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There are several pitfalls that risk managers should avoid when purchasing business interruption coverage to ensure they are properly covered and stay out of the courts, policyholder attorneys say.
First of all, risk managers should make sure they have a definition of "suspension" or "interruption" in their business interruption forms that covers the business for partial suspensions, advises Richard Lewis, a partner with law firm Anderson Kill & Olick P.C. in New York.
"There have been a tremendous number of really bad cases...that essentially say that unless there is a total cessation of every element of their operations, they get no business income coverage," Mr. Lewis said. "That's completely wrong, but there are a number of cases that find that. So if a policyholder suffers a loss to their factory and (is) able to limp along and never completely cease operations, some courts would say they get no (business interruption)."
In addition, Mr. Lewis recommends that policyholders who plan to purchase civil authority or ingress/egress provisions, which provide coverage if employees are unable to access the property, also "should lobby for forms that do not contain the words 'prohibit' or 'prevent."'
The courts have read those words "extremely broadly" in ruling that "if there is any possible way a customer can get to the premises, you have no civil authority coverage," Mr. Lewis said, noting that the words "hindered" or "impaired" are preferable.
When it comes to civil authority provisions, buyers also should make sure the clause applies even if there is no physical damage to the insured property, advises Peter M. Gillon, an attorney with Greenberg Traurig L.L.P. in Washington.
"Many companies involved with airports and airlines discovered a gap in coverage when they lost business after (the Sept. 11, 2001, terrorist attacks) due to the shutdown of airspace by the (Federal Aviation Administration), and their policies did not apply because there was no physical damage to their property or the physical damage was not sufficiently proximate," Mr. Gillon said.
Additionally, policyholders should clarify that the waiting period for business interruption losses is the sole deductible and that the waiting period begins immediately, even if the loss occurs on a weekend or a holiday, Mr. Gillon said.
Sometimes a policy has both a waiting period and a separate monetary deductible, which Mr. Gillon advises clients to avoid to prevent insurers from claiming that two deductibles apply.
Additionally, the hours within the waiting period should be stated clearly as clock hours and not business hours to prevent a 24-hour waiting period from becoming a three-day period, as some insurers have contended, Mr. Gillon said.
Lastly, when buying business interruption coverage, make certain "you're matching the way the loss is figured to the realities of your business," Mr. Lewis advised.
For example, a factory that is out of business for three months following a fire will not recover from its business interruption policy if the loss is measured based on the amount of sales and if the factory has an offsite warehouse containing three months worth of manufactured goods that could be sold during the restoration period, he said.
Similarly, businesses such as law firms that are typically paid six months after they do the work are not going to "feel the pinch" of a business income loss in some cases until after the restoration period ends. Rather than sales, the loss should be valued as lost billable hours, Mr. Lewis said.