Basics of business interruption insurance: the ins and outs of tricky coverage: it's important to know and interpret policy language, exclusions and coverages in order to state a valid claim under this insurance.

• Author: Hummer, Paul M.

Business interruption insurance is "`designed to do for the business what the business would have done for itself had no loss occurred.'" (1) Thus, this coverage provides a vehicle to recoup earnings lost as a result of an occurrence of a covered risk that interrupts the insured's business operations. (2) The coverage may be purchased as an endorsement to a property insurance policy or as a separate insurance policy. The coverage form typically provides insurance against loss of earnings and also may cover other costs, including payroll, rent, insurance premiums, utility bills and taxes. Business interruption insurance typically requires proof of covered physical loss to specified property, causing actual interruption of business with resulting monetary loss.

SCOPE OF COVERAGE

1. Insuring Provision

   A typical business interruption insuring provision reads:

   This policy insures against loss resulting directly from necessary interruption of business caused by damage to or destruction of real or personal property, by the peril(s) insured against, during the term of this policy, on premises occupied by the Insured and situated as herein described. (3) B. Covered Causes of Loss

   Because coverage for consequential economic losses is generally added to a commercial property policy by way of endorsement, coverage is usually "closely tied to the underlying property damage coverage. That is, the endorsement usually covers business interruptions that result from physical loss or damage to covered property from a covered peril." (4) Thus, the language of the business interruption endorsement must be read in light of the underlying property damage coverage and the enumerated causes of loss to determine whether a particular interruption will trigger coverage.

   The mere fact that there has been a business interruption is not sufficient to trigger coverage under a business interruption endorsement. The interruption must have been caused by a covered cause of loss. On this point, Red Bird Egg Farms Inc. v. Pennsylvania Manufacturers Indemnity Co., (5) a Fourth Circuit case, is instructive. In that case, a lightning strike somewhere outside Red Bird's property caused an interruption in the power supply to its facility. Later that same day, the utility company restored single-phase power to Red Bird's facility, instead of the usual three-phase power. The introduction of single-phase power burned out the motors in approximately a hundred ventilation fans, causing permanent damage to the fan motors. Without proper ventilation, more than 500,000 chickens perished.

   Red Bird submitted a claim to its insurer for the loss of the birds, debris removal and business interruption. The insurer denied the claim for business interruption, relying on an exclusionary provision that stated that there was no coverage for:

   Any loss caused directly or indirectly by the failure of power or other utility service supplied to the described premises, however caused, if the failure occurs outside of a covered building. But if the failure of power or other utility service results in a covered cause of loss, we will pay for the loss resulting from that covered cause of loss. Red Bird argued that the exclusion contained in the property coverage was not applicable to its loss, because the introduction of single-phase power was not an "interruption" in utility service and could best be characterized as the introduction of too much power for the fan motors. The court rejected this argument because the policy excluded interruption losses caused by a "failure of power or other utility service" and did not speak in terms of "interruptions" in utility service.

   Red Bird further argued that the failure of electrical service resulted in a fire (a covered cause of loss) that, in turn, damaged the fan motors and triggered the business interruption coverage. But the single-phase current merely caused overheating without the presence of flames that melted the insulation of the wires in the motors. Thus, the fan motor damage was not caused by a covered cause of loss.

   The Fourth Circuit held that the business interruption losses suffered by Red Bird occurred as a result of "failure of power or other utility service," and sustained the insurer's denial of coverage.

   Similarly, in Meritcare Inc. v. St. Paul Mercury Insurance Co., (6) a Third Circuit case applying Pennsylvania law, the operator of a nursing home closed its facility for more than two months because the roof was structurally unsound. The operator's insurance policy provided property damage and business interruption coverage that read, in relevant part:

   We'll insure covered property against the risk of direct physical loss or damage involving collapse of a building or any part of a building ... (7) Although it was undisputed that the roof of the structure did not cave in, the plaintiff argued that the collapse provision was triggered when the structural integrity of the nursing home was seriously impaired. The insurer further noted that the term "collapse" was not defined in the policy and was capable of several meanings.

   The Third Circuit, however, stated that the terms of the insurance contract were to be given their plain, ordinary meaning, (8) and that Pennsylvania case law previously held that collapse meant "to fall together or fall in." (9) Since a collapse did not occur, the plaintiff was not entitled to recovery of its losses under the business interruption insurance.

   An insurer also prevailed in its denial of a business interruption claim in Protection Mutual Insurance Co. v. Mitsubishi Silicon America Corp. (10) In that case, the insured operated a manufacturing plant in Salem, Oregon. Owing to a flood, the city closed its waste water treatment facility, and the insured was forced to shut down most of its operations for two days because it could not discharge waste water into the sewer system. It sought reimbursement of its business interruption losses caused by the loss of utility service.

   In interpreting the insurance contract, the Oregon Court of Appeals noted that its over-all design, which is typical of most business insurance policies, consisted of a general statement of coverage that was both limited and expanded by other provisions. Thus, the court said its interpretative task turned...