Reed Smith Client Briefings

As with the attacks of September 11, 2001, and the hurricanes of 2005 in the Gulf of Mexico, the 2017 hurricanes that devastated the southeastern United States will spawn a host of “time element” claims: claims based upon loss of income or incurred expenses over the time businesses were affected by the loss. If the past is any guide, insurance companies will strenuously resist these claims. The purpose of this paper is to give policyholders an understanding of the basic nature of potentially applicable Business Income and Contingent Business Income coverages.

Business Income

Business Income insurance is designed to cover a policyholder for profits lost, and unavoidable expenses incurred, during the hypothetical Period of Restoration needed to repair or replace damaged or destroyed property used by the policyholder in its operations. The following issues are typical in Business Income claims:

What is the rate of loss? The first issue is the most fundamental: figuring the amount of the Business Income lost per month during the Period of Restoration. Property policies typically provide little guidance as to how the amount of a Business Income loss is to be calculated: essentially, they state that Business Income is to be calculated from historical figures. This leads to many sources of potential conflict, such as whether examination is made of the business as a whole or a small sector of the business, and the period of past performance examined to map a trend. Essentially, the policy language is so vague that it ensures that, if the claim is large enough, the policyholder and the insurance company will have different views as to the rate of loss. Accordingly, for such losses, the policyholder should probably hire a forensic accountant, versed in property insurance, early in the process.