Typically, business interruption coverage is only available where a covered peril causes property damage to an insured property, causing an interruption in the property's business operations. In Studley Box & Lumber Co. v. National Fire Insurance Co. the New Hampshire Supreme Court expanded the scope of business interruption coverage based upon the principle of mutual dependency. In light of Studley Box, what constitutes "mutual dependency" sufficient to allow an undamaged business unit to recover for business interruption losses?

Business interruption insurance provides coverage for losses arising out of the inability to continue the normal operations and functions of the business. Typically, business interruption coverage is only available where a covered peril causes property damage to an insured property, causing an interruption in the property's business operations. In Studley Box & Lumber Co. v. National Fire Insurance Co. the New Hampshire Supreme Court expanded the scope of business interruption coverage based upon the principle of mutual dependency. Mutual dependency recognizes that where separate properties are interrelated such that damage to one property disrupts the business operations of another property, the recoverable business interruption loss will not be confined to the particular property that was damaged. In light of Studley Box, what constitutes "mutual dependency" sufficient to allow an undamaged business unit to recover for business interruption losses?

In Studley Box the insured property was a lumber manufacturing plant that consisted of several buildings, including a stable that housed horses used in the operation of the plant. [1] A fire destroyed the barn and killed several horses. The policy provided business interruption coverage for the loss of profits due to total or partial suspension of the business resulting from a fire. The court found that the buildings were mutually dependent because a fire loss to any of the plant's buildings affected the business in its entirety and not merely the particular part of the business carried on in such unit.[2] Due to this interdependency between the business units, the court held that the insured could recover for all of its business interruption losses.[3]

Since Studley Box, two lines of cases have emerged. Some decisions distinguish themselves from Studley Box by finding that mutual dependency does not exist unless there is an actual suspension of business operations by the undamaged business unit. Other cases have allowed recovery if there is a decrease in production or sales following property damage to an interrelated business unit.

The first line of cases has determined that property damage to one business unit must require the undamaged unit to partially or totally suspend operations. In the absence of this necessary suspension of operations, mutual dependency does not exist. For example, in Ramada Inn Ramogreen, Inc. v. Travelers Indemnity Co. of America, a fire damaged the insured's hotel restaurant, but the four buildings containing hotel rooms were not harmed. [4] The insured argued that it was entitled to recover under the business interruption provisions of its insurance policy for the decline in occupancy of the hotel rooms because it was a result of the closing of the restaurant, and the restaurant and hotel were mutually dependent upon each other. [5]

The insurance policy provided coverage for "loss of earnings resulting directly from the necessary interruption of the insured's business caused by loss or damage by a peril insured against to a building or personal property on the premises designated in the declarations." Id. However, the court held that business interruption recovery is intended when the loss is due to an inability to use the premises where the damage occurred and since the hotel buildings were able to accommodate the same number of guests after the loss, they were not mutually dependent on the restaurant. [6] [7]

Cases such as Ramada Inn appear to be in the minority. Other courts have allowed recovery based upon mutual dependency when a business unit suffers a decrease in production or sales, so long as the insured can prove that the decrease was caused by property damage to another business unit.

In Wood Goods Galore, Inc. v. Reinsurance Association of Minnesota the insured filed a business interruption claim for declined sales at its retail stores after a fire occurred at the manufacturing facility.[8] More than half of the furniture sold at the two stores was manufactured at the damaged facility. The policy's business interruption coverage section stated that "if your business operations or occupancy are necessarily interrupted because of direct physical loss of or damage to real or personal property at the described premises, we will pay your actual loss or earnings." [9] The court held that the manufacturing and sales portions of the insured's business were dependent upon each other, so under the standard interpretation of business interruption coverage the insured was entitled to recover for losses suffered at both retail stores. [10]

The court reached a similar conclusion in Del Monte Fresh Produce, Inc. v. Ace Insurance Co. [11] The insured business sold bananas that were grown on its plantation. The insured filed a claim after the plantation was flooded during a hurricane and a substantial number of banana plants were damaged or destroyed. The damage caused a decrease in production and sales. [12] The court found that although the plantation's operations were not completely suspended during the period of reduced banana production, the lost banana yield constituted "interruption of business" within the meaning of the policy. This loss was caused by the flood because the business operations were dependent upon the banana plants. And since the policy did not require a total suspension of operations, the insurer was required to provide coverage. [13] [14]

Some insurance policies directly address mutual dependency and the scope of coverage. For example, Arthur Anderson LLP v. Federal Insurance Co. involved an all-risk policy that contained an interdependency coverage provision. [15] The provision stated "[t]his policy is extended to cover the total loss sustained by the Insured anywhere in the world caused by loss, damage or destruction by any of the perils covered herein during the term of this policy to any real or personal property as described in Clause 9." [16] Real or personal property was defined as property not otherwise excluded that the insured owned, leased or used, or in which the insured had an insurable interest. [17]

The insured, an accounting firm, argued that it was entitled to receive coverage for a loss in earnings that occurred in the three and a half months following the September 11, 2001 terrorist attacks. The insured did not lease or own any property in the World Trade Center or the Pentagon, so the dispute centered on the meaning of "insurable interest." [18] The term was not defined by the policy. The insured argued that an insurable interest was any economic interest in the continued existence of a property, which would exist if the loss of the property could cause the insured an economic loss. [19] The court found that the expansive definition was in conflict with case law. Instead, the court defined an insurable interest as one that exists when the insured derives a pecuniary benefit from the continued existence of the property or will suffer a direct pecuniary loss if the property is damaged. [20] Under that definition, the court held that the insured could not prove it had an insurable interest and coverage was due. [21]

The case law indicates that the mutual dependency doctrine is enforced in many jurisdictions. Courts continue to recognize Studley Box and reject the notion that recoverable business interruption losses should be confined to the particular property that was damaged. Instead, recovery based upon mutual dependency is often allowed, so long as the insured can prove that the business interruption was caused by property damage to another insured business unit. More often than not, this business interruption can take the form of a decrease in production or sales rather than a suspension of the business operations of the undamaged business unit. Insurance companies can attempt to avoid the uncertainty created by the split in authority on mutual dependency by requiring a total suspension of business operations or directly addressing the doctrine in their policies.