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BUSINESS INTERRUPTION INSURANCE

By Anthony Greene

(The following is an excerpt that was taken from an article written by Anthony Greene for the Winter 2004 edition of the Jer-Z-Journal.  The complete article may be viewed in that edition or you may contact Anthony Greene at agreene@jamisongroup.com for more information.)

 

The purpose of Business Interruption coverage is to indemnify the firm for losses arising from the inability to continue normal operations and functions due to an event covered under the policy.  These losses include loss of business income and extra expenses that the firm would not have otherwise incurred if the “covered event/peril” had not taken place.

 

Water damage, toxic spills and violence in the work place can all generate losses of income and extra expenses that law firms may want to cover under business interruption insurance policies.

 

Since business interruption coverage is part of the property insurance policy, the “covered events/perils” in the property form determine if there is any business interruption coverage.

 

Earthquake, flood and terrorism are perils that must be added to a property insurance program for an additional premium.  In many instances, that additional premium charge is insignificant when compared to the exposure the firm retains if one of these events disrupts their operations.  One law firm with over $8 million of property, business income and extra expense had insured the values for their property and only had to pay an additional $1,400 to have the policy cover losses stemming from earthquake and flood.

 

Another consideration when evaluating the coverage  a particular policy provides for loss of income and extra expense exposures is the extent to which the policy covers losses that a firm incurs resulting from “covered events/perils” that occur away from the premises.

 

A few examples where the amount of coverage differs from policy to policy are:

  • If a fire, explosion or other covered event/peril takes place near an office and causes no physical damage to the premises, yet a civil authority denies access to the premises because of the proximity to the affected area – does the policy respond?
  • If a covered event/peril at a utility results in the loss of power and/or communications at an office and it interrupts business – will the policy respond?
  • If a covered event/peril takes place at the offices of a company used for outsourcing key aspects of an operation and it interrupts business or forces a business to incur extra expense – does the policy respond?

Policies provide different amounts of coverage for lost business income and extra expense claims made by a firm based on the breath of the following coverage in the policy form:

  • Acts of Civil Authority Coverage
  • Business Income Off Premises Power or Communication Failure Coverage
  • Contingent Business Premise Coverage

A Business Income Extra Expense worksheet is a great tool for helping a firm to categorize its exposures and determine if the disaster recovery plan sufficiently mitigates loss of income and extra expense exposures.

The business income section would require an administrator to evaluate periodically:

  • All sources of income to the firm.
  • Amount of revenue that would be maintained annually while offices are being restored.
  • The maximum number of months it would take to restore an office.
  • Opening expenses that are over and above the norm that are needed to maintain temporary premises and conduct business on a temporary basis.

If, as part of a disaster recovery plan, reciprocal arrangements have been with other entities to provide temporary space at a reasonable price, the amount of business income insurance needed to be purchased would be reduced.

Law firms that have a greater risk of impact to covered events or perils that can lead to a major suspension of operations and result in loss of business income should give greater consideration to properly insuring the type of business interruption exposure necessary for their operation.

Anthony K. Greene, CIC< CRM is a Director at Herbert L. Jamison & Co., L.L.C. in West Orange.  Anthony is a Certified Insurance Counselor and Certified Risk Manager.  He can be reached at (973) 669-2323 or by e-mail at agreene@jamisongroup.com.