Copyright 2008. All rights reserved.
Time element coverages are those where the measurement of loss is tied to a period of time. Most time element coverages are related to business, but there is an analog in the homeowners' policy in the form of the additional living expense coverage. This paper concentrates on the time elements under commercial coverages.
Over the past century, insurance for time element losses has evolved from a fairly simple type of business interruption coverage to a menu of coverages that address developing circumstances and needs. This paper is intended as an overview of those time element coverages. In order to put the coverages in the current context, examples will be given from recent cases. An in-depth study of any of these issues requires study beyond the scope of this paper. This is particularly true in those instances where the reported cases are not in agreement, such as whether there must be a total cessation of business, or whether the post-loss business market can be considered in determining the amount of loss.
A. Types of Time Element Coverages
The following time element coverages are addressed in this paper:
- Business Interruption
- Extended Period of Indemnity
- Gross Profits
- Extra Expense
- Soft Costs
- Contingent Business Interruption
- Contingent Extra Expense
- Civil Authority
- Service (Utility) Interruption
- Rental Value and Rental Income
- Leasehold Interest
B. Origin Of Time Element Coverages
The forerunner of business interruption coverage was called "Use and Occupancy" coverage. In the early days, the calculation of loss was often based upon a per diem formula. Over the past century, that coverage has evolved into business interruption coverage which is based upon the determination of the "actual loss sustained" during the period of resolution. The period of interruption may also be referred to as the period of interruption or the period of liability. The period of restoration is the time required to repair the damaged property in the exercise of due diligence and dispatch. In the past decade, it has become common to provide for coverage beyond the "due diligence" time. Such coverage is normally described as extended period of indemnity coverage.
Originally, business interruption applied only where there was physical damage at the insured property which directly affected operations. It is now possible to obtain business interruption insurance (called contingent business interruption insurance or "dependent properties insurance") where the physical damage is at a third party location such as a supplier or customer, or even an anchor tenant or attraction property. It is also possible to obtain such insurance where no access to the insured property is prevented because of physical damage elsewhere. This can be under coverages described as ingress/egress or order of civil authority.
Because there are many different types of business interruption coverage, and, indeed, of time element coverage, it is important to look at the specifics of the policy. In many cases, the policy is a manuscript policy used for large business enterprises. The language used in some manuscript policies is, at best, sparse. Expectations often exist within the industry as to the understanding of that language.
While most time element coverages originated in non-standard markets, they now exist also in the market that is more traditionally addressed by standard forms such as ISO forms. For convenience, we will in this paper often refer to ISO forms but caution strongly that it is important to look toward the specific language in the applicable policy and the context in which coverage has been provided.
II. BUSINESS INTERRUPTION COVERAGE
The standard fire policy in virtually all states excludes business interruption. Traditionally, if purchased, the coverage was added back to the policy through an endorsement. Common endorsements were "Gross Earnings" and "Net Profit". It was generally assumed that both would reach the same result. The underlying principal was that coverage would be provided for those expenses which necessarily continued and the net profit which was lost during the period when the business could not be operated because of physical damage. That period, now often called "the Period of Restoration," was the time required in the exercise of due diligence and dispatch to repair or replace the property that was physically damaged. Thus, the traditional business interruption coverage required physical damage from an insured peril to property that prevented the insured from operating in whole or in part. Normally, the property was owned by the insured, but it also could be property used by the insured such as an elevator in a building. It is sometimes said that business interruption insurance is intended to do for the business what the business would have done for itself had no loss occurred. Such a generality is a misleading overstatement. In fact, many business interruption policies won't restore the business to the same level as existed before the loss. For example, there may be a loss of customers who are never regained. In reviewing the various types of coverage, we should keep in mind the need to look to the specifics of the language, occasionally as informed by custom and practice.
Protection Mut. Ins. Co. v. Mitsubishi Silicon Am. Corp. is an example of a case stating the general notion of business interruption insurance as "doing for the business what the business would have done for itself had no loss occurred," but then emphasizes the need to consider the specific coverage in the policy. In Protection Mutual, an interruption of business was due to a flood which in turn shut down the city's water treatment facility. This prevented the insured from operating. The court noted the business interruption insurance doesn't cover such economic loss. In relying on and reciting the importance of the specific coverages the court stated:
When real and personal property is lost or damaged, commercial enterprises often incur further consequential economic losses (e.g., increased costs, lost profits) flowing from their inability, or impaired ability, to conduct their business operations. Special additional coverage, in the form of endorsements to a casualty policy, can be negotiated to cover those economic damages. In covering those consequential economic damages, so-called "Business interruption" insurance is "designed to do for the business what the business would have done for itself had no loss occurred...". A & S Corporation v. Centennial Insurance Company, 242 F.Supp. 584, 589 (N.D.Ill. 1965). Typically the added endorsement is closely tied to the underlying property damage coverage. That is, the endorsement usually covers business interruptions that result from physical loss or damage to covered property from a covered peril. See generally B. Glean, Annotation, Business Interruption or Use and Occupancy Insurance, 83 A.L.R.2d 885 (1962). Few generalizations about business interruption endorsements can be made, however, because the nature of the coverage varies widely. In any given case, the particular terms and conditions of the policy in question must be examined to determine whether a specific business interruption loss falls within the scope of the coverage.
Several points are essential to this coverage. These include the requirement that there be physical damage to property, that it be from insured peril, that it actually prevent, suspend, or at least reduce the ability of the business to operate, and that it continues only for the theoretical time required to repair the property. We will look at each of these requirements.
A. Physical Damage
First, there must be physical damage to property. A seminal case on this is National Children's Exposition Corp. v. Anchor Ins. Co. This addressed a claim for loss of business to an exhibition. There was no physical damage to property, but attendance at the exhibition was reduced or prevented because of a snowstorm. The court held that the absence of physical damage precluded consideration of business interruption coverage.
Physical damage may exist but does not prevent the operation of business. This does not trigger business interruption coverage. For example, in Harry's Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Co., a snowstorm effectively shut down an automobile dealership and also caused roof damage in the building. While there was damage to the building, that damage was not responsible for the shutdown. There was, therefore, no recovery.
Another common situation is where businesses are combined, such as a golf course and pro shop or a restaurant and motel. In Ramada Inn Ramogreen v. Travelers Indem. Co., a fire destroyed a hotel restaurant. The insured sued claiming that the loss of the restaurant caused a loss of hotel earnings. The court held against the insured finding that the hotel had suffered no damages and was able to accommodate its full number of patrons. In holding against the insured, the court stated that "recovery is intended when the loss is due to inability to use the premises where the damage occurs..."
In Gregory v. Continental Ins. Co., the insured sustained damage to its golf course and related buildings, but only the buildings were insured. The insured claimed it should recover for losses in the pro shop due to the closure of the golf course. The court restricted recovery to that resulting from the physical damage to the buildings themselves and refused to provide recovery for any claimed additional losses caused by damage to the golf course.
One variation on the physical damage theme is a situation where the amenities associated with a property may be damaged. In Royal Indem. Ins. Co. v. Mikob Properties, Inc., the insured owned and managed an apartment complex containing three separate apartment buildings. Following a fire, one building was rendered uninhabitable, while two buildings remained open. Because of the fire, tenants in the two habitable buildings were unable to use amenities near the damaged building. Following a decrease in occupancy of the habitable buildings, the owner sued seeking payment for the decreased rental income. In finding that there was no business interruption coverage, the court found that reduced aesthetic appeal due to lost amenities did not constitute the required suspension of operations.
B. The Damage Must be the Type Insured
As mentioned above, not only must there be physical damage, that physical damage must be caused by an insured peril. In Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. Texpak Group, N.V., coverage was not present because the business income loss was caused by a non-covered peril, defective design.
C. Operations Must Be Interrupted
The physical damage may cause a reduction in the insured's operations but not necessarily suspension of those operations. This raises the question of whether a total suspension is required. Several cases in the past decade found that the policy did require total cessation. Other policies provide that coverage exists for a total or partial suspension. This is an issue that must be examined in light of the specific policy language that is applicable.
D.. Period of Restoration
The loss continues only for the time required in the exercise of due diligence and dispatch to repair or restore the property. Originally, this was described as the "period of interruption" but now is often described as the "period of restoration." This is a theoretical period based upon hypothetical rebuild. The seminal case on this is Beautytuft. The most recent application is in the World Trade Center loss of 9/11 where the court held that business interruption ("rents" in that case) continued for only the time that would have been required to rebuild the original towers and not for the additional time to rebuild the redesigned buildings at the site.
The period of interruption has been presented in the context of the World Trade Center loss and several circumstances. In Duane Reade, the court held that it would be the time required to build a reasonably equivalent store in a reasonably equivalent location, and not the time required to build the World Trade Center. A similar holding involved the retail clothing stores at the World Trade Center in Retail Brand Alliance, Inc. v. Factory Mutual Insurance Co., a technology company in Streamline Capital, L.L.C. v. Hartford Cas. Ins. Co. and a securities firm in Lava Trading v. Hartford Fire Ins. Co., On the other hand for businesses directly related to the servicing of the towers, the court has held the period of restoration to be the theoretical time to rebuild them.
E. Actual Loss Sustained
As noted, the measurement of loss business interruption policies is now typically based upon a calculation of the "actual loss sustained." This may require consideration of whether the insured has "made up" some of the losses it sustained once it resumes its business. The calculation of actual loss sustained requires an in-depth study. However, by way of introductory comments, we refer to three recent cases. In Admiral Indem. Co. v. Bouley Int'l Holdings, the insureds food businesses were damaged in the September 11th attack. The property was capable of being repaired and reopened on September 29th. Nonetheless, phone service did not exist until January 7, 2002, and the facilities did not open until February 9, 2002. The insured had both business interruption and extended period of indemnity coverage. While the court found that there was a business interruption loss during the due diligence period ended on September 29th, the court found that any loss beyond that date was not recoverable because the insured had in effect recaptured the revenue through a catering business. In Baxter Int'l Inc. v. American Guarantee and Liability Ins. Co., the Illinois Appellate Court held that the insurer's property damage payment, which included compensation for losses to the insured's finished goods and inventory, could be factored into the calculation of the business interruption claim. The property damage payments effectively eliminated the business income loss; therefore, the insured could not prove that there had been any actual loss sustained.
In Finger Furniture Co. Inc. v. Commonwealth Ins. Co., the store which housed the insured's central computer system was closed due to flooding. This prevented all of the insured's stores from opening. In order to compensate for lost sales, the insured cut prices and ran sales the following weekend. The court found that the policy language required the business interruption calculation to take into account historical sales figures and that the insurer could not look to what occurred after the loss to determine the business interruption loss. But the court noted that there was no evidence that the lost sales were "made up." Whereas the Baxter court's decision turned on preventing a windfall for the insured, the Finger Furniture decision apparently prevents a windfall for the insurer. In both cases the court was presumably influenced by consideration of what loss was actually sustained.
III. EXTENDED PERIOD OF INDEMNITY
Because the business interruption period of restoration ends at the time when the property can be restored or repaired, and because the insured often sustains a loss beyond that date, extended period of indemnity coverage is often available. This provides coverage not to exceed a stated period of time following the later of the actual presumption of business or the due diligence period of restoration.
Thus, an insured may sustain a loss with a period of restoration of eight months. The insured, however, may take ten months to rebuild - perhaps, because of some changes in the manner in which the property is rebuilt as compared to the property that was actually damaged. Extended period of indemnity coverage would provide recovery up to a specified period of time to start after the period of restoration, and once the insured has resumed business. This coverage has been common only for the past decade, and has received relatively little scrutiny in the courts. One case which discussed it is Duane Reade, a 9/11 case where the court commented on the nature of the coverage but did not specifically apply it. The court offered the following description:
The purpose of the Extended Recovery Period is to provide additional coverage for the likely event that Duane Reade will continue to suffer losses due to its business interruption after it reopens the WTC store. The Extended Recovery Period guarantees Duane Reade its pre-9/11 profits until the earlier of when Duane Reade can restore business at its WTC store to the condition it would have been in [Policy time limit] had the WTC not been destroyed or twelve months after the Restoration Period ends.
IV. GROSS PROFITS
In Canada and the U.K. it is common to write business interruption insurance on a gross profits basis. This achieves a purpose similar to that achieved through an extended period of indemnity. Under a gross profits policy, loss is calculated for a specified period of time regardless of the period of restoration. Such a policy does, however, require that the insured use due diligence in resuming operations. While this coverage is not common in the U.S., there are instances where it has been used in the U.S. It normally is more expensive, but in time it may also be seen more often. As of now, there are no decisions in the U.S. construing it.
V. EXTRA EXPENSE
Extra expense is often considered as a part of business interruption coverage but, in fact, it must be viewed also as an alternative to business interruption coverage. Extra expense coverage provides for the payment for those expenses that are in excess of normal operating expenses, and that are reasonable and necessary to continue the business following physical loss or damage to the property. Typically, extra expense coverage is used where a business must continue its day-to-day operations because of the nature of the business, e.g., a law firm or a newspaper. Extra expense is meant to provide funding in such a situation so that the business can continue operations during the period of time necessary to repair the physical damage. Physical damage must occur for extra expense coverage to apply and it applies only during the period of restoration.
Extra expense does not cover the cost of permanent repairs. In Thompson v. Threshermen's Mut. Ins. Co., the insured sought recovery for the cost of replacing its store under the extra expense provision of its policy. The insured argued that such a claim was proper because the landlord refused to repair the building, and the insured had to find alternate facilities in order to continue its business. The court rejected this argument holding that providing the insured with coverage under its extra expense provision would be tantamount to providing the insured with a new building as an "extra expense".
Notwithstanding the fact that extra expense does not pay for permanent repairs, a portion of the cost for a portion of permanent repairs may be recoverable. For example, as specified under many forms, the coverage will include the cost to repair or replace property "to the extent it reduces the amount of loss that would otherwise be payable...[under] the extra expense form...." The claim will be reduced to the extent of the value remaining in that property following the expiration of the period of restoration.
Often times, there is confusion over the different forms of extra expense, and in particular, those expenses that are incurred specifically to avert a loss under the business interruption form as compared to those expenses that are incurred purely under the extra expense coverage. Business interruption insures normal expenses that must continue after a loss. Extra expense does not cover such expenses.
But business interruption may also insure "extra" expenses (above normal) that reduce (avert) a business interruption loss. An example of an expense to avert a loss would be a situation where an insured moves to an alternate location in order to continue its operations. To the extent that the expense reduces the business interruption loss that would otherwise be recoverable, it can be collected as an expense to avert loss under business interruption coverage. On the other hand, under extra expense coverage where an insured such as a newspaper publisher must find an alternate facility for staying in business for continuing its operations, that portion of the expense above normal expense is covered even if it exceeds a loss that would theoretically be recoverable under a business interruption form. Extra expense was one of several time element coverages considered in the in the ABM case, a 9/11 case. ABM provided janitorial service to tenants at the World Trade Center. The principal claim was for business interruption but the claim also included an extra expense element. The Court found that ABM "used" the common areas and tenant spaces because ABM derived its income from servicing such areas, thus satisfied the policy requirement that the damaged property be "used."
The Court held that under the language of the extra expense provision ABM needed only to show that it had incurred extra expenses relating to the general operation of its business over and above costs normally incurred. Finally, the Court remanded the issue of whether the extra expense resulted from a covered incident.
VI. DELAYED COMPLETION/SOFT COSTS
Extra expense also may be applicable to costs incurred to property under construction where there has been a delay in the completion because of an insured event. Such extra expenses are described as "soft costs" and can be included within builders risk coverage for extra expenses. The soft coverage may include additional interest; taxes; architect, engineering and other consultants' fees; renegotiation expense; legal and common expenses; and others that fit within the general description of soft costs for such coverage. We know of no reported decisions on soft expense coverage.
VII. CONTINGENT BUSINESS INTERRUPTION
Contingent business interruption provides coverage for situations where the insured's "suppliers" or "customers" suffer some form of physical damage. It is also often described as "Dependent Properties Insurance." The insured purchases contingent business interruption coverage to protect against its inability to secure its supplies or sell its goods.
The ISO Broad Form provides:
A. We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to "dependent property" at a premise described in the Schedule caused by or resulting from a Covered Cause of Loss.
Contingent business interruption has the same basic requirements as ordinary business interruption coverage, except for the fact that the property that suffers physical damage must be that of the supplier, customer, or other dependent property. The risk rests with the third party supplier or customer rather than the insured. Note that as with ordinary business interruption, the cause of damage and the type of damage to the dependent property must be covered under the insured's policy. In other words, if a cause of damage is excluded, then no contingent business interruption coverage will exist.
Also, as with ordinary business interruption, coverage exists for the period of restoration. Normally, the period is defined as the theoretical period needed to replace or repair the damaged property with due diligence and dispatch. Under the ISO form, it starts 72 hours after the loss.
In an economy where companies increasingly outsource production, contingent business interruption is an increasingly common form of insurance. Also, as manufacturers' customer bases become more unique, contingent business interruption provides protection for those businesses that sell their goods in a specialized market.
A. Types of Contingent Business Interruption Coverage
The ISO Forms identify four types of dependent property: 1) Contributing locations; 2) Recipient locations; 3) Manufacturing locations; and 4) Leader locations.
Contributing locations are suppliers who deliver materials or provide services to the insured. Utility services are normally excluded from this definition, but loss of utilities can be covered under service interruption insurance. Most likely, the insured's operations are dependent upon receiving the product or services from the contributing location.
Recipient locations are customers of the insured. As compared to a contributing property, the recipient location lies "downstream" in the insured's operational chain.
Under the ISO form, "manufacturing locations" are those companies who deliver products to the insured's customers under a contract of sale. Orders are taken from customers and then placed with the various manufacturers, who in turn manufacture and ship to the insured's customers. If a fire occurred at one of the manufacturing facilities, this could prevent that manufacturer from supplying the sales company with product; thereby, preventing the sales company from selling those systems to its customers.
Finally, there are leader locations. In this situation, other businesses attract customers to the insured's business. More likely than not, the leader location will be located in the vicinity of the insured. Oftentimes, the leader location is the "anchor tenant" of a property. A large department store can act as a leader attracting customers to a strip mall location with other smaller tenants.
Very few reported decisions address contingent business interruption. The earliest decision is Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York. Following flooding in the Midwest, including the Mississippi River, the insured made claims for contingent business interruption coverage for losses caused due to increased transportation and raw materials costs. The court held that the Army Corps of Engineers, the Coast Guard, and the generic group of Midwest farmers were "suppliers of good and services" under the plain meaning of contingent business interruption of the provision covering "any supplier."
The next major case was Pentair, Inc. v. American Guar. And Liability Ins. Co.. An earthquake struck Taiwan damaging an electrical substation that supplied power to two manufacturing facilities that supplied the insured with battery packs. The relevant language in the policy was "this policy...insures against loss resulting from damage to or destruction by the perils insured against, of: property of a supplier of goods...services to the Insured...". The court held that such language did not provide coverage where the physical loss occurred at the electrical substation because it did not directly supply the insured with any good or service. The electrical substations may have produced power to the manufacturing facilities (the "suppliers") but did not provide the insured with anything that it directly used.
Contingent business interruption coverage was discussed in the Zurich Am. Ins. Co. v. ABM Indus. Matter, but the Second Circuit found coverage was under the business interruption portion of the policy, thereby mooting the question of applicability of a sub-limit for contingent business interruption.
An example of the significance of the failure to have contingent business interruption coverage is Air Liquide America Corp. v. Protection Mut. Ins. Co. where the insured fertilizer distributor which was located immediately adjacent to a plant that manufactured products for the fertilizer distributor. The plant and the distribution company were separately owned. An explosion at the plant damaged both properties. The business of the distribution company would have been interrupted by physical damage, but in any event it would have had no fertilizer to supply its customers because of the destruction of the nearby fertilizer manufacturer. The distributor had business interruption insurance, but the policy contained an idle periods provision which provided that there would be no loss payable for any period of time during which the business would not have been in operation in the absence of a loss, that is, insured physical damage to its property. The distributor's recovery was precluded by the idle periods clause-regardless of its own damage, it could not have continued operations due to the loss of its principal supplier.
VIII. CONTINGENT EXTRA EXPENSE COVERAGE
Coverage for contingent extra expense is available with similar provisions as those found in contingent business interruption coverage. The coverage grant provides:
We will pay for the necessary Extra Expense you incur due to the direct physical loss of or damage to property at the premises of a "dependent property" described in the scheduled caused by or resulting from any Covered Cause of Loss.
The seventy-two hour waiting period found in the definition of "period of restoration" in the ISO contingent business interruption endorsement is not included in the contingent extra expense coverage.
Contingent extra expense was discussed in a negligence claim against a broker in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota. Here, Aon acted as broker for ADM's insurance program. While obtaining a $50 million excess layer, Aon failed to include contingent business interruption and extra expense coverage. ADM suffered losses as a result of flooding which affected the corn crop, especially the ability to transport it. Following, ADM brought suit against Aon seeking damages, including those ADM alleged were based on Aon's failure to procure contingent business interruption and extra expense coverage.
On appeal, Aon argued that ADM could not recover contingent extra expense because it suffered no business interruption loss. Aon's argument centered on the theory that ADM had to show that it "actually ceased production" in order to recover. The Court of Appeals disagreed finding that the following policy provision (in the underlying layers where coverage was bought) " "[t]his policy covers against loss of earnings and necessary extra expense resulting from necessary interruption of [ADM's] business... caused by damage to or destruction of real or personal property..." did not require cessation of business to trigger coverage.
IX. INTERRUPTION BY CIVIL AUTHORITY
The provisions vary in policies, particularly the geographic proximity required. It also has a relatively short time limit. For convenience, the ISO form is set forth below. Unlike earlier editions of the ISO form and some nonstandard forms, this edition of the ISO form does not contain a proximity requirement.
a. Civil Authority
We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.
The coverage for Business Income will begin 72 hours after the time of that action and will apply for a period of up to three consecutive weeks after coverage begins.
The coverage for Extra Expense will begin immediately after the time of that action and will end:
(1) 3 consecutive weeks after the time of that action; or
(2) When your Business Income coverage ends; whichever is later.
As can be seen from the ISO language, civil authority is similar to contingent business interruption in that the physical damage occurs at a third party location. Civil authority coverage is meant to provide protection where the insured's property may suffer no physical damage, but due to damage at another location civil or military authority issues an order that prevents the insured from accessing its own property. The prohibition must be real, and it must be the result of physical damage. Examples of both requirements follow.
A. Prohibition of Access
In 730 Bienville Ptnrs. Ltd. v. Assur. Co. of Am., the insured alleged that the FAA ground stop following 9/11 prevented guests from getting to its hotels thereby constituting a "prohibition of access" as defined under the policy's civil authority provision. The court held that the policy language which provided "we will pay for the actual loss...caused by action of civil authority that prohibits access to your premises..." required prohibition of access directly at the insured's property. Travel restriction was distinguished from actual restricted access to the hotels. Patrons may have been unable to fly to the insured's hotel locations, but the hotels themselves were still accessible.
A similar result is found in Southern Hospitality, Inc. v. Zurich Am. Ins. Co. Once again the insured claimed that the FAA ground stop order hindered access to hotels. In this case, the policy provided coverage for "actual loss of Business Income...caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property other than at the described premises..." Here, the insured argued that "prohibit access" was ambiguous. The court rejected the insured's argument finding that the term was not ambiguous, and that its plain ordinary meaning was "formally forbid" by "authority". Like 730 Bienville, it was not enough that the FAA's order limited means of travel. The order, in and of itself, did not prevent people from accessing the hotels.
An ABA article commented on three other recent decisions in which prevention of access has been an issue. As opposed to the decisions mentioned immediately above, in these cases there is no real issue regarding the proximity of the damage. These insureds' businesses were directly impacted by the destruction of the World Trade Center. Instead, the holdings turn on whether access was actually prohibited. Access was not prevented where scaffolding closed entryway made getting into a Brooks Brothers more difficult. In another matter, access was not prevented where the insured could reach his office via subway or on foot though vehicular access was still prohibited. Finally, in a third decision, access was not prevented where it was held that a restaurant was still accessible though vehicular and pedestrian traffic was diverted.
B. Intent Behind the Order Preventing Access
In United Air Lines Inc., v. Ins. Co. of the State of Pennsylvania, the court held that the insured had to prove "it was denied access to its "locations" at the Airport "as a direct result of damage to adjacent premises." The case turned on whether the insured could prove that the shut down was a direct result of damage to the Pentagon. The insured could not make such a showing because the damage to the Pentagon was not the reason for the ground stop order, rather the main impetus for the order was the fear of future attack.
In City of Chicago v. Factory Mut. Ins. Co., claim was made for denial of access to the airports in Chicago. The City of Chicago sought coverage under both the Ingress/Egress and "Protection for Preservation of Property" provisions. The court found no coverage under either provision. Regarding Ingress/Egress, the court held that the policy required physical damage to property within 1,000 feet of the affected property, and the FAA's ground stop order was issued to prevent future and further terrorist attack. As such, The City of Chicago could not satisfy the causation requirement. The court affirmed this lack of causation in its rejection of the claim under the "Preservation of Property" provision. The court found that there was no evidence that the ground stop order sought to protect any of the City's airfields.
On the other hand, in U.S. Airways, Inc. v. Commonwealth Ins. Co., the court found coverage. The policy provided coverage for 30 days "when, as a direct result of a peril insured against, access to real or personal property is prohibited by order of civil or military authority." The court found that the order to close Reagan National Airport was made specifically because of fear that it would be targeted for a future terrorist attack. It concluded that closing the airport protected the property of U.S. Airways and all other operators at the airport. Because of this, the order of civil authority was issued as a result of a direct risk of damage or loss to U.S. Airways' property.
C. Prohibition of Access Must be Caused by an Actual Order of Civil (or Military) Authority
Penton Media, Inc. v. Affiliated FM Ins. Co. is another September 11th civil authority decision. The insured's claim dealt with both the application of the civil authority coverage and the meaning of "by order of civil authority." Only the latter is discussed here. The insured scheduled a tradeshow to be held at New York City's Javits Center. After the September 11th attack, FEMA and the City of New York entered into an agreement with the Javits Center to use the Center as a base of operations. The insured's tradeshow was cancelled, and it brought claims under the civil authority provisions. The court looked to the dictionary definition of "order" and concluded that an order of civil authority required a command or mandate. The execution of the lease agreement did not rise to the level of a command or mandate. Since the insured could not supply any proof that the Javits Center was closed by virtue of a command or mandate, no coverage was found.
X. INGRESS / EGRESS
Ingress/Egress coverage is similar to civil authority coverage but does not require an order of civil authority. Rather, it requires physical impediment of ingress and egress for a specified period of time. It covers loss of business income "sustained during the [specified] period of time when, as a direct result of a peril not excluded, ingress to or egress from real and personal property not excluded hereunder, is thereby prevented". Coverage is usually found in manuscript or broker generated forms, and is not in ISO forms.
Ingress/egress coverage was at issue in Fountain Powerboat Indus, Inc. v. Reliance Ins. Co. There was no damage to the insured's property but storm damage precluded access to the property. The court addressed whether physical damage to the insured's property was a required element for ingress/egress coverage, and whether, under the extended period of indemnity clause, the ingress/egress coverage extended to the period of time after the insured regained access to its property. In both instances, the court found for the insured but this decision is dependent on specific language in the policy.
XI. POWER AND SERVICE INTERRUPTION
Another form of business coverage for third party damage is Off-Premises Service Interruption. It is similar to contingent business interruption in that the utility is in effect a supplier. The coverage actually predates contingent business interruption. This coverage supersedes, at least in part, the provisions of exclusion for service interruption that is common to most policies. ISO Form coverage is excluded for utility interruption if the interruption occurs outside of a covered building. The relevant language is as follows:
Following is the language from the ISO Form's Utility Services-Time Element Endorsement:
Your coverage for Business Income and/or Extra Expense, as provided and limited in the applicable Coverage Form, is extended to apply to a "suspension" of "operations" at the described premises caused by an interruption in utility service to that premises. The interruption in utility services must result from direct physical loss or damage by a Covered Cause of Loss (as indicated in the Schedule) to the property described in Paragraph C. if such property indicated by an "X" in the Schedule and is located outside of a covered building described in the Declarations.
Issues may arise as to the triggering cause of damage. For example, in Bagelman's Best, Inc. v. Nationwide Mutual Ins. Co., the question arose as to whether the service interruption had to be "accidental" before covered triggered. The power company made a tactical decision to shut down power for five days due to rising flood waters. The insured suffered losses and brought claim under its Off Premises Service Interruption provision. The coverage was for "loss and expense resulting from the necessary interruption of business caused by an "accident" to any equipment that is...(3) used to supply electrical power, heating, air conditioning, gas, water, steam, or telephone services to your premises." "Accident" was defined as a "sudden and accidental breakdown...". The insured argued that the shutdown was a "constructive accident". The court rejected coverage holding that the insured was aware of the shutdown as it was a planned event. There was no unexpectedness to this shutdown; therefore, there could be no accident. Since coverage was provided only in event of an accidental breakdown no coverage could be found.
A similar holding is found in Lyle Enterprizes, Inc. v. Hartford Steam Boiler Inspection & Inc. Co. Once again, the issue was whether the power outage was accidental or fortuitous. The policy defined "accident" to include "a fortuitous event that causes direct physical damage to "covered equipment'". No coverage was found because the engaging of the power company's protective mechanisms caused the outage at the insured's place of business. The engaging of protective equipment was a purposeful not accidental event; therefore, no coverage was found.
It is important to note whether the service interruption coverage applies only when triggered by physical damage of the type insured, or only requires an accident (such as failure to turn a switch. Both types are available.
One other issue to note is that this coverage often contains a "Waiting Period" under which there is no coverage unless the power was interrupted for more than the "waiting period." If the interruption in service is less than the "Waiting Period," no part of the loss is covered. If, however, it is longer than the waiting period, the loss from inception may be covered but that is subject to requirements such as the requirement of the insured to notify the utility.
XI. RENTAL VALUE & RENTAL INCOME COVERAGE
Rental value correspondence is similar to business interruption coverage.
In the ISO Form, rental value coverage provides insurance for the insured's net rental income as well as the fair rental value of any portion of the premises occupied by the insured, plus continuing operating expenses in connection with the premises, including payroll, and charges that would normally be paid by the tenant. The recovery, like business interruption, is reduced to the extent that expenses are reduced.
Rental Value is defined by the ISO form as:
5. "Rental Value" means Business Income that consists of:
a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred as rental income from tenant occupancy of the premises described in the Declarations as furnished and equipped by you, including fair rental value of any portion of the described premises which is occupied by you; and
b. Continuing normal operating expenses incurred in connection with that premises, including:
(1) Payroll; and
(2) The amount of charges which are the legal obligation of the tenant(s) but would otherwise be your obligations.
In Celebrations Caterers, Inc. v. The Netherlands Ins. Co., an insured attempted to recover under a "rental value" coverage provision for losses due to "slow down or cessation...of business activity," following a fire loss. The insurer rejected the insured's claims for rental value losses because the insured failed to demonstrate loss of tenant occupancy of the insured premises. Id. at *3. Finding for the insurer, the court held the plain language of the policy stated that "rental value" coverage applied only where the premises were rendered untenantable. While there may have been a slow down in business, at no time had the insured's premises been rendered untenantable; therefore, coverage under the "rental value" provision was unavailable.
Another decision of note is Broad Street, LLC v. Gulf Ins. Co., a September 11th case. The court examined whether a business interruption claim exists where the property has or is able to resume operations. The court rejected such a claim absent a total cessation of operations. The insured, owner of an apartment building, provided rent abatement and other concessions to tenants following disruptions caused by the terrorist attack. The insured made claims for business interruption / rental losses that occurred after tenants could safely reenter and inhabit their apartments. The court held against the insured finding that the term "necessary suspension" required complete cessation of operations.
Sher v. Lafayette Ins. Co. analyzed the issue of how to valuate a rental income loss claim. The insureds claimed business interruption losses for loss of rental income follow Hurricane Katrina. Pre-Katrina, the insureds rented two apartments, each one for $700 a month. At trial, the insureds presented evidence that the rental value would have doubled to $1400 a month for each. The court held that the language of the business income policy allowed recovery of the increased rental value as the "actual loss." We believe that this decision will be reviewed by the Louisiana Supreme Court.
XII. LEASEHOLD INTEREST
The leasehold interest ISO form provides coverage for:
We will pay for loss of Covered Leasehold Interest you sustain due to the cancellation of your lease. The cancellation must result from direct physical loss of or damage to property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.
Leasehold interest provisions cover losses suffered by insured tenants. The coverage is triggered when there is physical damage to the premises from a covered cause of loss which causes a cancellation of the lease. The insured is covered for leasing more expensive replacement premises. The amount of recovery is dependent on the language in the policy and typically includes a formula for determination of present cash value of a lease.
Time element coverage is an integral part of first party insurance. As industries continue to grow, so too grows the potential for greater loss. This, combined with the increasing recognition of the significance of time in business operations, makes makes time element coverage likely to have an increasing market presence. Many of the time element coverages have received little attention in the courts. That is now likely to change.
 Portions of this paper are based, in part, on prior publications by one of the authors. When that situation exists the information has been updated for this paper.
 See, Datatab, Inc. v. St. Paul Fire Ins. Co., 347 F.Supp. 36 (S.D.N.Y. 1972). See also, Zurich Am. Ins. Co. v. ABM Indus., Inc., No. 01 Civ. 11200, 2006 WL 1293360 (S.D.N.Y. May 11, 2006).
Protection Mut. Ins. Co. v. Mitsubishi Silicon Am. Corp., 992 P.2d 479 (Or. App. 1999).
 Id. at 481.
 See e.g., Peter E. Kanaris, Analytical Approach to Business Interruption, Extra Expense, and Civil Authority Coverage Issues, (Tort Trial & Insurance Practice Law Journal, Fall 2007). This paper explores an analytical approach to business interruption, extra expense, and civil authority.
 National Children's Exposition Corp. v. Anchor Ins. Co., 279 F.2d 428 (2d Cir. 1960).
 Harry's Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Co., 126 N.C. App. 698, 486 S.E.2d 249 (N.C. Ct. App. 1997).
 Ramada Inn Ramogreen, Inc. v. Travelers Indem. Co., 835 F.2d 812 (11th Cir. 1988).
 Gregory v. Continental Ins. Co., 575 So.2d 534 (Miss. 1990).
 Id. at 540.
 Royal Indem. Ins. Co. v. Mikob Properties, Inc., 940 F. Supp. 155 (S.D. Tex. 1996).
 Id. at 157; See also Howard Stores Corp. v. Foremost Ins. Co., 82 A.2d, 398, 441 N.Y.S.2d 674 (1981) aff'd, 56 N.Y.2d 991, 453 N.Y.S.2d 682, 439 N.E.2d 397 (1982) (recovery denied for water damage to business where there was no actual suspension of business, but rather an alleged adverse effect on continuing sales).
 Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. Texpak Group, N.V., 906 So. 2d 300 (Fla. Dist. Ct. App. 2005).
 American States Ins. Co. v. Creative Walking, Inc., 16 F. Supp. 2d 1062 (E.D. Mo. 1998), aff'd at 75 F.3d 1023 (8th Cir. 1999); Home Indemnity Co. v. Hyplains Beef, L.C., 893 F. Supp. 987 (D. Kan. 1995), aff'd 89 F.3d 850 (10th Cir. 1996); Quality Oilfield Prods. Inc. v. Michigan Mut. Ins. Co., 971 S.W.2d 635 (Tex. App. 1998); Keetch v. Mutual of Enumclaw Ins. Co., 831 P.2d 784 (Wash. Ct. App. 1992).
 Beautytuft Inc. v. Factory Ins. Assoc., 431 F.2d 1122 (6th Cir. 1978).
 SR Int'l Business Ins. Co., Ltd. v. World Trade Center Properties, 2005 W.L. 827074 (S.D.N.Y. 2005).
 Duane Reade Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384 (N.Y. 2005).
 Retail Brand Alliance, Inc. v. Factory Mutual Insurance Co., 489 F. Supp. 2d 326 (S.D.N.Y. 2007).
 Streamline Capital, L.L.C. v. Hartford Cas. Ins. Co., WL 22004888 (S.D.N.Y. 2003).
 Lava Trading Inc. v. Hartford Fire Ins. Co., 365 F. Supp. 2d 434 (S.D.N.Y. 2005).
 Zurich Am. Ins. Co. v. ABM Indus., Inc., No. 01 Civ. 11200, 2006 WL 1293360 (S.D.N.Y. May 11, 2006).
 Admiral Indem. Co. v. Bouley Int'l Holdings, LLC 2003 U.S. Dist. LEXIS 20324 (S.D.N.Y. Nov 13, 2003).
 Baxter Int'l Inc. v. American Guarantee and Liability Ins. Co., 861 N.E.2d 263 (Ill. App. Ct. 2006).
 Finger Furniture Co. Inc. v. Commonwealth Ins.Co., 404 F.3d 312 (5th Cir. 2005) Id. at 314-315.
 Duane Reade, Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384.
 Thompson v. Threshermen's Mut. Ins. Co., 493 N.W.2d 734 (Wis. App. 1992).
 See, Thompson at 737.
 ISO CP 00 30 04 02.
 Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158 (2d Cir. 2005).
 Note that on remand the district court held the causation issue was for the jury. See, Zurich Am. Ins. Co. v. ABM Indus., Inc., No. 01 Civ. 11200, 2006 WL 1293360 (S.D.N.Y. May 11, 2006).
 International Risk Management Institute, Inc., Commercial Property Insurance, Vol. II, § IX.J.37-38 (2004).
 ISO CP 15 08 04 02.
 Beautytuft, Inc. v. Factory Ins. Assoc., 431 F.2d 1122 (6th Cir. 1970).
 Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 936 F. Supp. 534 (S.D. Ill. 1996).
 Id. at 541-543.
 Pentair, Inc. v. American Guar. And Liability Ins. Co., 400 F.3d 613 (8th Cir. 2005).
Pentair, Inc. v. American Guar. And Liability Ins. Co., 2003 WL21804874 (D. Minn. 2003).
 Pentair, Inc. 400 F.3d at 615.
ABM Indus., 397 F.3d 158 (2d Cir. 2005).
 Air Liquide America Corp. v. Protection Mut. Ins. Co., 1997 U.S. App. Lexis 35860 (9th Cir. Oct. 9, 1997).
 Air Liquide America Corp. v. Protection Mut. Ins. Co., 1997 U.S. App. Lexis 35860 (9th Cir. Oct. 9, 1997).
 ISO CP 15 34 10 00.
 Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004). While the policy at issue in this matter contained a Contingent Business Interruption provision, the 8th Circuit discusses only contingent extra expense.
 Id. at 852.
 ISO CP 00 30 04 02.
 730 Bienville Ptnrs. Ltd. v. Assur. Co. of Am., 2002 WL 31996014 (E.D. La. Sept. 30, 2002), aff'd 2003 WL 21145725 (5th Cir. 2003).
 Southern Hospitality, Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137 (10th Cir. 2004).
 Id. at 1139.
 Id. at 1140.
 Clark Schirle, Time Element Coverages in Business Interruption Insurance, "The Brief" (Fall 2007).
 Royal Indemnity Co. v. Retail Brand Alliance, Inc., 822 N.Y.S2d 268, 270 (App. Div., 1st Dep't 2006).
 Abner, Herrman, & Brock, Inc. v. Great Northern Ins. Co., 308 F. Supp. 2d 331, 336-37 (S.D.N.Y. 2004).
 54th Street Ltd. Partners, L.P. v. Fidelity and Guarantee Ins. Co., 763 N.Y.S.2d 243, 244 (App. Div., 1st Dep't 2003).
 United Air Lines Inc., v. Ins. Co. of the State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006).
 Id. at 134.
 Id. at 135 (citing, Alan R. Miller, Business Interruption Insurance: Current Issues, 702 PLI Litig. & Admin. Practice Course Handbook Series 233, 267 (2004) ("Access may have been prevented to some property, but not because of the physical damage that occurred.")). See also, Clark Schirle, Time Element Coverages in Business Interruption Insurance, "The Brief" (Fall 2007).
 City of Chicago v. Factory Mut. Ins. Co., 2004 WL 549447 (N.D. Ill. Mar. 18, 2004).
 Id. at 3. See also e.g., County of Clark v.. Factory Mut. Ins. Co., No. CV-S-02-1258-KSD-RJJ (D.Nev., Sept. 30, 2003), 8-21 Mealey's Emerg. Ins. Disputes 14 (2003) where the court denied airport's motions for summary judgment stating that there was no certainty that the FAA order was a direct result of physical damage to the WTC.
 Id. at 4.
 U.S. Airways, Inc. v. Commonwealth Ins. Co., 2004 WL 1637139 (Va. Cir. Ct. 2004).
 Id. at 3.
 Penton Media, Inc. v. Affiliated FM Ins. Co., 2006 WL 2504907 (N.D. Ohio Aug. 29, 2006), aff'd, 2007 WL 2332323 (6th Cir. Aug. 15, 2007). Regarding the appeal, Penton did not appeal the lower court's construction of "order of civil authority." Rather, the 6th Circuit examined whether "described locations" as found in the Civil Authority provision applied to all of the locations described in the policy, even those designated specifically for coverage other than Civil Authority coverage. The Court found that it was unreasonable to conclude that "described locations" in the Civil Authority clause applied to locations described in policy provisions which applied only to physical loss or damage, not prohibition of access.
 Penton at *6.
 Fountain Powerboat Indus., Inc. v. Reliance Ins. Co., 119 F. Supp. 2d 552, 558 (E.D.N.C. 2000).
Richard P. Lewis and Nicholas M. Insua, Business Income Insurance Disputes, at 6-119-121 (2007).
 Fountain Powerboat, 119 F. Supp. 2d 552.
 ISO Form CP 15 45 04 02.
 Bagelman's Best, Inc. v. Nationwide Mutual Ins. Co., 2004 WL 2793214 (N.C. Ct. App. Dec. 7, 2004).
 Id. at *2-*3.
 Id. at *3.
 Lyle Enterprizes, Inc. v. Hartford Steam Boiler Inspection & Inc. Co., 399 F. Supp. 2d 821 (W.D. Mich. 2005).
 Id. at 823, 825.
 Celebrations Caterers, Inc. v. The Netherlands Ins. Co., 2008 WL 282293 (E.D. Pa. Jan. 1, 2008).
 Broad St., LLC v. Gulf Ins. Co., 832 N.Y.S. 2d 1 (App. Div. 1st Div. 2006).
 Id. at 5-6.
 Sher v. Lafayette Ins. Co., 2007 WL 4247708 (La. App. 4 Cir. Nov. 19, 2007).
 Id. at *11.
 ISO CP 00 60 06 95.
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