Why Policy Language is Critical in Business Interruption Claims

When a business seeks to recover damages under a business interruption policy, the language of the policy is critical. Even if a policyholder presents a well-reasoned claim backed by solid evidence, it may be denied if the business has failed to meet the policy’s conditions for recovery.

Series of Unfortunate Events

This was the central issue in TransWorld Food Service, LLC v. Nationwide Mutual Insurance Company, a recent case decided by the U.S. District Court for the Northern District of Georgia. From 2015 to 2018, the business suffered one disastrous loss after another. Although management had the foresight to buy “businessowner” insurance policies, the insurer (Nationwide) denied all or part of claims filed for the following events:

Refrigeration mishap. In December 2015, a contractor charged TransWorld’s refrigeration system with an incorrect coolant, affecting the ability of some of the system’s coolers to reach optimal temperatures. TransWorld claimed that the error forced it to lower prices to remain competitive. Nationwide denied this entire claim.

Waterline failure. In January 2016, a waterline in TransWorld’s building failed, resulting in flooding and property damage. Nationwide hired financial experts to assess the property damage and lost income. Although TransWorld received roughly $711,000 for property damage and $342,000 for lost business income, the company claimed it was entitled to higher amounts.

Roofing contractor error. In July 2017, a roofing contractor hired by the building owner cut TransWorld’s freon supply line, resulting in property damage and lost inventory. TransWorld obtained a partial recovery from the contractor’s liability insurer and sought additional compensation from Nationwide for property damage and lost business income. Nationwide made a small payment for equipment damage. But its financial expert concluded that there was no suspension of business that would trigger a lost income claim.

Leaky neighbor. In July 2018, a water leak in a neighboring unit allegedly caused TransWorld to suffer roughly $162,000 in property damage and $180,000 in lost business income. TransWorld filed a claim with the building owner’s insurer, but it was denied.

Motion for Summary Judgment

TransWorld brought a lawsuit to recoup additional damages related to these claims. And Nationwide subsequently filed motions for summary judgment. The court granted summary judgment for the pre-2018 claims on procedural grounds, finding that they were barred by the statute of limitations or by TransWorld’s failure to satisfy the policy’s notification provisions.

But the court did look at the substance of the 2018 claim. Nationwide argued that TransWorld wasn’t entitled to recover for lost business income, because TransWorld lacked a record of profitability and failed to show the requisite suspension of its business. The policy stated that Nationwide “will pay for the actual loss of ‘business income’ you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’” TransWorld countered that its profits were quantifiable, and that the policy didn’t require a complete cessation of business activity.

The court didn’t address the profitability issue. Instead, it determined that TransWorld wasn’t entitled to recover its lost business income because a mere reduction in business activity didn’t constitute a “suspension of operations” under the policy. According to the court, the term “suspension” unambiguously meant “a temporary, but complete, cessation of activity.”

The court also held that Nationwide didn’t waive its right to exclude coverage by paying Transworld’s lost income related to its 2016 claim. “The doctrines of implied waiver and estoppel,” the court explained, “are not available to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded therefrom.” (Internal citation and quotation omitted.)

Sidebar: Hire an Expert to Support Your Claim

When a company files a claim under a business interruption insurance policy, involving a forensic accountant or other financial expert early in the process can enhance the chances of success. Relying too heavily on the insurance company’s experts — who ultimately are advocates for the insurer — can be risky.

Examples of ways that a financial expert can assist the insured include:

• Interpreting the policy language — in particular the definition of “lost business income,”
• Determining the scope of coverage,
• Establishing the loss period,
• Calculating and documenting lost income and other damages,
• Supporting requests for advances from the insurer, and
• Advising on loss mitigation strategies.

Perhaps most important, an expert can communicate with claims adjusters and other insurance company representatives in language they understand and present a well-reasoned analysis of the facts. This can significantly expedite the claims process.

Lessons Learned

This case demonstrates the importance of understanding a business interruption insurance policy’s language when pursuing a claim for damages. The court’s holding suggests that if TransWorld had shut down its operations completely in the wake of the flooding — even for a short time — the outcome may have differed. For help understanding policy language and providing a well-supported estimate of damages, contact a financial professional with experience in preparing business interruption claims.