This is almost laughable, it is so obvious: "Business income can be confusing, to say the least." One of the FC&S expert analysts wrote this in August's FC&S Dec Page, which lets its users know what has recently been updated, added to, or commented on in the service. I almost cut the line from the text when I read it; simply saying it seems redundant.
I did not, however, because business income insurance is confusing in almost all of its aspects, from setting values pre-loss for the risk manager to sorting it all out after the loss for insureds, CFOs, brokers, accountants, lawyers, and everyone up and down the line.
In terms of coverage issues, BI is a hot topic. Almost automatically, BI used to mean bodily injury liability in the insurance pro's mind; now it means business income or interruption. In terms of press, BI is becoming dominant. Several requests for FC&S analyses have been published as FC&S Q&As, staff writer/analyst Susan Massmann covered some basic issues in an FC&S Onlines column in The National Underwriter property and casualty edition in August, and National Underwriter's Professional Publishing Division has just brought out a new book on the topic, The Business Interruption Book: Coverage Claims and Recovery. Worth my recommending to you (even if I were not employed by the publisher), this look at BI issues is written by partners from Ernst & Young's insurance practice group, Daniel T. Torpey and Daniel Lentz, and David A. Barrett of the law firm Latham and Watkins, based in Washington D.C.
The week of this writing, FC&S staff, led by Associate Editor Diane Richardson, fielded this BI query:
Our client is in the commercial real estate business. He buys properties, restores them if necessary, and leases them. Recently, he purchased a commercial building and was in the process of renovating it. He had shown the property to two prospective tenants but, before any lease could be signed, the building sustained a covered water loss.
The issue for us is that the insurer is denying the claim stating that, because the premises were not rented at the time of the loss, there can be no business income loss. The insurer also states that New York law prohibits payment when there are no tenants. The insured is covered by a standard business owners policy, ISO form BP 00 02 (12 99). What do you think?
The loss is covered subject to the insured's proving the loss. We should add, however, that the amount of a business income loss often is the subject of negotiation between insured and insurer. In other words, the insured might assert that he is entitled to X amount, but the insurer offers only Y. The two then negotiate an acceptable settlement.
One case turned up in research that had a situation much like the one described, in which condominium owners were unable to recover loss of rents while the condo was being repaired following a covered loss. In this case, Certain Underwriters at Lloyd's London v. Hogan et al., 556 S.E.2d 662 (N.C.App. 2001), the policy language specifically precluded coverage, because no signed rental contracts were in place (the form in question was a Lloyd's form).
In the present situation, the form is a standard ISO business owners form, with no similar requirement. As to the insurer's position that New York law forbids business income payment for non-rented premises, if that is true, the insurer must be able to point to the law, or case law, forbidding this practice. The only case our research uncovered was a New York case that declared BI coverage was uncollectible when the non-rented property was one in which the property was deemed uninhabitable prior to the loss.
In the situation you describe, the insured is in the business of renting commercial real estate, and the agent and insurer accepted that he was in this business. They both also knew that these particular premises were not occupied. A covered cause of loss occurred; business income coverage should have been triggered. There are no exclusions eliminating coverage. The insured is in the business of restoring and renting property. If he also can document that he has shown the property with a view to renting it, and was fully prepared to rent once a tenant signed a lease, this loss should be covered.
BI and Salvage Sales
Another recently asked BI question has to do with salvage value as it might reduce BI recovery:
My client owns a large store that sells new appliances. He had a major fire loss. In settling the property loss, he bought back many of the damaged appliances and sold them. Now, the insurer wants to deduct the income from the sale of the salvaged goods from the amount that would be payable as lost business income.
I do not think this approach is correct. My client was not in the business of selling damaged goods; his business was selling new appliances. Therefore, I do not see the sale as being part of his business, and do not think the income should be deducted. Opinion?
The argument that you pose, that the insured is not in the business of selling damaged appliances and, therefore, any income derived from the sale of salvage should not be deducted from the business income loss, has merit. However, in a review of two cases that address the subject (although indirectly), this did not appear to be an issue. In the first, International Service Insurance Co. v. The Home Insurance Co., 276 F.Supp. 632 (W.D. Okla 1967), the argument involved the amount that Home owed for expedited salvage operations it contracted for with International. Home's business income policy required its insured to expedite debris removal and salvage operations, if possible, in order to minimize business income loss. In addressing the suit, the court found no problem with reducing the business income loss due to the sale of the salvage.
In Hampton Foods Inc. v. Aetna Casualty & Surety, 601 F.Supp. 58 (E.D. Mo. 1984), the court, ruling on another matter, noted that the insured's amount recoverable for his business personal property loss was to be reduced by the sale of salvaged property. Thus, there is precedent for sale of salvage reducing a loss otherwise payable.
The most compelling argument, however, is that the business income form (CP 00 30 04 02, but also earlier editions) states, under Loss Determination Condition C: Resumption of Operations, "We will reduce the amount of your: (1) business income loss, other than Extra Expense, to the extent that you can resume your 'operation,' in whole or in part, by using damaged or undamaged property (including merchandise or stock) at the described premises or elsewhere." Here, "operations" means "your business activities occurring at the described premises."
As stated, the insured's business activity is selling new appliances, but we believe that the two provisions must be read together to give the loss condition its meaning. The policy speaks of using damaged property (including merchandise) to reduce the business income loss by resuming operations in part, and that is what your insured has done. Therefore, we believe that the insurer is correct in its approach.
Bruce Hillman is editorial director, Professional Publishing Division, of the National Underwriter Co.
The FC&S Claim Queue is prepared and written by the editorial staff of The Fire, Casualty and Surety (FC&S) Bulletins, the most widely used encyclopedic reference service devoted to insurance policy interpretation and coverage topics. FC&S is published by The National Underwriter Company. The editors welcome comment at fcs@nuco.com. For more on FC&S, visit www.fcsbulletins.com
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