Judging by the number and types of questions we receive from FC&S subscribers, business interruption insurance is one of the more difficult coverages to comprehend. While some other coverages may be as simple to interpret as a paint-by-numbers picture, business interruption insurance is more akin to a Picasso—mechanical skills alone are not enough to thoroughly understand it.

Business interruption insurance requires three elements to trigger coverage:

1.        There must be an actual loss of business income. Business income is defined as net income and continuing operating expenses. To determine if there has been a loss of business income, net profit or loss is added to necessary continuing operating expenses and then compared to what would have been earned but for the loss.

2.        The business must experience a necessary suspension of operations during the period of restoration. Some older forms do not define suspension, but more recent ISO policies have defined the term to mean both a complete cessation of operations, as well as a slowdown. The period of restoration usually begins some specified amount of time following the loss—seventy-two hours for the ISO form—and ends when the property should be repaired or replaced with reasonable speed or when the business resumes at a new location, whichever comes first.

3.        The loss must result from direct physical loss or damage at the premises described in the declarations that is caused by a covered cause of loss.

To illustrate how the three elements dovetail, consider the following losses resulting from ingress and egress obstruction losses, which are triggered by the three required elements.

One instance of an obstruction of ingress and egress business income loss comes from a reader whose insured's business was located next to a building that was being demolished and reconstructed. The sidewalks and street in front of the insured's business were also being repaired, and access to the insured's business was obstructed. As a result, sales were down 60 percent.

Applying the first element—the requirement that business income was lost—the business experienced a 60 percent loss in sales, thus a loss of income.

The next element specifies that the lost income must result from the necessary suspension of operations. Because the premises were obstructed by the construction, a slowdown occurred. Thus, depending on the policy's definition of suspension (or, if lack of one, the jurisdiction), the loss could be determined to meet this element.

However, the loss does not meet the third element. There was no direct physical loss or damage to the insured's premises. And although ingress and egress coverage does not always require a direct physical loss to the insured's property, there must be a loss to property described in the declarations. Even if the building next door were described in this insured's declarations, it suffered no loss. The building was purposely demolished and rebuilt. So, no coverage exists for the loss of business income.

Another ingress and egress matter was disputed in a recent court case, City of Chicago v. Factory Mutual Insurance Company. In this case, the City of Chicago satisfied the first element by suffering a loss of business income when the Federal Aviation Administration (FAA) ordered all takeoffs and landings to halt following the September 11, 2001, terrorist attacks.

The second element was met because three airports—O'Hare, Meigs Field, and Midway—were closed between September 11-14, 2001, and operations were suspended.

The City sought coverage for its loss under an ingress/egress provision within its Factory Mutual commercial property and business income policy. The provision stated that the policy covers the actual loss sustained “due to prevention of ingress to or egress from the Insured's property, whether or not the premises or property of the Insured shall have been damaged.” The interruption still required physical damage, just not necessarily to the insured's premises.

Factory Mutual argued that the cause of loss was the FAA's grounding of all flights. The City, though, alleged that the grounding was an indirect result of the terrorist acts that caused physical damage to the World Trade Center and the Pentagon. The City also reasoned that, because Factory Mutual used the phrase “direct physical loss or damage” in other policy provisions but not in the ingress/egress provision, that indirect causes of business interruption, such as the grounded flights, should be insured.

The court pointed out that “indirect or remote loss or damage” was excluded by the policy. While it agreed that ingress and egress to the airports was prevented by the FAA, which was an indirect result of the damage caused by terrorists to the World Trade Center and the Pentagon, it was a type of damage explicitly excluded by the policy. Further, the court said that the physical damage did not fall within the territorial limitation—the kind of property covered either was property in which the City had an insurable interest or that was located within 1,000 feet of city property. The actual property damaged did not fall into either category.

The court said that the prevention of ingress and egress under the circumstances did not trigger the business interruption insurance.

In both examples, the missing element was a direct physical loss to covered property. Although the other two elements applied to the loss, without the third element, no coverage was available.

Ingress and egress situations comprise only part of the business interruption picture. The whole work involves a mixture of complex insurance and accounting principles that may appear more abstract than representational. Just as it sometimes helps to consult a guidebook to decipher a Picasso, The National Underwriter Company has published a new book that guides the reader through the issues related to business interruption insurance—The Business Interruption Book: Coverage, Claims, and Recovery. Written by Daniel T. Torpey, Daniel G. Lentz, and David A. Barrett, the book is available through the National Underwriter online store, http://www.nationalunderwriter.com/nucatalog/.