Insurers, Policyholders Clash Over Business Interruption Claims

Over the years, insurers and policyholders have been arguing in courts over how to calculate business interruption losses during catastrophes.

This is the type of coverage that is often ignored until there is a loss. But once there is a loss, some companies realize their lost profits may be more than the amount of property damage they suffered.

Insurance companies, of course, have figured this out as well, according to Finley Harckham, a veteran insurance attorney at the New York law firm Anderson Kill & Olick. He spoke at his firm’s recent policyholder advisor conference, held in New York. The goal of the event was to help risk managers and corporate general counsels maximize their companies’ insurance recovery.

Both policyholders and insurers have been trying to interpret wider effects of catastrophes to their own respective advantage.

Profits Would Have Soared, If They Remained Open

This issue really began with hotels in areas devastated by hurricanes and other storms. Policyholders that owned hotels argued that the business interruption loss should be calculated using projected higher profits they would have made from the increased demand for shelter in the aftermath of hurricanes. If hotels had been spared in the hurricane, they would have done fantastic business. The courts disagreed with the policyholders’ argument, saying that would be “a loophole for policyholders.” However, the courts did agree with some policyholders using this approach. Harckham pointed out a Louisiana case involving a carpet store in the wake of a massive flood. Everybody’s carpets were flooded and had to be thrown out. The store could have done fantastic business if its own stock of carpets had not been ruined. The policyholder asked that the business interruption loss be calculated using this higher profit. The court agreed.

He said it resulted in a backlash from insurers. Insurance Services Office (ISO) and others changed policy forms to state that coverage would not be provided for potential beneficial effects that a catastrophe would have had.

Some insurers have also tried to interpret coverage to their advantage. He said there were stores in the World Trade Center, in the lower level, that were destroyed on 9/11. Stores had high-dollar limits of business interruption insurance. But insurers took the position that stores aren’t entitled to business interruption coverage because if the stores had survived, they wouldn’t have been able to do any business anyway because the area was blocked off. “Insurers tempered it by saying, ‘We are nice guys so we are not gonna hold you to that standard,'” Harckham said. “‘We will assume instead that your stores survived but in the area of ground zero, not in the middle of ground zero. So you would have done a little bit of business.'”

The court rejected that argument. The court ruled that business interruption losses should be calculated with the assumption that policyholders continued to do business in a world in which Sept. 11 never happened.

This issue persists. Even after that case, some insurers have raised this type of argument again. So far, odds are strongly in favor of policyholders. But he warned that while many policies now protect insurers from their own downside risk on this issue, there is no corresponding provision for policyholders. Many policies remain silent on whether policyholders can lose some or all coverage.

Topics Carriers Profit Loss Claims