In the first decade of the 21st century, the Insurance Services Office, Inc. changed the name of the old business interruption policies. The new names for the forms are business income and extra expense coverage, or business income (excluding extra expense) coverage.
Rental value coverage is an optional aspect of the forms, which come with a variety of options including agreed value, monthly indemnity limit, and so on. Some are subject to coinsurance, while others are not. The modern property adjuster must be an accountant as well as a fireman, investigator, reporter, and construction engineer in order to fully understand all of the specifications involved.
The renamed forms quickly became familiar when the BP oil spill occurred. It has been nearly a year since the BP Deepwater Horizon rig exploded and dumped millions of gallons of oil into the Gulf of Mexico. That catastrophe caused a major direct loss to BP and its oil-drilling partners, but it was the indirect loss to the fishing and tourist industry that got most of the headlines; those costs may well have exceeded the costs of direct loss.
The Gulf Coast fishermen who were temporarily unemployed due to the BP oil spill complained bitterly about their losses. One might suspect that few had any sort of business income coverage, and their only recourse would be claims against BP or its drilling partners. I suspect that more than a few ran into problems when they went to prove how much money they had lost, for undoubtedly more than one fisherman was on a cash and carry business basis. The day's catch might be sold at the dock for a certain dollar amount to a fish dealer, who would then resell it to a processor or wholesaler for another amount, and you and I would buy it at the store for an even greater price. But the fishermen who sold their fish at the dock probably kept very few records, or at least provable records, as to how much they got paid for it.
When BP's claim representatives or Ken Feinburg (the guy in charge of reparations), ask for records, they would—or at least should—have questioned anything that didn't represent accurate books and records. (I hope a reader involved in those claims will write to tell us exactly what sort of books and records were being accepted when the claims were filed.) That's not to say, however, that they didn't investigate the claims. According to a news source, one restaurant waiter filed a claim for lost income following the spill, but the restaurant where he had worked closed a month before the spill even happened. That is certainly a lesson in deal in good faith, but verify!
Many Kinds of Indirect Loss
The issue of record-keeping isn't the only complication when it comes to assessing indirect loss. The problem with "business interruption," as the old forms were known, was that many businesses must continue operations regardless of direct damage. For example, state-of-the-art computer centers, often housed in a separate location than other operations, have a multitude of risk management techniques to avoid a long interruption. A large battery pack allows the computers to shut down slowly if there is a power outage or brown-out, and then restart slowly once power is restored. If there is direct damage to the center, most have duplicate data stored on other media (tapes, disks, drums, and hard drives) off-site so that important information can be retrieved easily. They might have arranged a temporary computer center location, referred to as a "hot site," for use until the insured center can be restored.
This is what extra expense coverage is for; it covers those extra costs of moving the off-site data to another location, moving necessary staff, and operating from there until the insured location is back in business, which could take months. That could mean months of hotel and restaurant bills for the computer staff, rental costs on the computer center, transportation and communication costs, and other expenses.
Landlord and Tenant Arrangements
The considerations don't stop there. The rental value coverage option in the business income forms also has several options, such as including or excluding payroll or other operating expenses. It could apply to a lessor, who will lose income from lessees if a covered loss occurs, or it could cover costs to a lessee who has to move, at least temporarily, because the premises where the tenant does business is damaged by a covered peril.
But that is not the only type of leasehold interest that can be insured. Suppose, back in 1932, the insured entered a 99-year-lease on a vacant area near a town and built a factory. The lease contained a clause saying that if the building the lessee constructed on the site suffered a fire, the lease could be voided. By 2011, that factory is smack-dab in the middle of a booming city. The land is worth a fortune, but the tenant is still paying rent based on that 1932 agreement. Wouldn't that lessor love to see a fire at the factory?
Let's reverse the scenario; the location of the vacant area in 1932 was booming, with factories all around. The 99-year lease had the same fire provision, stating that the lease could be voided if fire damaged the building constructed on the property. This time, the product the insured lessee made at the factory is no longer made, and 90 percent of the old building, broken windows and all, is sitting in the center of a slum with vacant buildings surrounding it. Yet, unless bankrupt, the lessee is still paying that lessor rent every month. The lessee could sublet the unused parts of the building, but who wants it? Wouldn't a fire be a handy thing to occur? Those leasehold interests are insurable, either for the tenant or the landlord. It's an odd kind of indirect loss coverage, but there it is, just waiting for the flames to void the lease agreements.
Exploding Boilers and Contingency Losses
Adding another form to the list of name changes, boiler and machinery policies are now called equipment breakdown forms. What used to be known as the outage or the use and occupancy indirect loss aspects of the old B&M forms now use the same wording as business income policies, including extra expenses. There are still many boilers in use, usually for heating or steam power, and those types of mechanical devices that spin, whirl, and rotate are still prone to malfunction and could cause damage; but much of that equipment, which used to be the bread and butter of the Northern Industrial Belt states, now resides in Mexico or China. The need for equipment breakdown coverage may now include far more than just boilers, lathes, and assembly line conveyors—it could involve air conditioning compressors and fans, elevators, and similar lifting devices. Despite these changes in the equipment, the need for indirect loss coverage if it should break down is still important, even if the names of the coverages are different.
Just In Time
There are also a great variety of contingency loss coverages to consider. I thought a lot about this about 25 years ago when a little book called The One-Minute Manager came out, and some folks in the education department of the company where I worked thought it was the greatest training tool ever written. I thought it was the dumbest thing I'd ever read. I showed it to my wife, who had been an elementary school teacher, and she said, "This is a basic how-to-teach-kindergarten book." There was the "one minute praise," and the "one minute 'boot-in-the-butt'" and a weekly meeting. Oh, yes, businesses could not survive without that weekly meeting. That's what the cartoon Dilbert is all about.
What struck me about the book's title, however, was that businesses had resorted to a different type of management form—last minute management. Well, that was not new. If it wasn't for doing things at the last possible moment, nothing would ever get done. Last minute management had a system though, and it worked. It was called "just in time delivery." It did away with at least one or two additional transportation trips, and did away with warehouses. Have you seen a warehouse lately? Public storage for all of your junk maybe, but not a real "warehouse." The old system of moving raw materials from the source to a warehouse, then from the warehouse to the factory, then moving the finished product from the factory back to another warehouse, from which it would be delivered to a retailer was inefficient. Instead, "just in time delivery" means having the raw material delivered directly to the factory on the very day it is needed, using it immediately, and then shipping products directly to the distributor or retailer, just as it is needed for the sales being conducted.
Great idea! Until . . . well, until the railroad or truck line goes on strike and the raw materials the factory needs don't arrive, so the factory has to shut down. Or, should a flood wash out the bridges the railroad needs to cross and the supplies can't get there, then the factory is out of luck. The producer of the material that the factory needs could even have a fire, meaning they can't produce the material, and the factory that makes the final product has to shut down until the source is back in business. Any number of problematic scenarios is possible.
Looking Ahead At Loss
You get the picture. All of these hypothetical instances are indirect loss situations due to a contingency. Everyone and everything is contingent on something else, and when that something else goes haywire, there is going to be loss. It is most often an insurable loss, but not always. When a flood washes out the railroad bridge or the truck line has a strike, neither of those is likely to be a covered loss. In the case that the factory that supplies the materials needed to make the finished product has a fire, however, the fire would be a covered contingency if the receiving factory has dependent property business income coverage.
Undoubtedly, as we move further into the future, new types of indirect loss will arise, and underwriters will come up with new versions of indirect loss coverage to insure against that loss. Who, in 1940, was concerned about whether a nuclear power plant might shut down and cause a major power outage? Who, in 1960, was worried about whether a computer worm or virus might infect the Internet? What the next decades will bring remains to be seen.
For claim adjusters, adaptability is the key. Whatever the claim involves direct or indirect loss, the elements are the same: coverage, liability, and damage. The tasks are the same: investigation, evaluation, and resolution. It was that way when the Sun Fire Insurance Company opened in London after the great fire of 1666, and it will be the same when a fire occurs in 2066. The way investigations, evaluations, and resolutions are conducted may change, but the basics will be the same. Whether it is health insurance including disability (the indirect loss), fire insurance with business income loss, or liability insurance with loss of use, the indirect costs of loss will still be almost as large as the direct loss.
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