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


ADJUSTING TODAY date, pursuant to this precedent. For example, in BA Properties, Inc. v. Aetna Cas. & Sur. Co., 273 F.Supp.2d 673 (D. Virgin Islands 2003), a hurricane damaged a hotel, which was then sold before repairs were completed. The court found that “any change in the insurable interest after the time of loss does not affect the amount that the insured can recover under the applicable insurance policy.” Thus, the court ruled that the policyholder could recover “for its business interruption losses for the time period after it sold the Hotel,” including expenses that would have continued in the period.

A review of these cases reveals the correct application of the so-called “theoretical” BI rule. The rule comes into play only when repairs are not, in fact, completed, thus causing the need to estimate the amount of time it would have taken to complete repairs and return to expected business levels. This estimation is, by nature, speculative, but it is not divorced from reality. In projecting the theoretical time it would have taken, one takes into account the usual and expected contingencies under the facts and circumstances. As in Anchor Toy, a certain number of weeks for normal contingencies should be included in the BI period estimate. 155 N.Y.S.2d at 603.

Rule Two: When the Property is Actually Repaired

If the property is actually repaired, as is more often the case, the presumptive BI period is the amount of time the repairs actually took. As the Dileo court explained in discussing a rebuild versus a no-rebuild scenario, “the only difference is that in the [rebuild] case [the] proof is governed by the time actually and necessarily taken to restore the business, while in the [no rebuild] case [the] proof is governed by estimates.” 248 N.E.2d at 676. Indeed, the BI policy language is for “actual loss sustained,” directing that the actual interruption period (if there is one) be used to calculate the actual BI loss.

Against this actual baseline, the burden then shifts to the insurer to establish that the policyholder failed to move with all due diligence and dispatch. Sometimes, this is the case, and it makes sense that an insurer should not have to pay extra BI simply because the policyholder unduly delayed the repair process. But many times, this is not the case — the policyholder did everything it could, within its power, to keep repairs moving. And yet insurers frequently point the “due diligence and dispatch” accusatory finger at the policyholder. This can be highly frustrating for a policyholder when it has done all it could to keep on schedule, despite delays caused by the insurer and without adequate insurer funding.

The actual time is the analytical starting point from which the insurer may try to prove that the policyholder has failed in some respect, such that the adjustment of the BI period should be shorter. For example, in Alevy v. Alliance General Ins. Co., 1996 U.S. App. LEXIS 27826 (9th Cir. 1996), the court held that where actual repairs have taken place, that presumptively fixes the BI period. “In this case, rebuilding has occurred, and the actual replacement time may be determined with some accuracy. To find that the actual replacement time cannot be used to determine the ‘actual loss sustained’ would be contrary to a layperson’s interpretation of the policy language and would defy common sense.” Id. at *5. “Thus, the appropriate methodology … is to begin the analysis using actual replacement time. [The insurer] is entitled to contest … whether the actual replacement time [the policyholder] claims is ‘such length of time as would be required with the exercise of due diligence and dispatch. …” Id. at *5-6.

The Alevy court correctly distinguished and harmonized the “theoretical” BI period cases. “[I]n these cases either the insurance payment was to be made before rebuilding was complete or no rebuilding was contemplated. Using theoretical replacement time is entirely appropriate under such circumstances. In this case, rebuilding has occurred and replacement time may be calculated using historical information.” Id.

In SR International Business Ins. Co., Ltd. v. World Trade Center Properties et al., 2005 U.S. Dist. LEXIS 13001 (S.D.N.Y. 2005), the court held that the BI period for the World Trade Center buildings is theoretical...