The Length of the Road Back from Disaster: Four Rules for Measuring the Business Interruption Period



...necessity, one must predict the “theoretical” amount of time it should take, with all due diligence and dispatch, to complete repairs and return to expected business levels.

Insurers mechanically reference the “theoretical” BI rule even when there is an actual record, but when one reads the seminal cases addressing a “theoretical” BI period, one finds that the theoretical approach is adopted mainly in such circumstances when there is no actual repair period available to otherwise define the BI period. Thus, in the seminal, most oft-cited case for this proposition, Beautytuft, Inc. v. Factory Ins. Association, 431 F.2d 1122 (6th Cir. 1970), a building destroyed by fire was not rebuilt because the policyholder decided to move to a new location. The court held that the policyholder remained entitled to recover BI for the “theoretical” time it would have taken to rebuild on the old site. Id. at 1124-25. In another frequently cited case for this rule, Anchor Toy Corp. v. American Eagle Ins. Co., 155 N.Y.S.2d 600 (N.Y. Sup. Ct. 1956), the policyholder chose not to rebuild, but again remained entitled to BI for the theoretical rebuild period. Even then, the court held that in calculating the “entirely theoretical” period, ordinary construction delays should be assumed. Id. at 603. The court allowed an estimated eight weeks of “contingencies” to be included in the calculation of the theoretical BI period. Id. at 604. Likewise, in Dileo v. U.S. Fiduciary & Guaranty Co., 248 N.E.2d 669, 676 (Ill. App. 1969), where a building was condemned after a fire, the court allowed a theoretical BI period not cut off by the condemnation date. The theoretical claim also included continuing expenses for necessary payroll that “would have” been paid in the theoretical period. Id.

The “theoretical” rule likewise comes into play when a property is sold before repairs are complete, and insurance rights are retained by the seller. In that scenario, the policyholder remains entitled to the full theoretical BI loss, including for the period after the...

“In a large disaster like Katrina, an insurer sometimes approaches the ‘due diligence and dispatch’ issue completely in the abstract, as if only that one property is affected and there is an ample supply of contractors at the ready. Such an approach ignores the clear rule that delay and difficulty caused by circumstances beyond the control of the policyholder must be taken into account.”