Business Interruption – One Coverage, Three Policies
Acknowledgement: This blog is inspired by, and largely based on, a 2017 Adjusting Today article “Business Interruption Coverage Times Three” by Joseph S. Harrington, CPCU.
Business interruption, now often called “business income” insurance is an important part of any business owner’s insurance program. Without replacement for lost income a business may not survive a major loss. Compared to property damage, business interruption losses are more difficult to adjust. Making it more complicated, a business interruption can impact not one but three policies.
The original business interruption form applies to loss of income (usually but not always including extra expense) from damage to real and personal property. As the need grew to insure specialized equipment, “boiler and machinery” insurance developed and eventually became “equipment breakdown” insurance. (In the latest forms used by some insurers, coverage extends to electronic circuitry impairment.) With the recent development of “cyber” insurance, coverage was included for business interruption due to data breach or loss and sometimes for systems failure.
Coverage forms are at different stages of development. Most property forms use or follow the ISO standard wording as a base, sometimes adding extensions such as interruption at dependent properties. While many insurers use the Hartford Steam Boiler equipment breakdown form, others have their own forms. Cyber insurance is the least standardized; some insurers include a business interruption insuring agreement, some offer an optional endorsement and some do not cover it.
Business interruption coverage offered on each type of policy differs by perils covered and excluded; limits; deductibles and/or waiting periods; period of restoration; extended periods of indemnity; and coverage extensions which may overlap with other policies. (For example, equipment breakdown policies often include a sub-limit for “data restoration” which would also be covered in a cyber policy.)
It is not only probable but likely that a major loss that shuts down a business would include real and/or personal property damage, equipment breakdown and interruption of computer operations. Three policies would be triggered and three adjusters from at least two insurers (property and equipment breakdown could be covered in the same policy) would have to sort out who was responsible for which part of the loss.
Equipment breakdown and property insurers have addressed coverage conflicts by a “Joint or Disputed Loss Agreement” which must be attached to both policies to be effective. It would make sense to adopt this agreement for cyber policies that cover property and/or business income losses.
Until insurers figure out how to harmonize business interruption insurance among three different policies, businesses and their brokers must be sure their policies are as broad as possible, minimizing coverage gaps and duplication.