As recent disasters--both natural and manmade--have dramaticallyincreased the number of business interruption claims, coveragechallenges have become a more important issue to corporateinsurance buyers.

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Understanding the criteria used to evaluate businessinterruption coverage claims has become a critical factor inavoiding litigation and resolving coverage claims.

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Buyers should gauge the following criteria to better deal withcoverage problems: direct physical loss to specific property, proofof business interruption and actual monetary loss.

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There must be a direct physical loss to specific property or aninsurance policy clause to cover different situations. For example,in the case of Cleland Simpson Co. vs. Fireman's Insurance Co., ahurricane struck the city of Scranton, Pa., thereby suspendingwater service. The mayor's subsequent closure of the city'sbusinesses, due to the loss of water and a possible risk of fire,caused an interruption of business for the insureds. The businesslost its case against the insurer, however, because there was noactual physical damage to the premises.

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Consider the recent decision, Narricot Industries Inc. vs.Fireman's Fund Insurance Co., where civil authorities suspendedoperations of all of the insureds' plants due to a hurricane thatcaused the city's water system to shut down.

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This prohibition of access to the business' facilities led to aninterruption claim. Importantly, in this case, there was a "civilauthority clause" in the insurance policy permitting a claim forlosses caused by an action of a civil authority.

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A side note: Under policy terms, "hurricane damage" would be acovered loss whereas "flood damage" would not. This again stressesthe importance of carefully reading the language of the insurancepolicy prior to presenting the claim.

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With any claim dispute, an actual interruption of businesssolely resulting from the physical loss to specified property isexamined. In the case, American Medical Imaging Corp. (AMIC) vs.St. Paul Fire & Marine Insurance Co., a fire at AMIC'sheadquarters resulted in smoke and water damage, rendering the useof the facilities impossible. So AMIC rented space at analternative site and relocated there the next day. It did notreturn to its headquarters for approximately six months.

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After receiving money from the insurer for property damage, AMICpresented a claim for $500,000 in lost earnings and extra expensescaused by the fire and relocation. The claim was based on analleged loss caused by the disruption of AMIC's telephonesystem.

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The insurer, St. Paul, refused to honor the lost earnings andextra expenses claim. AMIC filed a lawsuit seeking coverage for thelost earnings and expenses. A lower court dismissed the plaintiff'sclaim as too speculative, concluding that AMIC's businessoperations had not been suspended within the meaning of thepolicy.

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The appeals court, however, reversed the decision, holding thata jury could believe AMIC lost business due to the relocation andreduced telephone capacity at the temporary site.

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This case illustrates the importance of proving an actualinterruption of business. Because AMIC was diligent in its effortsto stay in operation, a question arose as to whether there was,indeed, an actual interruption of business.

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The AMIC case also shows there must be a monetary loss resultingfrom the covered interruption of business. In support of its claim,AMIC submitted projections of its future business that wereprepared prior to the alleged loss.

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The insurer challenged the nature of the speculativeprojections. The court nevertheless ruled that the evidence couldjustify a finding by the trial court that (1) AMIC's loss wasentirely the result of the fire and relocation; (2) was entirelycaused by a change in the business climate that is not covered bythe policy; or (3) was caused by some combination of the two.

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In another example, the Superior Court in Berkeley Inn Inc. vs.Centennial Insurance Co. affirmed the trial court's determinationthat Berkeley Inn had failed to establish any business interruptionloss. The accounting records introduced evidence revealing thatnotwithstanding the fire, which destroyed the insured's building,it was doubtful that the operation would have continued as a viablebusiness enterprise.

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The complete record established a floundering business with noapparent rescue in sight. The company therefore could not provemonetary business interruption loss.

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As risk managers and buyers dig themselves out of disasters,they must carefully check policy clauses and review the detailedsupporting records related to claims.

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