Yet another issue at stake is business interruption. Lord Peter Levene, chairman of Lloyds, noted last fall in an address to the New York Risk and Insurance Management Society that due to the Sept. 11 terrorist attacks, “thousands of businesses were disruptedsome many miles, even thousands of miles away. If one office of an international company is destroyed or has to close, the companys entire operations can grind to a halt.”

Lord Levene further remarked that typical estimates of the business interruption losses stemming from the WTC disaster were 20-to-25 percent of the total estimated loss, or some $10 billion.

It seems fair to say that many of the affected businesses (obviously more subtly than in the property insurance court case involving WTC leaseholder Larry Silverstein) are working through business interruption claims that are just as critical to them as the question of whether there is $7 billion or $3.5 billion available to reconstruct the Twin Towers. They illustrate the many misunderstandings that can surround business interruption insurance scenarios.

Among the most problematic of the issues is the adequacy of the limit of insurance purchased when coverage is arranged. Tied in with this is the fact that typical policies limit the claim to a “period of restoration,” a term that typically is defined on the policy but still the subject of frequent misunderstanding.

According to business interruption specialists Dan Torpey and Dan Lentz of Ernst & Youngs insurance claims team, “even risk managers with a thorough understanding of business interruption insurance have to ask this question: How much business interruption coverage does my company need?”

These experts believe that setting limits greater than those actually needed wastes business assets on insurance premiums that could be better used to manage other risk exposures. Not buying enough insurance, however, is an even greater nightmaresomething no risk manager wants to face at the time of loss.

But what is the art and science of establishing the accurate limit of coverage?

Most of us are familiar with the typical business interruption worksheet, which is used to calculate an annual flow of business and the amount of expenses that have to be paid while business is suspended. Once this value is calculated, it is multiplied by a coinsurance percentage.

The coinsurance percentage is designed to encourage businesses to purchase sufficient insurance to cover its exposure. Businesses that do not meet the coinsurance requirement are penalized when the loss recovery is calculated.

I always think of the coinsurance percentage as a reflection of the likely length of down-time a business will face in the aftermath of serious damage to its property.

In order to insure the business for an entire year of down-time, the risk manager would purchase a policy worth 100 percent of the annual value derived through the worksheet; 50 percent of the annual value would equate to a six-month recovery.

This explanation is overly simplistic (especially to experts like Mr. Torpey and Mr. Lentz), but it illustrates the importance of the coinsurance clause and explains how the coverage worksthe business must not only determine an annual estimate of net profit and expenses, but also the length of time for reconstruction.

After the calculation is completed, many underwriters will agree to delete the coinsurance requirement. This eliminates the danger of being penalized at the time of loss for underinsurance.

If the calculation is incorrect, however, insured businesses still might not have sufficient limits to weather a lengthy business interruption. If, for example, a business has an annual business interruption value of $1,000,000 and determines that it could rebuild within six months, it might select a 50 percent coinsurance percentage and purchase $500,000 business interruption limit.

But if a risk manager has underestimated the possible reconstruction period, the company may run out of limits even if there is no coinsurance penalty.

Many insurance policies define the “period of reconstruction” as the length of time from the date of the property damage that triggers the suspension until repairs should be completed with reasonable speed and with similar quality of materials.

The definition may vary slightly from policy to policy, and there often is a waiting period before the clock starts ticking.

This is a critical factor in the recovery because it sets boundaries on how long the insured business may collect on its business interruption coverage.

At least one business has already tested the meaning of “period of restoration” as it pertains to the WTC catastrophe.

Streamline Capital, which was located in One World Trade Center, provided computer and technology management services to securities traders, brokers and dealers. The company believed that it should be entitled to collect business interruption payments for the maximum period allowed in its insurance policy because of the delays in reconstructing the building that housed its operations.

The U.S. District Court for the Southern District of New York disagreed, ruling in Streamline Capital, L.L.C. v. Hartford Casualty Ins. Co. that the restoration period was bound by the time that Streamline should have been able to reestablish its operations, either at the WTC or in another location.

The court reasoned that the business interruption coverage was dependent only on “replacing what is necessary to resume” operations and not on resuming operations in a specific office at a specific location. So the state of rebuilding at the Twin Towers complex did not impact the amount of time it should take for Streamline to resume operations.

I can guarantee that the amount in dispute in the Streamline case pales in comparison to the arguments not being waged in the same court for the Silverstein case. But both cases revolve around how one term that may or may not be defined in the policy is interpreted by the court.

In the Silverstein case, the issue is what an occurrence means. In Streamline, the term was the period of restoration. Both are coverage definitions that have a significant impact on how much a company will be paid.

The amount of publicity that each case garners, however, revolves around the number of zeroes that are involved.

Diana Reitz, editor of the “Tools & Techniques of Risk Management & Insurance,” currently is editing “The Business Interruption Book: Building Claims, Rebuilding Businesses,” a book by Daniel T. Torpey, Daniel G. Lentz and David A. Barrett. The book is available from the National Underwriter Company. She may be reached at [email protected].

Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.