Short Term Coverage for Business Income Loss

By Dennis Smith, Esq.

In the wake of hurricane Sandy, many professional service businesses were totally shut down for two or three days, losing substantial amounts of income.  A typical business owner’s policy will “pay for the actual loss of business income [the insured] sustain[s] due to the necessary suspension of your ‘operations’ during the ‘period of restoration’.”  “Operations” is generally defined to mean your business activities occurring at your place of business.  The majority of courts have interpreted the undefined phrase “necessary suspension” to mean a total cessation of business operations.  Put differently, in order to trigger coverage for business income loss, the professionals’ business, at least initially, has to be completely shut down such that no professionals are able to work at the office.   The more troubling definition, as it relates to the recovery of short term business income loss, is the definition of “period of restoration.”  In many policies, “period of restoration” is defined to mean the period of time that begins “seventy-two hours after the time of direct physical loss or damage for business income coverage. . .”  In the world of the professional service business, a seventy-two hour waiting period before the policy allows for the recovery of business income could be quite damaging and may result in hundreds of thousands of dollars of unreimbursed losses. 

The bottom line is that professional services companies should review their business owners’ policies carefully to determine whether a short term business income loss would be covered.  Even in the worst scenarios, businesses typically experience one to three days of losses before being up and running at full capacity.  Under such circumstances, depending upon your policy provision, coverage for the business income loss may not be recoverable.

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