Suppose you are counsel for a policyholder impacted by a damaging storm, hurricane or other catastrophic event. Your client reports that it sustained property damage and a significant business interruption loss. You are asked to assist in preparing and submitting the claim to the carrier. The accountant confirms that the policyholder’s net profit is down substantially as compared to the two prior years. You dutifully prepare the claim, submitting to the carrier 100 percent of the measured loss in net earnings plus fixed expense. Is that all there is to it?
Or, suppose you are counsel for the carrier receiving the claim. Has the insured satisfied its burden simply by submitting this total measure of its “business interruption” loss?
The simple answer to both questions is “no.” Whether you represent the carrier or the policyholder, a critical step in the process is to evaluate whether the claimed business interruption loss is causally connected to insured physical damage. This step is often the “missing link” in business interruption claim submissions.
First-party property policies typically contain language that requires business interruption loss to be a “direct result” of insured physical loss or damage, typically damage to insured property. This causal link reflects the fundamental nature of property insurance policies — they insure physical loss or damage to insured property. To the extent business interruption coverage is available, it also must be caused by the insured physical loss or damage.
This may seem a fairly self-evident proposition, but it is often “overlooked” in claim submissions to carriers. And even if the policyholder recognizes this policy requirement, significant disputes can arise as to whether the requirement has been met and which party has the burden of proof on the issue. Fortunately, courts around the country have provided helpful guidance.
In one of the leading cases, United Airlines incurred a significant loss of income due to the Federal Aviation Administration’s ground stop order following the events of 9/11.[1] United owned a ticket office at the World Trade Center, which was destroyed when the twin towers collapsed. United’s gates at the Ronald Reagan Washington National Airport were also purportedly “impacted” by the attack at the Pentagon when ashes and debris settled near it. United submitted a time element claim to its insurer for the income United lost during the period of time the FAA grounded flights.
The court rejected United’s claim as presented because United did not link its lost earnings with insured property damage. The relevant policy language provided:
This policy insures against loss resulting directly from the necessary interruption of business caused by damage to or destruction of the insured locations resulting from terrorism ... This section is specifically extended to cover a situation when access to the insured locations is prohibited by order of civil authority as a direct result of damage to adjacent premises …
The court determined that the language “resulting directly from” requires a link between the lost income claimed and insured physical damage at the insured location (or located adjacent to the insured location). The court noted that “United cannot show that the airport was shut down ‘as a direct result of damage to’ the Pentagon ... The evidence also indicates, not surprisingly, that the government’s subsequent decision to halt operations at the airport indefinitely was based on fears of future attacks.”[2]
The court ultimately concluded that United could recover the amount of losses attributable to the destruction of its ticket office in the World Trade Center, but “because the other loss of earnings was caused by the nationwide suspension of air service rather than ‘damage to or destruction of [a United] location,’ United could not recover under the policy for earnings lost as a result of the systemwide disruption of air service.”[3]
These principles have been applied across a wide variety of factual circumstances. For example, when the U.S. Food and Drug Administration issued an advisory to customers regarding potential E. coli contamination in spinach, a provider of fresh spinach experienced a reduction in earnings for which it submitted a business interruption claim. A California court rejected the spinach provider’s claim because there was no causal link or nexus between its business loss and an event covered by the policy.[4]
Also in California, following the Rodney King trial, the city of Los Angeles imposed dusk-to-dawn curfews on businesses in certain areas due to rioting and looting. The owner of several movie theaters submitted a claim for business interruption loss, which their carrier denied. The court upheld the denial because the loss was not a direct result of damage to or destruction of property and, therefore, was missing the requisite causal link.[5] Another example arose in a case out of Hurricane Andrew, where an insured hotel owner made a claim for loss of income where it sustained damages to air conditioning units, a pool pump and the telephone system. The insured claimed that the hotel lost profits as a result of damaged rooms not being available for rent.
The factual evidence, however, indicated that the insured never turned away a single customer due to physical damage from the hurricane and there were at all times vacant rooms available to rent. Focusing on the lack of evidence connecting the damage to the hotel to the claimed loss of revenue, the court concluded that the insured had failed to demonstrate the required “causal nexus” between the two and sustained the coverage denial.[6] Many more examples can be found in courts across the country.
Moreover, because this causal requirement is a condition of coverage, not an exclusion, the insured bears the burden to establish the necessary link. In Compagnie Des Bauxites de Guinee, for example, the insured’s business was interrupted when two trains collided, thereby halting rail traffic and preventing the insured from transporting ore from its mine to the coast to be shipped.[7]
The policy’s time element coverage insured against “loss resulting directly from necessary interruption of business caused by damage to or destruction of real or personal property …”[8] The insured claimed over $2.6 million in lost business income. The insurer argued that the claim was overstated as much of the alleged lost income was attributable to other causes of loss, including the unavailability of qualified locomotive engineers. The trial court charged the jury to find a causal connection between the lost income and the insured property damage. The insured argued on appeal that the trial court “erred in instructing that the business interruption must have resulted directly from damage or destruction of real or personal property, that the court erred in placing the burden of proof on the policyholder, and that the court erred in charging that [the insured] cannot recover for business interruption losses caused by a lack of locomotive operators.”[9]
The appellate court affirmed the judgment. The court noted that the company agreed to pay loss sustained “resulting directly from such interruption of business,” not loss sustained from other causes. Such interruption is interruption caused by “damage to or destruction of real and personal property,” not interruption caused by the unavailability of locomotive engineers. And since the policy required that the insured submit a proof of loss, and CBG was the plaintiff in a contract action, placing on it the burden of establishing its loss was not error.[10]
Whether policyholder or carrier, it is critical to understand these fundamental principles and policy requirements. Businesses sustain economic losses for any number of reasons, including competition, unavailability of labor, reduced demand for services or products, geographic undesirability, or a whole host of other causes. This is particularly true in claims arising out of catastrophic losses with significant and sometimes long-lasting areawide impacts.
But if an insured is seeking business interruption coverage, it has the burden to establish a causal link between insured physical loss or damage and the claimed business interruption loss. Failure to supply this missing link can prove fatal to a claim.
[1] United Airlines, Inc. v. Ins. Co. of PA., 439 F.3d 128 (2d Cir. 2006).
[2] Id. at 134.
[3] Id. at 130.
[4] Fresh Express Inc. v. Beazley Syndicate 2623/623 at Lloyd’s, 131 Cal. Rptr. 3d 129 (Cal. Ct. App. 2011).
[5] Syufy Enterprises v. Home Insurance Co. of Indiana, No. 94-0756, 1995 WL 129229, *2 (N.D. Cal. March 21, 1995).
[6] Southern Hotels Ltd. P’ship v. Lloyd’s Underwriters at London, Civ. A. No. 95-2739, Civ. A. No. 95-2739, 1996 WL 592732 (E.D. La. Oct. 11, 1996).
[7] Compagnie Des Bauxites de Guinee v. Ins. Co. of N. Am., 721 F.2d 109 (3rd Cir. 1983).
[8] Id. at 111.
[9] Id. at 113 (emphasis in original).
[10] Id. at 113-114 (emphasis in original); see also Minkler v. Safeco Ins. Co. of Am., 232 P.3d 612, 616 (Cal. 2010) (holding that: “The insured has the burden of establishing that a claim, unless specifically excluded, is within basic coverage, while the insurer has the burden of establishing that a specific exclusion applies”); Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281, 1287 (10th Cir. 2006) (holding that “under an all-risk policy, once the insured demonstrates a loss to the property covered by the policy, the insurance carrier has the burden of proving that the proximate cause of the loss was excluded by the policy language”) (emphasis added).
