FC&S Ponders Business Income Claims

The answer to the multibillion-dollar question of how big the ultimate insured loss from the terrorist attacks on America will be hinges on determining the size of lost income and expense claims that arise from attack-related business shutdowns, insurance experts say.

“Massive,” “major,” “global” and “uncertain” are all words that consultants, claims experts and insurance analysts are using to describe the extent of business interruption claims related to the attacks. These experts have set estimates that vary anywhere from $3.5 billion to $25 billion, all agreeing that theres potential not only for claims from operations that were once housed in New York's World Trade Center buildings, but also from those situated well beyond the 10048 WTC ZIP code.

Theres plenty of reason for variation in potential loss estimates, according to one group of insurance coverage experts here at The National Underwriter Company. But the coverage arguments the financial types are using to get at their numbers are not always entirely correct, they warn. Indeed, some dont even have the name of the coverage right, according to David Thamann, associate editor of the FC&S Bulletins.

(The National Underwriter Company in Erlanger, Ky., the parent company of this newsmagazine, also publishes FC&S Bulletins and FC&S coverage guides.)

“You can continue to refer to it as business interruption if you want to. But the official name is business income,” Mr. Thamann said, referring to the coverage title on the standard Insurance Services Office form, which was revised last October.

Using that standard form as a guide, Michael McCracken, another associate editor, responded to one much-debated question: Are businesses located in Downtown New York, but outside of the World Trade Center, covered for business income losses sustained because police and civil authorities closed down many streets in New York City?

Under the standard ISO business income form, if a civil authority shuts down access to a building due to physical damage not at your premises, you've got coverage for three weeks–and it begins 72 hours after the shutdown, Mr. McCracken said.

The 72-hour waiting period acts like a time deductible, noted Diana Reitz, another FC&S associate editor, explaining that under the standard form, insureds never recover losses sustained for the first three days, but do have coverage for any losses during the three consecutive weeks after coverage begins.

Not every company that buys this type of coverage has a standard form, she cautioned. “Company-specific” forms may start with ISO's template, “but then they're going to put a lot of bells and whistles in to differentiate themselves,” she said, noting, for example, that one major commercial lines carrier's form automatically extends the coverage period on its middle-market package from three weeks to 30 days.

Some potential claim situations that will come up as a result of the attacks are “very borderline,” she said, noting that the presence of specialized, non-standard or manuscripted forms will be one reason that carriers may respond differently on some of the seemingly more ambiguous coverage questions.

Ms. Reitz said she believed that nonstandard forms would be more common for bigger firms. “Consider a popcorn vendor at an airport,” she said. “If they're a regional or local candy company, they're probably going to have an ISO form or package that's off-the-shelf. But if they're part of a large chain, they might have a more customized form that would provide more coverage.”

Ms. Reitz also noted that answers to some of the more ambiguous business income coverage questions will simply depend on the leniency of carriers involved in interpreting policy language.

Putting all that aside, Mr. Thamann emphasized that on the particular question of coverage for civil authority shutdowns, whether its a standard form or a manuscripted one, “this coverage is written into the form. You don't have to get a special endorsement.”

“Everybody, if they have business income, is probably going to have this,” Ms. Reitz agreed.

Turning their attention to questions about a coverage commonly referred to as “contingent business interruption”–which could apply if an insured business had a main supplier or customer in the World Trade Center–the FC&S experts provided some basic definitions.

“You can get coverage by endorsement” for those situations, Mr. Thamann said, again providing a more correct title for the endorsements available under the standard form–”business income from dependent properties.” He said dependent properties may fall in one of four categories: contributing locations, recipient locations, manufacturing locations and leader locations.

A leader location would be like a department store in a mall, explained another FC&S associate editor, Diane Richardson, who noted that customer traffic for a neighboring store might depend on the business volume of the “leader” department store.

“If a company had one of these dependent properties endorsements, it would have coverage if a supplier or the distributor” located in the World Trade Center “happened to go down” because of terrorist attacks, Mr. Thamann said.

“But there is no coverage–this won't apply–if your supplier” is situated outside the World Trade Center and “was closed down because of civil authority actions,” Ms. Richardson said.

Under the definition of contingent or dependent properties, “the form says, We will pay for the actual loss of business income you sustain due to the necessary suspension of your operation that is caused by direct physical loss or damage to dependent properties,” she said.

Explaining again what would be covered, Mr. McCracken said, “If your prime customer or supplier was in the World Trade Center and your business was somewhere else, youve got coverage due to the direct loss” to the dependent property in the Trade Center.

“Broaden that,” said Bruce Hillman, editorial director of Risk and Insurance Markets for the Professional Publishing Group of The National Underwriter Company, challenging the FC&S group that had come together to debate potential coverage issues. “Lets suppose the dependent company is in Upstate New York–or a supplier company is in Northern Kentucky, but cant deliver because the airlines are shutdown,” he said.

“No coverage,” Ms. Reitz and Ms. Richardson responded together.

If a business in Kentucky depends heavily on another business in downtown New York outside the World Trade Center that wasnt physically damaged, but was shut down by authorities, the Kentucky business cannot recover even if theres a dependent properties endorsement on its policy, Mr. Thamann agreed. “There has to be that direct physical damage,” he said.

Noting that at least one lawyer has suggested that he could still argue that such a loss “arises out of physical damage,” Mr. Hillman said, “theres no telling what can happen if he did.” The outcome would depend on the sympathies of a jury and a judge, as well as the creativity of the argument, Mr. Hillman said.

Ms. Richardson saw less room for creativity. “The policy language” of the standard form “says caused by direct physical damage. Thats not the same as 'arising out of. So what the attorney has said, if that language were on a policy, could be correct, but not under the standard forms,” she said.

Reacting to a broader coverage theory advanced by a claims executive during a recent National Underwriter interview–that contingent business interruption insurance would cover any situation where an insured company is “directly affected by an event outside of its control” that impacts a source of business from which it derives income–the FC&S experts said they were uncomfortable with such interpretations.

“Then we might even get into economic reasons,” Ms. Reitz said, rejecting the theory. She did note, however, that its possible to manuscript any language into a policy–even language like “an event outside of its control.When we get into special forms, Im of the opinion that maybe some very large accounts would have dependent coverage from civil authority. But your plain, normal business, probably not.”

“The emotionalism of the event makes everybody want to lean to find coverage. But thats going to severely impact our industry–if thats the way these cases go,” Mr. Hillman said.

Citing one major insurers form as an example, Ms. Reitz noted that the limit of dependent properties coverage was $250,000. “Thats not a lot,” she said.

For some businesses, the three-week civil authority shutdown coverage might not be a lot, either. Ms. Reitz noted, for example, that some airports, like Reagan National, remained closed as this article was being written. Referring to business lost by small airport shops or airport taxi services, she said, those are perfect examples of a situation where the civil authority shutdown coverage would apply. “Those people may have three weeks” worth of coverage, “but I would find it hard to believe that a lot of them have more than that,” she said.

Even in cities where airports have reopened, there have been media reports of business slowdowns at neighboring bars and restaurants, stemming from the fact that less people are flying because of the fear of repeat attacks. Will business income coverage apply? “I honestly dont know,” Ms. Reitz said. “It would really be stretching, I think, for that” to be covered, Ms. Richardson added.

The FC&S experts agreed that business income policies will cover partial shutdowns, not just complete cessations of business, if there is physical damage to an insureds property or dependent property. “The most recent [ISO] form defines suspension to mean slowdown or cessation of your business. In the previous ones, they didnt define that word,” Mr. Thamann said. “I think you can infer that the intent of the form, even before the current one, was that it would cover a slowdown.”

Ms. Reitz pointed out that disagreements are sure to arise in valuing claims, because for almost any business, some portion of a slowdown may be traced back to a general economic downturn occurring before the terrorist attacks.

Ms. Reitz agreed that “professional firms,” such as the law offices, accounting and consulting firms that made up much of the tenant list of the World Trade towers were also the types of firms least likely to buy business income protection. (That assertion was initially put forth in a statement released by the National Association of Independent Insurers of Des Plaines, Ill.)

Drawing from past experience that she had in placing insurance for banks, Ms. Reitz said: “They would never buy business income insurance–because they just cant be down.” Instead, they all bought extra expense coverage, designed to pay for the costs of keeping their firms operating”to set up trailers or special offices, or to rewire the computers.”

For how long? Suppose, for example, a business has temporarily relocated, but has not yet decided on its permanent new location. When does the extra expense coverage end?

“Extra expense means necessary expenses you incur during the period of restoration,” Mr. Thamann said, reading from the standard form. Continuing, he said: “A period of restoration begins 72 hours after the direct physical loss and it ends the earlier of the date when the property at the described premises should be repaired, rebuilt or replaced, or that date when business is resumed at a new permanent location.”

With respect to attack-related expenses, Mr. Hillman agreed that the definitions raise questions. “Nobody even knows whats going to happen with the premises where the World Trade Center was. So at what point are they permanently in a new place? Theres a subjective element to that,” he said.

Ms. Reitz believes dollar limits of coverage will give objective answers to such questions. “If I had to make a prediction, I would think that many businesses will run out of limits before they run out of time,” she said.

Ms. Reitz said that, for a long time, it was very hard to convince small companies to dole out premium dollars for such business income coverage, generally. “Since the market has been very soft recently, there's probably a higher likelihood that mid-market, smaller companies would have this,” she said. “But getting them to buy more–to increase the coverage–might have been difficult.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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