Business interruption insurance is designed to compensate an insured for its actual business interruption losses resulting directly from physical damage by an insured peril to the insured’s covered property. An insured has the burden to establish certain elements: (1) physical damage; (2) caused by a covered peril; (3) to covered property; (4) an actual and necessary interruption of the insured’s business; (5) the interruption must be caused by the insured physical damage; and (6) actual loss resulting directly from the interruption of the business.
A recent opinion from the New York Supreme Court, Appellate Division, in the case of Yal-Lo, Inc. v. Travelers Indemnity Company, Case No. 519646 (July 30, 2015), illustrates the fifth element.
The insured operated a business that sold cosmetics. In December 2004, the system used to eject sewage water from the business malfunctioned, resulting in sewage flooding and damage to the building. The insured alleged that beginning in April 2005, it was forced to suspend all business operations, terminate its rental lease, and vacate the property. The insured then sought to recover $183,435 in lost business income and over $6 million in consequential damages for the demise of its business.
The Court affirmed a prior summary judgment ruling in favor of the insurer, dismissing the case. The Court explained that the insured was required to show that its inability to continue its business operations was due to the damage sustained as a result of the hazard insured against. The insured failed to present any such evidence. In fact, the insurer presented evidence that the insured was never forced to close as a result of the malfunction of the sewage system. In particular, the damage caused was repaired by the end of December 2004, four months before the insured terminated its lease, vacated the premises, and ceased operations.
When analyzing a business interruption claim, one should make sure that the insured has provided evidence to establish all of the elements needed to recover. For an in-depth discussion on business interruption and similar coverages, see my article entitled, Time Element Coverages in Business Interruption Insurance, The Brief, Fall 2007, you can read the article here.