Article The Insurance Coverage Law Bulletin

A Policyholder's Common-Sense Approach to Business Interruption Claims

The tragic events of 9/11 brought to the forefront a form of insurance that has great importance for the business community, but heretofore has received relatively little attention from the insurance bar - business interruption insurance. The reason is simple: Notwithstanding the high-stakes litigation over the World Trade Center's insurance claims and other claims arising out of 9/11, business interruption claims have been the subject of infrequent litigation when compared with claims involving general liability, products liability, construction, and directors' and officers' coverage.

One reason that business interruption insurance claims have flown largely below the legal radar is that they have historically been an adjunct to a form of insurance where prompt and amicable adjustment has generally been the rule: property insurance. Business interruption claims tend to be resolved in the ordinary course, as part of a more-or-less predictable book of business. The first-party nature of business interruption insurance claims has also contributed to their less litigious character. Unlike many of the other forms of insurance coverage, business interruption insurance rarely involves underlying claims that are themselves the subject of litigation. The numerous coverage exclusions associated with alleged insurer misconduct are thus rarely implicated. In contrast to liability insurance claims, business interruption claims rarely involve a "tail." As a consequence, they do not involve thorny problems concerning trigger of coverage and how losses should be allocated among multiple policy periods.

Unlike liability insurance and, to an increasing degree, directors' and officers' coverage, business interruption insurance rarely involves large categories of claims that are driven by outside legislative, political or social influences. In contrast to asbestos litigation, mold claims or even the recent explosion of accounting and financial scandals, nobody thinks of the "business interruption" problem - although the events of 9/11 are arguably once again a notable exception. Business interruption claims are almost never characterized by the sort of coverage issues that cut across numerous policyholders and industries like mass torts; nor do they involve any emerging change in the underlying rules like the wave of litigation that has followed in the wake of the Enron collapse.

Although the nature of the business interruption claim lessens the chance of an ugly coverage fight, the risk remains and, as the World Trade Center litigation has demonstrated, it is very real, especially where a large loss affecting third parties has occurred. The balance of this article proposes a framework for minimizing the prospect for litigation over business interruption claims and keeping the lawyers on the sidelines.


The traditional approach toward resolution of large business interruption claims in the United States has involved the policyholder, the insurer, a third-party adjuster retained by the insurer and, on occasion, the broker. Sometimes, for particularly complicated claims, the policyholder retains its own accounting professionals. Rarely are lawyers part of the mix. Indeed, business interruption forms often include reimbursement for the cost of accounting professionals hired by the policyholder to assist in the presentation of the claim, but they generally expressly exclude coverage for attorneys' fees. This approach is in line with the tradition of adjusting such claims through cooperation, rather than confrontation.

This cooperative approach to the adjustment process is commendable.

It keeps transaction costs down. If coverage issues are minor, it almost certainly enhances early resolution. Nevertheless, policyholders, especially those with large, complex claims, are well advised to assemble a team of professionals - including those with insurance, accounting and legal expertise - at the outset of the claim.

 The Broker. Of all professionals who may become involved on behalf of the policyholder in resolution of business interruption claims, the appearance of the broker is the most expected and least controversial. The broker probably assisted in placement of the insurance and is generally the point of contact for the insurer on matters of premium payment, policy issuance, and claims handling. The broker is often familiar with the insurer's claims personnel and likely has a sense of how the claim should be presented and which aspects of the claim may become controversial.

It is sometimes tempting when claims become complicated or contentious to push the broker to the side and rely solely upon the accountants and lawyers. That is a mistake. Although brokers are often loath to create coverage controversy, they may be the only professionals on the policyholder's team that have professional contacts with the personnel who are actually adjusting the claim for the insurer. Insurance is their business, and brokers may also have real leverage because of the large volume of insurance placed with the insurer. The importance of these business relationships should not be underestimated. Furthermore, brokers may have a better sense than any other professionals as to which parts of a claim are "salable" and which are not. Finally, the broker may help preserve a valuable degree of trust with the insurer and adjuster, especially if lawyers and accounts - who the insurer is likely to view with a great deal of skepticism - must surface.

 The Accountant. Although the adjuster retained by the insurer is nominally independent, the policyholder should never lose sight of who is paying the adjuster's bills. Many adjusters have long-standing relationships with insurers. And try as they might to be fair and objective, the risk that an adjuster will pigeonhole a complex claim into a time-tested (or timeworn) template is significant. Experienced, independent accountants know how adjusters commonly approach claims; indeed they frequently sit, literally, on the other side of the table. They know how to gather and organize the financial data and present the claim so that questions can be minimized, and they frequently develop creative, innovative ways of calculating the loss that can sure that the policyholder receives full value for its claim.

Not surprisingly, insurers frequently discourage the use of independent financial advisers. The involvement of accountants represents a cost that the insurer is often obligated to pay under the policy. It also injects an inevitable risk of confrontation. No less obvious, however, is the prospect  that an independent accountant is likely to drive the claim value up. After all, while presentation of an appropriate claim is one reason for a policyholder to bring in its own accountants, maximizing the claim value is an equally important role. In short, whatever the insurer may say, policyholders should involve their own accounting professionals in the claim process from the outset and employ them in active negotiations with the claim adjuster.

 Counsel. In contrast to the visible recommended role for accountants, policyholders are generally best served by keeping their lawyer under wraps for as long as possible. The appearance of counsel - on either the insurer's or policyholder's side - is generally a sign that things may be headed in the wrong direction. While counsel should generally stay in the background wherever possible, early involvement of counsel in complicated claims is crucial. The policyholder's counsel can assist in navigating complex policy terms and conditions. Counsel can be a valuable reality check on the broker's interpretation of those terms - an interpretation that may be focused on the way it has always been done, rather than upon creative, cutting-edge legal arguments. Privilege issues may also loom large as a claim is prepared, and counsel can assure that the privilege is preserved whenever appropriate. Business interruption claims often result in the creation of a large volume of financial reports. Many of these may involve scenarios never intended for presentation to the insurer. Likewise, candid discussions with the broker about coverage issues seem natural and will almost invariably occur. Without involvement of counsel, such documents and conversations are almost certainly subject to discovery in the event of litigation. Although thorny issues of privilege are likely to arise even if counsel is involved at the outset, that is precisely why the lawyer can have such an important role in claim preparation.

Sometimes, of course, serious coverage issues arise. Even then, where possible, the policyholder's attorney should remain in the background, assisting the team in evaluating which aspects are worth pursuing and which should be compromised. But on those occasions where it has become clear that the insurer is stonewalling a meritorious portion of the claim, surfacing with counsel can send a powerful message that the policyholder is serious about its claim and the insurer better get serious too. Because the visible involvement of counsel can - and should - send a clear message that the claim may be headed toward litigation, the timing of visible involvement is crucial. As noted below, the policyholder is well advised to defer aspects of the claim that involve significant coverage issues. Wherever feasible, even the most complicated financial issues should be resolved before attention is turned toward coverage issues. That way, even if counsel's involvement results in litigation, the issues to be litigated have been narrowed as much as possible.


The initial presentation of the claim sets the tone for all that follows. Policyholders should assume that the claim presented is the claim litigated. It is axiomatic that conservative claims are adjusted; aggressive claims are litigated. The overly aggressive claim is likely to be met with almost immediate push back from the insurer. Tempting as it is to put items on the table to "trade" in later negotiations, great care should be taken to ensure that every aspect of the claim has at the very least a colorable basis. The policyholder should not include anything in the claim that it is not willing to stand behind in the event of a lawsuit.

The claim should be structured to fit accepted "buckets" of coverage. Sometimes coverage overlaps. For example, certain costs may qualify as either "Extra Expense" or "Expense to Reduce the Loss." All significant portions of the claim should be examined to determine if overlapping coverage exists. In such circumstances, if the policy contains sublimits, the bucket offering the highest sublimit should be selected.

Documentation of the claim - especially of those aspects likely to be controversial - is crucial. Wherever possible, the claim should be supported by the insured's ordinary business records. Because business interruption policies generally provide that both past performance and projected future results are relevant to the calculation of lost profits, the policyholder should expect that the insurer will want to see detailed historical financial records. Where the claim depends upon assumptions regarding future growth or expansion that make past performance less relevant, the policyholder should expect a heightened level of scrutiny. In such circumstances it is important that the claim be supported by documentation and financial projections actually created during the budgeting and planning process. It is especially valuable if the policyholder can establish that outside entities, including banks and investors, relied upon the same financial projections utilized in formulating the claim.

Once the claim is presented, the policyholder's accountant should follow up with an early meeting with the adjuster to walk through the claim, explain the assumptions and methodology, and answer any questions. The policyholder should expect that claim presentation is likely to be just the first step in a long dance. Detailed - and sometimes inexplicable - follow-up questions should be anticipated. It is tempting to refuse to provide information that the policyholder knows is irrelevant, but care should be taken to avoid the appearance that there is something to hide. If the request is overly burdensome, a discussion of more efficient ways of getting at the information requested is in order.

Not all aspects of a claim are equally strong. Weakness should be acknowledged, the rationale for the position taken should be explained, and the need for compromise should be anticipated. By contrast, the policyholder should be prepared to vigorously defend the strong parts of the claim. If the adjuster is being unresponsive, direct involvement of the insurer's senior claims personnel should be demanded. Keep the pressure on by focusing on prompt resolution - and payment - of portions of the claim that cannot be subject to reasonable dispute. Most policies provide for partial payment, and the policyholder should aggressively demand "progress" payments and push the insurer for a detailed accounting of which items are not yet payable and why.

Although most complex business interruption claims will involve at least some coverage issues, the focus of negotiations should remain for as long as possible on payment of the claim, not on coverage. The policyholder should press for an early acknowledgement of coverage. The policyholder should demand to know if the insurer believes any aspects of the claim raise coverage issues. An aggressive response to "smoke screen" coverage issues is in order. Serious coverage issues should be tabled until the end of the process so that the parties can focus on those items that can be cooperatively resolved.

Finally, once other aspects of the claim have been resolved, any remaining coverage issues should be addressed. If these issues involve significant value, it is time for coverage counsel to surface. As with other aspects of the claim, the policyholder's position should be detailed and well documented. Presenting the insurer with an informal brief or "white paper," with appropriate citation to legal authorities, can be a powerful tool. It provides the insurer with an explanation of the strength of the policyholder's position, and it sends a clear message that the policyholder will insist upon the full policy coverage to which it is entitled. The threat of litigation rarely needs to be explicit, but a well-prepared legal position will often be the final step in ensuring that the policyholder achieves the full value of the insurance that it has purchased. 

Reprinted with permission from the February 1, 2004 issue of The Insurance Coverage Law Bulletin c

Law Journal Newsletters.