Commercial Insurance

Business Interruption Coverage

Commercial insurance is insurance taken out by a business to insure its ability to continue in operation. Policies cover a wide range of possible problems including insurance to cover auto accidents, injury or damage to customers, discrimination for age, sex, race, etc., and/or slander or libel. Insurance is also available to cover destruction of plant or equipment and business interruption. Liability coverage for third parties generally does not give rise to bad faith or insurance company malpractice, unless the insurance company refuses to defend and/or indemnify the insured against the claim, lawsuit or verdict. If your insurance company fails to provide a defense for you or fails to indemnify you against a claim, lawsuit or verdict, you have the potential for a bad faith or insurance malpractice claim. This is because the insurance company did not do what it contracted to do when it accepted your premium. It did not protect its insured.

Destruction of Plant or Equipment Coverage

A policy covering plant and equipment will have a dollar limit of liability. The most common area for disputes to arise is in valuing the plant and equipment. Just because the insurance company agrees to write a dollar amount of insurance on the plant and/or equipment does not automatically mean the figure will be accepted if there is a loss. Value is defined as replacement value or present value, which is actual cost less depreciation. Your insurance policy will reflect which coverage you have chosen. The burden of proof concerning the value of the property that has been destroyed is on the person making the claim. We handled one case where the insured property was an experimental prototype. Construction of the prototype had not been completed at the time of the loss. There was no guarantee that the science required to complete the prototype would be developed since it did not exist at the time of the loss. This presented a major problem for us in establishing value. If possible, try to have a liquidated value established in the insurance contract by agreeing in advance on the value of the product if it is unique or experimental. In that way you can avoid the issues that we faced. As always when attempting to establish value, hire the best experts available. Your case is likely to go to some form of trial. The most credible witness – the one with the best qualifications - will be believed.

Many insurance policies insuring real estate contain an arbitration provision. The arbitration hearing is held to determine the value which is in dispute, and the decision is binding on both sides. If an insurance company refuses to abide by the arbitration provision, that can be grounds for a bad faith or insurance company malpractice. Arbitration involves issues of value as opposed to issues of coverage. If the dispute is over coverage, the insurance company does not have to submit to arbitration. Coverage disputes are treated differently because there is a basic disagreement as to whether or not any money is due as opposed to how much money is due.

In a coverage dispute, it is critical that the insurance company be asked to set forth the basis for its refusal to pay. The insurance company should be asked which provision of the policy it relies upon in denying coverage. If there is conflicting language in the policy about the position taken by the company, it should be pointed out to the company. Ambiguities in the contract are resolved against the creator of the contract. That means that if there are two logical interpretations of policy language, the one favoring the insured will take precedent.

Disputes concerning coverage are more difficult to resolve than disputes concerning value. In a coverage question the insurance company takes the position that the loss is not covered at all. In a recent Pennsylvania case, an insured bought coverage concerning construction of a business location. During construction part of the foundation collapsed. A review of the work performed by the contractor showed that the foundation was defective and needed to be replaced. The insurance company claimed that the loss was not covered because it was a partial collapse of the foundation and not a total collapse. The policy did not require a total collapse. As a result, the interpretation by the insurance company was flawed. During the trial the adjuster handling the claim testified that he had reviewed other cases in Pennsylvania and had consulted with an attorney who supported the adjuster’s decision to deny the claim. The adjuster had no evidence to support his statement that he reviewed cases or that he had any conversation with an attorney. The Judge did not believe the adjuster and was offended by the attempt to mislead him. The Court decided to compensate the insured for all monies spent installing a new foundation, plus interest on loans taken out to pay for the new construction, lost income for concessions made to tenants for late completion of the project, loss of income from tenants withdrawing from their leases because of late completion of the project, and punitive damages against the insurance company for bad faith.

Business Interruption Coverage

Business interruption insurance is purchased by a business to guarantee its continued existence if some event causes it to shut down. The key issue with respect to business interruption insurance is that this insurance is intended to replace interrupted income. If there is no interruption of income, the contract will not likely permit a recovery under this coverage. The terms of the contract must be carefully read because there are limitations on establishing the base year from which the calculation will be made to establish the loss. There are also limitations based on the amount of income being generated before and after the loss occurs.

Disputes over business interruption often center over accounting issues. The insurance company will request that financial records be analyzed by their own accountants. Problems with business interruption coverage arise when the insurance company delays payment. Money is the lifeblood of an ongoing business. Without money to pay employees and buy raw materials, the business will wither and die. If there is a dispute as to the amount of money to be paid for business interruption insurance, the insured should request that the insurance company pay the amount it concedes is appropriate while reserving the issue of additional payments. In that way, the business can continue to operate. Should the insurance company refuse the request, the insured business may become insolvent. If that happens, there is a potential for a bad faith or insurance company malpractice case. That case will be dependent on the data generated for review by the accountants as well as the appropriateness of the policy interpretation. Throughout all stages try to simplify the issues. If your case ever goes to court, you want to be able to present a simple proposition to the jury.