Americans are genuinely saddened by the loss of human life and the destruction caused by the Sendai-area earthquake and tsunami. The safety of the people who have lost loved ones and homes in the disaster remains everyone's chief concern, as Japan begins the difficult work of restoring basic services to those affected, the rebuilding of homes, businesses, and indeed, entire towns and cities. It may be years before the full impact of the disaster will be known. A widely-quoted estimate is that insured losses from the earthquake alone will range from $150 to $300 billion (U.S.). No doubt the disaster will prevent the shipment and timely delivery of products essential to many different industries for several months to come, interrupting the operations of businesses around the world. Fortunately, many companies have "business interruption" insurance coverage that may help them offset the lost income and additional expenses they will incur.
For executives who are scrambling to find replacement suppliers or who are busy rescheduling customer deliveries, preparing to file "a business interruption" claim may be the last thing on your mind. Unfortunately, the ability to recover for your lost income or additional expenses as a result of a "business interruption" will largely depend on the steps you take now to make sure insurance coverage applies and incurred losses are properly documented. A few of those steps are outlined below.
What is "Business Interruption" Coverage?
"Business interruption" insurance is generally designed to provide an income stream for an insured company during a period when its operations are completely or substantially suspended due to events outside of its control. For example, imagine lightning strikes the insured's leased warehouse, causing a fire which destroys several months of ready-for-sale inventory. In that instance, "business interruption" coverage would provide the insured with regular payments beginning soon after the claim is made and accepted, which -- in theory – are equal to the company's lost revenue.
The idea, of course, is to make sure the company has money to pay its employees and continue normal operations while it rebuilds its inventory. "Business interruption" coverage also provides reimbursement to insureds for additional expenses they have incurred in attempting to meet their contractual obligations during the period of interruption. For example, a hotel in Japan that suffers damage to its property as a result of the tsunami could pursue, under its business interruption coverage, the profit it lost while repairing the property damage.
In addition to coverage for losses of "business income" stemming from the destruction of the policyholder's own property, a number of other similar coverages are available for losses of business income stemming from other events, such as "contingent business income" coverage, which is designed to cover a policyholder for loss of income caused by damage to or destruction of property owned by others, usually identified as "contributing" or "recipient" locations (i.e., suppliers and customers). An example would be coverage purchased by an auto manufacturer to protect it if its sole supplier of a key component suffers destruction of its factory, and the car maker suffers a business income loss from its inability to manufacture cars.
While the exact wording and case law interpreting these provisions varies, "business interruption" provisions generally require: (a) loss or damage to insured property; (b) interruption of the business due to a covered loss; (c) loss of income or profits; and (d) the loss must occur within a "period of restoration."
As you might suspect, "business interruption" claims often present complicated causation and valuation issues that should be analyzed as the loss progresses. Companies are strongly advised to address these issues as soon as the loss is expected, and not wait until a claim is actually made to the insurance company – by then, it is often too late to prove the facts necessary to document a claim.
Take Action Now to Properly Document Your "Business Interruption" Loss
If your company is experiencing or expecting financial losses because of interruptions caused by its inability to obtain previously ordered product or materials, you should first make sure you have insurance coverage for such losses. A starting point is to review all of your insurance policies to confirm that "business interruption" coverage is included in one or more policies. You should also make certain that insurance premiums have been paid to date.
Once you have confirmed that "business interruption" coverage is provided in your insurance policies, you must make certain the correct business entities have been indentified on the policies and endorsements. Your attorney may be able to help you review the policies to confirm coverage is available and that the correct businesses have been identified as insureds. This may not be as easy as it sounds – insurance companies often use forms prepared by independent insurance agents who are not familiar with how the policy should be prepared. Insureds often find out when it is too late that no coverage is available merely because the insurance agent checked the wrong box or failed to identify all of the business entities that should have been covered.
In addition, you should begin to put together the documentation necessary to later prove your business interruption claim. This might include taking steps to show that you attempted to obtain component parts or product from another supplier, or that additional expenses you incurred were purchased at commercially-reasonable prices. Remember, insurance companies will often deny claims based on the insured's failure to show that it used its best efforts to "cure" the source of the business interruption or to find reasonably priced substitute suppliers.
Insurer Defenses to Coverage
It can be anticipated that insurers will challenge the availability of coverage for losses related to the earthquake and tsunami. These challenges may include disputes regarding: (a) whether coverage for claims related to earthquakes and tsunamis are barred by any policy exclusions; (b) whether physical damage to insured property is required to trigger time element coverage such as business interruption coverage, and, if so, what may qualify as property damage; and (c) whether coverage exists for amounts spent to prevent or mitigate damages, even if property damage does not occur.
You should not assume that insurer defenses will defeat your company's claim for coverage. Every insurance-policy claim requires a careful analysis, based on the specific policy language involved, the circumstances giving rise to the insured's asserted losses, and the law of the applicable jurisdiction. Careful advance planning is suggested, if time permits, before any claim is made to the insurer.
In summary, insureds and others with potentially covered business losses should:
- Immediately locate and begin reviewing all of your insurance policies;
- Begin documenting the possible loss so that it is properly organized and maintained in a form that will provide adequate support for a claim under any applicable coverage provisions;
- Track all of the expenses you incur in preparing the claim (including possible attorneys' fees and the amount of time you have employees working on investigating and documenting the possible claim);
- Carefully follow any applicable notice and proof of loss provisions in your policies, including obtaining waivers or tolling agreements from your insurers;
- Meticulously document your loss by maintaining proof of business performance prior to, during, and after loss; and
- Create and maintain evidence of damage, including photographs and videos.