(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the part of a series she is writing on business interruption claims).
Most extra expense provisions state that coverage will be extended for necessary expenses that the insured incurs during the “period of restoration.”
The period of restoration in a business interruption claim is a concept of time. The period, as defined in most ISO forms, begins at the time of “direct physical loss or damage” and ends on the earlier of “the date when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality.” […] or “the date when the business is resumed at a new permanent location”
While there is normally little debate as to when the period of restoration begins, there is often much debate as to when the period ends, since most policies limit the time period to the time that it would take to repair or replace the damage “with reasonable speed or similar quality” and return the business to its pre-loss operational capability. This means that if an operation is suspended for four months but the premises could have been restored to operating conditions in eight weeks “with reasonable speed and similar quality,” the recovery period will probably be limited to eight weeks.
Insureds should keep in mind that returning the business to “operational capability” does not necessarily mean to return the business to pre-loss income levels, a feat which may take much longer to accomplish. Operational capability is merely the entity’s ability to produce goods and provide service at the same level, efficiency and speed as before the loss.
As a general rule, the end date of the period of restoration cuts off the loss of income and extra expense claim.
For example, in Millville Quarry v. Liberty Mutual, 31 F. App’x. 116 (4th Cir. 2002), a quarry operator maintained a system of four water pumps to remove naturally occurring excess water. The pumps were affixed to a platform and the policy only covered the pumps and the platform, but not the entire quarry. One day the quarry flooded and the pumps were lost. In order to save the quarry, the insured rented four additional pumps that were identical to the previous ones, but could not install them due to unrelated electrical problems. The quarry operator then rented additional pumps stabilized the quarry and resumed operations six months after the flood. The quarry operator filed a $9 million extra expense claim with Liberty Mutual. Liberty Mutual advanced $450,000 to the quarry operator to pay for the cost of pumping activities, but it denied the balance of the claim.
In affirming the lower court’s grant of summary judgment in favor of Liberty Mutual, the court reasoned that the period of restoration imposed a “temporal rather than substantive limitation on the” policy’s extra expense coverage. The court specifically noted that the period of restoration ended when the quarry operator obtained pumps that were identical in number and pumping capacity to the four that had been destroyed by the flood. Although the pumps were not operational on the date they were delivered due to the electrical problem, the court held that the pumps should have been replaced with reasonable speed and similar quality by the date of delivery and that any delay in making the replacement pumps operational did not arise out of the flood or any damage to the lost pumps. Extra expense costs incurred beyond the period of restoration, including costs for additional pumping activities, the construction of a second barge, hydrology investigations, and limestone grout work to stabilize the quarry, were denied as they were incurred outside of the period of restoration.
On the other hand, in Zurich American Insurance Co. v. ABM Industries, Inc., 2006 WL 1293360 (S.D.N.Y. 2006), a janitorial company that held a contract to clean the World Trade Center (“WTC”) submitted a claim to its carrier as a result of the September 11 attacks. ABM was a facility services contractor that provided janitorial, lighting, and engineering services in the common areas of the WTC; provided janitorial services for virtually all of the tenants in the WTC; and operated a call desk through which it provided engineering and lighting services to the WTC tenants.
Among the claimed extra expenses were (1) increased salary costs that resulted because the janitorial company was required to bump junior employees at other locations with more senior employees displaced from the World Trade Center, (2) increased unemployment insurance assessments levied by the State of New York after dozens of the company’s workers filed for benefits, and (3) costs associated with the termination of engineers whose services were no longer necessary following the destruction of the buildings. The policy had a standard period of restoration provision, stating that the length of time will not exceed what “would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace the property that had been destroyed or damaged.”
Following remand from the U.S. Court of Appeals for the Second Circuit, and contrary to some other WTC decisions, the district court held that “restoration of the World Trade Center itself [was] necessary for ABM to resume its operations.” In that case the court did not set a specific date for the end of the period of restoration and held that the “appropriate period of recovery is the hypothetical length of time required to rebuild the WTC”, which left the closure of the period of restoration to be determined by a jury and placed the policy’s entire $50 million extra expense limit in the hands of a jury.