, most business interruption coverage includes a waiting period of a certain number of hours before coverage begins. The length of that waiting period can be critical as losses attributable to the business interruption may continue to grow until the network system and level of service has been fully restored.  Insurers also may limit the “period of interruption,” the period of time for which the policy will pay for losses. Depending on the policy language, coverage may end before operations are fully restored.

It is important to understand these limitations when purchasing cyber insurance and to obtain the insurance that best fits the needs of your business. For this reason, we recommend involving insurance coverage counsel to assist in the insurance placement and renewal process.Continue Reading Responding to a cyber-related business interruption: best practices

Nearly two years into the COVID-19 pandemic, the battles over threshold business interruption coverage issues like the presence of physical loss or damage, causation, and the applicability of policy exclusions continue to rage.  Results have been mixed, with insurers notching wins in federal courts, and policyholders faring better in state courts and in certain jurisdictions.

But scores of policyholders who have avoided pre-discovery dismissal are now grappling with how other policy terms will impact their recovery.

Chief among these – particularly for policyholders with diverse and widespread physical locations and operations – is the impact of a classic question typically dealt with in handling catastrophic liability claims: how many occurrences are there?

The answer has profound implications for the amount of recovery, as it affects not only how deductibles may (or may not) apply but also how primary and excess coverage might respond to a large loss.

Three “tests” have emerged in case law to deal with this problem in the liability context. The “cause” test (adopted by the majority of jurisdictions) determines the number of “occurrences” by looking to the number of causes of injury or loss. The “effect” test determines the number of “occurrences” by looking to the number of resulting injuries or losses. And the “continuous process” test determines the number of occurrences by looking at the number of processes resulting in damage that were continuous, repetitive, and interrelated. See, e.g., Unigard Ins. Co. v. United States Fid. & Guar. Co., 728 P.2d 780 (Idaho Ct. App. 1986).Continue Reading “Occurrences” in COVID-19 business interruption litigation

The United Kingdom Supreme Court (UKSC) handed down its judgment on 15 January 2021 in The Financial Conduct Authority v. Arch Insurance (UK) Limited and Others. This test case was brought by the FCA on behalf of SME business interruption (BI) policyholders who have suffered financial losses as a result of COVID-19. The High Court judgment was handed down on 15 September 2020, with the special direct appeal to the UKSC taking place on 16 – 19 November 2020. The UKSC decision was largely seen as a victory for policyholders. As commented by Reed Smith partner, Mark Pring, in the Financial Times, “it can be said, without fear of hyperbole, that in principle at least this really is a catastrophic outcome for insurers.”

We have been reporting on these matters closely since March of last year, and have produced several more detailed alerts, which can be found on our Perspectives platform.

The court was asked to consider three broad categories of BI policy wordings, namely:

  • Disease wordings – which provide cover for BI losses sustained in consequence of, following or arising from the occurrence of a notifiable disease within a specific radius of the insured premises (COVID-19 was made a notifiable disease in England and Wales on 5 March 2020);
  • Hybrid wordings – which provide cover for BI losses sustained where restrictions have been imposed on the insured premises in relation to a notifiable disease; and
  • Prevention of access / public authority wordings – which provide cover for BI losses sustained where access to the insured premises has been prevented or hindered as a consequence of authority action/restrictions owing to an emergency in the vicinity of the insured premises.

In this post, we summarise some of the key points of the UKSC’s most recent decision and set out our views on some of the implications of the decision for policyholders (subject always to their individual circumstances).Continue Reading FCA v. Arch and others – The UK Supreme Court’s final word on business interruption insurance losses in light of the COVID-19 pandemic

A concert promoter cancels a sold-out show of a world-renowned recording artist, reimbursing millions of dollars in ticket sales as a result.  If the reason for the cancellation was COVID-19, does insurance cover that?

Event Cancellation Insurance Basics

Event cancellation insurance generally provides coverage only when there has been a triggering event under the policy.  Some policies are written, for example, to only cover cancellations caused by rain or bad weather.  Other event cancellation policies are all-risk policies, meaning that coverage may be triggered by any cause that is not specifically excluded.  For all types of event cancellation insurance, the triggering event must have been fortuitous, or outside of the policyholder’s control.

Good News for Policyholders

The good news for policyholders is that many all-risk event cancellation policies do cover cancellations caused by COVID-19 related shut-down orders.  For such policies, a shut-down order should qualify as a fortuitous triggering event.  Across the United States, nearly every jurisdiction has enacted some kind of order that caused the cancellation of large-scale events.

Notes of Caution

Policyholders should be cautious concerning the scope of exclusions in respect of viruses and communicable diseases.  Although these types of exclusions may bar coverage related to COVID-19, it is important to be mindful of variations in the exclusion language used.  Some exclusions apply to only specific named viruses, such as SARS and MERS.  Other exclusions contain carve-outs that may be applicable to COVID-19.Continue Reading COVID-19 event cancellation insurance – good news and bad news

Reed Smith Insurance Recovery partners John Shugrue, John Ellison, Amber Finch, Richard Lewis, and Matthew Weaver offer discussion and analysis on key issues relevant to businesses seeking, or evaluating whether to seek, coverage for COVID-19 losses. This webinar is available on demand and you can register here.

Here’s a brief summary of the topics addressed in the webinar:

  • Business interruption coverage and the physical loss/damage trigger (presented by Richard Lewis)

Business interruption insurance provides coverage when physical loss or damage adversely impacts a business, causing it loss.  This insurance covers lost profit and continuing expenses for the period needed to repair or replace damaged property and is designed to do for the business “what the business would have done had there been no loss or damage to property.”  For COVID-19, the key issue for business interruption coverage is: Can the known or suspected presence of a virus cause “physical loss or damage” to property?  For most businesses, it should generally be possible to make the requisite showing of physical loss or damage.

  • Contamination, virus, and microorganism exclusions (presented by John Ellison)

 In commentary, insurance companies have raised a variety of exclusions as potentially barring coverage for COVID-19 related losses.  Some of the exclusions raised include exclusions for virus, bacteria, contaminants, mold, and pollution.  Although there is significant diversity in exclusion wording across property policies, many policies contain standard virus exclusion language promulgated by the Insurance Services Office (ISO).  The ISO made demonstrably false statements to state regulators in seeking approval for this language.  Accordingly, virus exclusions may be vulnerable to challenge.  Additional information about insurers’ misrepresentations concerning virus exclusions is discussed in this article. Additionally, there are available challenges to the other forms of exclusion that insurers are raising that present viable responses to obtaining coverage even when they are asserted by your insurance company.

  • D&O coverage for shareholder claims (presented by John Shugrue)

Directors and officers liability insurance (D&O) coverage typically applies to liability claims made against individual directors for breach of fiduciary duty and to claims made against the business for securities law violations.  Potential claims implicating D&O coverage related to COVID-19 include shareholder claims for alleged failures to plan for, or respond to, the pandemic.Continue Reading Join us for an on-demand webinar “What policyholders really need to know about insurance for COVID-19”

Companies are facing operational and logistical challenges in recovering from the widespread destruction caused by these natural disasters. They will be looking to property damage and business interruption insurance to get them back on track. The time and cost to return to normal operations could be unusually long given the widespread destruction and the lack…

Courts commonly observe that the purpose of Business Interruption or Business Income insurance is to put the policyholder in the same position it would have been in had there been no interruption. The Business Interruption inquiry is, thus, counterfactual. As such, for Business Interruption claims that go to trial, insurance companies and policyholders alike usually…