Superstorm Sandy made landfall in New Jersey on October 29, 2012 causing severe property damage along the eastern seaboard. Forecasting companies put sophisticated catastrophe risk computer models to work estimating insurance claims. One firm, Equecat, estimated that Sandy’s impact could reach between $10 billion and $20 billion in insured losses, which would make it the third-costliest U.S. storm in history for insurers. i
Seven years earlier, Hurricane Katrina made U.S. landfall as a category 3 hurricane. Katrina’s winds, wind driven rains, and storm surge devastated thousands of businesses in Alabama, Louisiana, Mississippi and the Florida Panhandle.ii In many cases, businesses had to suspend operations for extended periods of time. As a result, substantial business interruption claims were submitted by businesses to private insurers following Hurricane Katrina’s disruption of their operations. Like Hurricane Katrina, Superstorm Sandy is expected to bring its fair share of business interruption claims.
Business interruption or business income coverage is protection against loss of income when a business suffers property damage from an insured peril, such as a hurricane, that interrupts the operation of the business. iii A typical business interruption policy form provides that the insurer will pay the actual loss of business income the insured sustains during the necessary suspension of its operations during the period of restoration.iv A commercial property insurance policy only covers physical loss or damage to business property, while the additional coverage allotted by the business interruption form covers the profits that would have been earned. Since business interruption coverage is included as part of the business’ property policy, it only pays out if the suspension of operations was caused by direct physical loss or damage to insured property resulting from a loss covered by the policy.v This additional coverage is applicable to all types of businesses, and it is designed to put a business in the same financial position it would have been in if no loss had occurred.vi
Business interruption coverage extends during the “period of restoration” or “period of indemnity”, which is usually defined to begin 72 hours after the time of “direct physical loss or damage” and to end on the earlier of “the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality” or “the date when business is resumed at a new permanent location”.vii The “should” language has been interpreted by courts to mean a theoretical restoration period based upon a hypothetical repair/rebuild when the property is not actually repaired, rebuilt, or replaced.viii If the property is actually repaired, rebuilt or replaced, then actual repair, rebuild or replacement time should be used in measuring the restoration period. But, a theoretical restoration period has been applied by courts where the insured failed to move with reasonable speed or failed to exercise due diligence and dispatch in repairing, rebuilding or replacing.ix
Not surprisingly, disputes often arise between insurers and policyholders regarding what is a reasonable restoration period. Indeed, insurers routinely argue that the restoration period is always the theoretical time it ought to take to complete repairs/resume business, with this theoretical view divorced from any of the actual facts and circumstances.x However, courts have extended the restoration period because of insurer delays, either in payment or in adjustment activity.xi Courts also have extended the restoration period because of delays caused by a third party, such as a contractor.xii The common thread running through this caselaw is that the restoration period cannot be computed in a vacuum, the end of the restoration period must be calculated based on the specific factual circumstances of the case, and insureds will not be penalized when the delay in repairing/rebuilding or returning to business was occasioned by events beyond their control.
In short, commercial policyholders submitting business interruption claims in the aftermath of Superstorm Sandy should not be surprised when their insurers insist on a theoretical approach to determining the length of the restoration period, ignoring the actual facts and circumstances. Nevertheless, delays in the adjustment of a catastrophic loss like a hurricane are inevitable and became the rule rather than the exception. Delays in repairing or rebuilding are also to be expected, as evidenced by the shortage of construction labor and materials immediately following Hurricane Katrina and the 2004-2005 Florida hurricanes. Courts have consistently extended the restoration period to account for these delays. Accordingly, policyholders submitting business interruption claims arising from Superstorm Sandy should be reluctant to accept an insurer’s theoretical restoration period that does not consider delays in repairing, rebuilding or replacing damage to insured property due to factors outside the insured’s control.