Coverage for Partial Business Interruption – Claims Magazine

COVERAGE FOR PARTIAL BUSINESS INTERRUPTION

ISSUE

Is there a "suspension of 'operations'" as required by a business interruption policy when there is a partial but not a total interruption of business? For example, suppose the french fryer at McDonald's goes down at lunch hour?

ANALYSIS

Industry Texts Support Coverage for a Partial Interruption

The policy promises to pay for lost income "due to the necessary suspension of . . . 'operations.'" The common meaning of "suspension" or "suspend" is to stop temporarily. See Webster's New Collegiate Dictionary 1165 (1980). Thus, a literal reading of the policy requires that operations, defined as "business activities occurring at the described premises," actually cease before there can be a compensable business interruption loss.

What are "business activities?" This question was addressed by three business interruption attorneys in R. Morrison, A. Miller, S. Paris, Business Interruption Insurance, Its Theory and Practice (1986).

Does "[business activities]" mean "retail sales"? If so, . . . . [t]he shutting down of one department in a department store because its stock was damaged would not constitute a suspension of . . . business operations . . . . But it could not mean that otherwise how could there be a "partial loss"? There would be no recovery if half of the machinery in a factory was damaged by fire, but the other half continued to operate. A more reasonable interpretation would be to include in the meaning of "suspension" the inability of any part of the described property to carry on the function to which it had been dedicated by the Insured. Such an interpretation would consider the shutting down of a single department in a department store as a suspension under the terms of the contract.

Two other industry texts, discussing standard forms using the language "necessary suspension," have acknowledged that coverage exists for partial business interruptions. Rodda, Trieschmann, Wiening, and Hedges in Commercial Property Risk Management and Insurance, (the text for CPCU 3), Vol. I, p. 300 (4th ed. 1994), wrote: "a business already operating at a net loss can sustain a business income loss if a partial or total shutdown increases the net loss beyond what was expected." (emphasis added).

K.W. Withers, Business Interruption Insurance Coverage and Adjustment, 1957, pgs. 9-12, acknowledged that a total or partial suspension may occur and discussed specific examples of each type of suspension with suggestions for adjusting same.

An Accountant Discusses Partial Interruption

If one acknowledges that a covered suspension may occur when a single item of property is damaged, how does one ascertain if that suspension was actually what caused the loss of profits? For example, what if a hand knit sweater used as a display in a yarn shop was stolen? Accountant Bill Bennett of Shore and Azimov, Chicago, Illinois suggested that an insurer initially assume causation and attempt to put a number on the insured's concerns. Mr. Bennett indicated that data should be obtained for the 3-4 years preceding the loss and trended in at least two different ways to determine if profits were actually below what reasonably should have been expected during the period of restoration. Then, depending on the type of business involved, there are techniques for ascertaining whether part of that loss was due to factors other than the physical damage in question.

Majority of Case Law Opposes Coverage for a Partial Interruption

A handful of recent cases have discussed whether business interruption coverage applies to a partial suspension. One court allowed recovery. American Medical Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F.2d 690 (3rd Cir. Pa. 1991) (scheduling service for ultrasound tests had fewer phone lines at temporary facility). This court was interpreting non-standard language that included coverage for a potential suspension, but the court did not rely entirely on that language.

The other courts have addressed standard language and interpreted it literally so as to disallow recovery for a partial interruption. Home Indem. Co. v. Hyplains Beef, L.C., 893 F. Supp. 987 (D. Kan. 1995) (meat processing plant suffered loss of data collected electronically for a fabrication floor to process meat into various cuts); Keetch v. Mutual of Enumclaw Ins. Co., 831 P.2d 784 (Wash. App. 1992) (motel was subjected to ash blown about by wind for a year after a volcano); and Royal Indem. Ins. Co. v. Mikob Properties, Inc., 940 F. Supp. 155 (S.D. Tex 1996) (apartment complex suffered reduced occupancy after amenities were seriously damaged by fire). See also, Quality Oilfield Products, Inc. v. Michigan Mut. Ins. Co., Michigan Mut. Ins. Co., 971 S.W.2d 635 (Tex. App. 4/16/98) (manufacturer of oilfield drilling and production equipment suffered theft of engineering drawings and computer information) and American States Ins. Co., v. Creative Walking, Inc., 16 F.Supp.2d 1062 (E.D. Mo. 8/17/98) (business suffered a broken water main and needed to use a temporary facility).

The court in Quality Oilfield refused to look at employee affidavits that would have created a fact issue concerning the intention of the parties and the insurer's interpretation of business interruption insurance. The court stated that since the policy was not ambiguous, such evidence could not be admitted. This evidentiary ruling helps to explain, at least with respect to this case, the difference between the approach of industry authorities and the approach of the court. Jurisdictions vary somewhat in their application of what is known as the parol evidence rule. See, e.g., Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388 (Ariz. 1984).

Conclusion

A literal reading of the forms appears to require a total suspension of operations to create a valid business interruption claim. There is case law to support this approach. On the other industry experts support the possibility of payment for a partial suspension. There is also a case that adopts this approach. ISO has indicated that it will clarify, for the CP later this year and for the BP next year, that a total interruption of business is not necessary for coverage, but rather, a partial interruption may be sufficient.