Business Interruption Insurance Hotels Hurricanes

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					  Mealey’s Catastrophic Loss
     Conference: Business
Interruption & the Impact on the
       Insurance Industry

         Walter J. Andrews
       Hunton & Williams LLP
This Morning’s Topic:

What have we learned from the business
 interruption disputes after 9/11 and earlier
 hurricanes that can be applied to business
 interruption claims after Katrina?
Now, some law is established on:
 Trigger of business interruption (“BI”)
 coverage
 Application and scope of “Action of Civil
 Authority” and “Dependent Property”
 coverage extensions
 Scope and length of the “Period of
 Restoration”
Business Income Coverage – What Does
the Contract Say?
We will pay for the actual loss of Business Income you
 sustain due to the necessary “suspension” of your
 “operations” during the “period of restoration.” The
 “suspension” must be caused by direct physical loss of or
 damage to property at premises which are described in the
 Declarations and for which a Business Income Limit of
 Insurance is shown in the Declarations. The loss or
 damage must be caused by or result from a Covered Cause
 of Loss . . .
An Important Note on
“Suspension:”
 Before 2001: Meant “cessation” of
 business
 Post-2001: Definition now includes
 “slowdown or cessation” of business . . .
Key Elements To Trigger A BI
Claim Are:
1)   Direct physical loss of, or damage to,
     property
2)   Caused by or resulting from a covered
     cause of loss
Must Be “Direct Physical Loss”
To Covered Property


After a hurricane, this most likely
will be evident in most cases
. . . But, “Direct” Damage Is Still
A Requirement For Coverage
That The Policyholder Must
Meet.
 City of Chicago v. Factory Mut. Ins. Co.:
   FAA ground-stop order after 9/11
   responded to “indirect loss or damage;”
   policyholder could not show “direct” loss
   or damage = no coverage triggered
Damage Must Be Caused by a
“Covered Cause of Loss:”
Valley Forge v. Hicks Thomas & Lilienstern:
No coverage for BI triggered by flood water
 from Tropical Storm Allison where flood
 excluded.
Parks Real Estate v. St. Paul Fire & Marine:
No coverage for dust from WTC entering
 building; dust was excluded “contaminant.”
Policyholder Bears Burden of
Showing a BI Loss Comes
Within Coverage of the Property
Contract
Wyndham Int’l, Inc. v. ACE American Ins.
 Co.
   Civil Authority Coverage:
We will pay for the actual loss of Business
 Income you sustain . . . Caused by action of
 civil authority that prohibits access to the
 described premises due to direct physical
 loss of or damage to property, other than at
 the described premises, caused by or
 resulting from any Covered Cause of Loss.
So, To Trigger Coverage, a
Policyholder Must Show:
 Action of civil authority
 Resulting from direct physical loss to other
 property
 That “prohibits access” to business
 Caused by Covered Cause of Loss
The Action of Civil Authority
Must “Prohibit Access:”
 Abner, Herrman & Brock v. Great Northern Ins.
 Co.: Investment firm’s chairman had difficulty
 getting around lower Manhattan when it was
 reopened after post-9/11 shutdown.

 If access is difficult, but not prohibited, no
 coverage
730 Bienville Partners v. Assur.
Co. N. Amer.:
 NOLA Airport closed after 9/11
 No BI coverage for French Quarter hotels.
 FAA’s closure of airports “hardly
 prohibited access to the hotels . . .The FAA
 did not forbid travelers from staying at the
 hotels if other than air transportation was
 available.”
St. Paul Mercury Ins. Co. v. Pitt
County Memorial Hospital:

  Hospital claimed for income lost from
  surgeries rescheduled due to Hurricane
  Floyd

  No BI coverage: Not all roads to hospital
  closed by civil authorities
Several Cases From 9/11 Have
Established Civil Authority’s Action
Must Directly Result From “Covered
Cause of Loss:”

 United Airlines, Inc. v. Ins. Co. State of
 Pennsylvania

 Paradies Shops v. Hartford Fire Ins. Co.

 Clark v. Factory Mut. Ins. Co.
What “Civil Authority” Actions
Affect Katrina Claims?
 Gov. Blanco’s Aug. 26 Order: State of
 Emergency, but no prohibition of access.
 Mayor Nagin’s Aug. 28 Order: Mandatory
 evacuation for all but essential personnel.
 Varied orders permitting repopulation of
 parts of New Orleans on rolling basis;
 reentry allowed to outer parishes at different
 times.
What “Civil Authority Actions
Affect Katrina Claims?
Mayor Nagin’s Sept. 6 Order required the
 removal of all New Orleans occupants not
 involved in recovery efforts

Issue: Which of these orders result from
  covered (hurricane damage) causes of loss,
  as opposed to uncovered (flood) causes?
NOTE on Ingress/Egress
Coverage
This policy covers the actual loss sustained
. . . due to the prevention of ingress to or
   egress from an insured location, whether or
   not the premises of the Insured is damaged,
   provided that such prevention is a direct
   result of physical damage of the type
   insured by this policy . . .
Ingress/Egress Coverage:
Clark County v. Factory Mutual:
  No ingress/egress coverage for airport
  shutdown by FAA orders after 9/11
  Shutdown not a “direct result” of WTC and
  Pentagon damage: “too remote in time and
  place to qualify as direct”
  How will this apply to Katrina claims?
“Dependent Property” Coverage:
We will pay for the actual loss of Business
 Income you sustain due to the necessary
 suspension of your “operations” during the
 “period of restoration.” The suspension
 must be caused by direct physical loss of or
 damage to “dependent property” described
 in the Schedule caused by or resulting from
 any Covered Cause of Loss.
“Dependent Property” Is Usually Defined As:


 Property operated by others upon whom you depend on to
 1)  Deliver materials or services to you, or to others for
     your account (not including water, communication or
     power supply services);
 2)  Accept your products or services;
 3)  Manufacture products for delivery to your customers
     under contract of sale; or
 4)  Attract customers to your business.
Southern Hospitality, Inc. v.
Zurich American Ins. Co.:

Hotel owner’s BI claim arising out of 9/11
 airport closures denied because it could not
 show what “property operated by others” it
 depended on for services that was damaged
 in the attack.
“Contingent Business
Interruption” Coverage:
Extends coverage to losses sustained “as the
 result of direct physical loss or damage of
 the type insured against to properties not
 operated by the Insured which wholly or
 partially prevents any direct supplier of
 goods and/or services from rendering their
 goods and/or services . . .”
Zurich American v. ABM Indus.,
Inc.:
 ABM provided janitorial and HVAC
 services in the World Trade Center
 Since ABM “operated” the building,
 destruction of complex did not trigger CBI
 coverage
 Second Circuit noted CBI is a “relatively
 recent development . . . Its scope has not
 been fully delineated by the courts.”
Business Interruption Coverage Only
Lasts During the “Period of Restoration”

 The period of time that:
 a)  Begins with the date of direct physical loss or
     damage caused by or resulting from any
     Covered Cause of Loss at the described
     premises, and
 b) Ends on the date when the property at the
     described premises should be repaired,
     rebuilt or replaced with reasonable speed and
     similar quality.
Duane Reade v. St. Paul Fire &
Marine Ins. Co.:

 Policyholder owned a pharmacy in the mall
 under the World Trade Center
 Issue: Is the Period of Restoration the time
 it takes to reopen a pharmacy in a rebuilt
 World Trade Center, or the time it takes to
 reopen somewhere else?
Second Circuit: Time It Takes to
Reopen Somewhere Else:
 No connection between the WTC and the
 Period of Restoration because “the physical
 premises of the WTC building in which (the
 store) was located was not the subject of the
 policy.”
Other Cases Reach Similar
Conclusions:
 Lava Trading v. Hartford Fire Ins. Co.
 Streamline Capital LLC v. Hartford Cas.
 Ins. Co.
 Int’l Office Centers v. Providence
 Washington – Policyholder’s only business
 was leasing out short-term space in WTC;
 therefore, period of restoration is time
 needed to rebuild WTC.
         9/11 vs. Katrina
Both involved large areas affected by orders
of civil authorities at differing times:

  9/11: Lower Manhattan

  Katrina: Orleans and other parishes;
  counties in Mississippi and Alabama
         9/11 vs. Katrina
“Direct physical loss or damage:”

  9/11: WTC, Pentagon damaged

  Katrina: More widespread damage; more
  individual properties damaged
         9/11 vs. Katrina
“Covered cause of loss:”

  9/11: Attack (ultimately) considered
  covered cause of loss

  Katrina: Causation issue not so clear:
  Flood – Wind - Vandalism

				
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