For obvious reasons, “Loss of Business Income” (S&O) insurance policies are commercial contracts of insurance. Insurance for losses of business income are usually attached to, whether as separate parts or as parts of an integrated whole first party policy, such as property insurance of some sort. Most often this is real property insurance, but it could be other sorts, e.g., patent, copyright, trademark, crime, credit (of various sorts) and even life insurance, whether on actual persons, profit earning animals, e.g., show horses or like those of Budweiser–any animal that makes money for the owner.
This type of insurance used to be entitled “Business Interruption,” but that is no longer. Old hands in the insurance business still refer to it as “BI” insurance, but this abbreviation is not immediately understood by others. A better abbreviation would be “LBI,” but it hasn’t really caught on industry-wide The insurance under discussion often has a related, but slightly different, coverage entitled “Loss of Rental Insurance” or something like that. Why these two categories are distinguished–if they really are–escapes me. The commercial real estate business is just that; it is a business with the aim of making profits. Nevertheless, the second category is often abbreviated “LOR” not “BI.”
This post is not about LBI-LOR type policies in general. It is about a much narrower component of these policies. It will focus on one section of some LOR’s, namely the “suspended operations” clauses. This, or variations of it, are frequently used clauses in both LBI and LOR type policies. Sometimes it reads like the two word clause just mentioned, and sometimes it reads “necessarily suspended operations,” or some variation of one of these. They do not appear in the same policy; of course, the word “necessary” is not always thought to be necessary.
The question is this: Are all suspensions of operations, or all suspensions of business, total, or are some of them partial? If total suspension of operations is a precondition upon there being coverage, then a business being half out of production or something like it, gets no coverage. This would also be true of a factory that has had a fire but keeps going a little bit, an oil well the production of which reduced to 5% of its previous production, a shopping center that has lost one keystone customer due to an insured explosion but where all of the minor rent-paying tenants keep going, or an apartment complex that has two buildings, one much larger than the other one, where the larger one is destroyed by a tornado, but the other one keeps going in its operations. For these hypos, it makes no difference if the insured is making a profit from its operations or not. Any operations = no coverage.
Of course, as in many high-end large or large-ish commercial property policies, there are several grades. It is said that the highest-end grades have coverage’s for partial loss of operations, but they are relatively rare in the broader business market.
Some people say that there being coverage only upon there is a total loss of operations is carrier treachery and a conspiracy. Others say that it is valid underwriting, and reasonable for all policyholders. After all, insureds are supposed to read and understand their policy. The critics of insurance industry practice, often say that it takes any outsider something like a Herculean mental grasp and effort to understand and “appreciate” the clause.
I do not hold the theories of treachery and conspiracy. I respect many insurers to much for that. even if they are glad when they see only partial operations, and take revenge-delight when denying coverage to a difficult+ insured. Taking delight in some, of course, does not entail delight in all. In addition, Delight does not imply bad faith, if the correct insurer behavior has been executed. I would not be surprised if it did not happen in at least some policies because of the vastly simpler of risk and cost analysis then hence underwriting in less expensive policies. However, the drafting of policies if final with respect to these analyses as all truly knowledgeable insurer would admit. I suspect that sound analysis would belie this attitude.
I suspect the estimate equations could be easily devised, involving various grades of partial operations. I suspect further that the language of the policies do not support the carrier’s view. I will explain the second of these presently.
Several courts, however, do not seem to have seen the trouble. Several of them–more so the lower courts than supreme courts–have adopted the total suspension view. Their reason is, in my view, quite extraordinary and invalid. They reason that the word “suspension” applies only to total stoppage, because of the meaning of the phrase “suspension of operations.” The case of GBP Partners, Ltd. v. Maryland Casualty Company, 2013 WL 57905 (5th Cir. January 3, 2013 (Texas Ike case) is typical; several previous cases are cited; and, they are very view. Not all of them hold a simple straight forward view about what will imply the “total suspension” view. For example, it distinguishes between “business” and “operations.” Aztar Corp. v. U.S. Fire Ins. Co., 224 P.3d 960 (Ariz. App. 2010)
This view will not withstand analysis by examples–call this analogical reason, if you like.
Here are come examples that reflective courts would almost certainly adopt:
When a lawyer is suspended from practice s/he cannot legally practice for awhile, even though suspension is not disbarment. However, a lawyer coul be suspended from part of the practice. Consider a lawyer that has anger issues. He might be suspended from trial practice or practice where contact with clients was involved. Or they might say that when a kid is suspended from school, he is out of the “game” for an interval, usually a specified length of time.
When a kid is suspended from school, (usually) he has to go away from the school for an interval–usually a short one. By consider a kid who is suspended from Latin class for a week until he stops cussing aloud at the difficulties of Virgil, or is forced off the football team for 6 games. These kids have been partially suspended. Imagine what a diplomatic principal might say to irate parents.
When a patient is prescribed 4 pills a day and one injection every 48 hours is not being made being better but worse, the doctors might say,we are goinig to eliminate Pill#1 and Pill#3 plus we are going to move the injection to every 24 hour. This patients chemical treatment process would not have been totally suspends, although it has happened partially.
A business which has 2 rental buildings; one is destroyed, and one is not. The insured makes little money, but less that half then before. The insured seeks coverage since one of his buildings was destroyed. The type of insurer being discussed would deny coverage.
Now suppose the insured incorporates the two buildings separately, keeps “separate” books on his “genious computer program”;and insures the building separately, thought all management practices are perform by the same people, each receiving 2 monthly checks. This “operation” would be insured for income loss as to the second building and its losses.
It given these examples, it seems perfectly clear to me that the phrase “suspension of operations” is ambiguous. Dictionaries often provides multiple meanings for the term “suspension.” While courts are not to strain when dealing with alleged ambiguities, nor are they permitted to ignore what exists.
Originally posted on 01/27/2013 @ 5:26 pm