Business Interruption Insurance – Recovering it All

Jeannine’s is my favorite breakfast spot in Montecito. Grab a coffee, have a seat outside, and do a little people-watching while you wait for pancakes. It makes for a delightful morning. That’s why it’s upsetting to me, and many others, that Jeannine’s may be facing some tough insurance challenges due to the recent debris flow. Unfortunately, it’s a problem for almost every business in town.

For days, there was deep mud outside Jeannine’s. Everything shut down on Coast Village Road – no customers, no workers, no income, not to mention the physical damage and cleanup. To say this was a “business interruption” would certainly be an understatement. It has created a dire financial situation for some. A total catastrophe for others. Businesses have to figure out how to stay afloat while pulling in a fraction of their ordinary monthly income. Layoffs will occur, essential repairs might be delayed, and price hikes may be necessary to save costs and cover the overhead.

Most people would expect these costs to be covered by business insurance. No big deal – the insurance companies will cover it. But that is not always true. As with most insurance policies, business insurance contains numerous deductibles, exclusions, and limitations. 

One section might say: “We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events.”

Ad nauseam, the policy may go on to say, “We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these.”

To some insurers, that means the business insurance policy does not cover damage caused by a specific, excluded peril, such as earth movement. Further, that it will not cover damage regardless of what caused the earth movement in the first place. That means that if a covered peril, such as a fire, causes a landslide, destroying your business, you would not be covered, even though your policy is supposed to protect you from fire damage. At least, that’s what the insurer would want you think.

Policies are deliberately written with unintelligible language to confuse insureds. The problem is that insureds often rely on the policy language to determine what’s covered. They take it at face value. Between the lines, however, are important legal doctrines. Case law and state insurance regulations determine coverage. Frequently, the policy language belies the reality of the situation. A business in Montecito that is covered for fire should be covered for the recent mudslide and flood damage, because the fire caused those events to occur. 

Unlike with homeowners insurance, business owners require protection for intangible losses. This includes business delays and loss of use. Businesses lose their customers, their employees. They lose capital to cover their overhead. These are significant damages and they can cause a chain reaction, sending a business down a hard road to recovery.

Business interruption insurance is usually contained in the endorsements section in the policy. There are many different types of policies, but the simplest kinds replace lost income. That means if business income was $100,000 per month and now it is $20,000, the insurance company pays the difference, $80,000. Once the business is made whole, it can pay its employees, cover the overhead, and maintain stable prices.

Business owners need to measure and report intangible losses. It is more than simply lost profit. It is a disrupted customer base, and losing valued employees. Businesses would be wise to consult with an accountant or other expert on measuring business profits, to assess all aspects of their loss. This enables them to present a reliable figure to recover their fair share from the insurance company and get back to serving delicious pancakes.