2022, article 7
CENTER FOR INSURANCE
POLICY AND RESEARCH
The History and
Development of Business
Interruption Insurance
David L. Eckles
Robert E. Hoyt
Johannes C. Marais
The History and
Development of Business
Interruption Insurance
David L. Eckles
Robert E. Hoyt
Johannes C. Marais
IMPORTANCE The importance of business interruption (BI) insurance as it relates to
the experience of businesses following disasters or other major losses has become
clear, as risk management professionals consistently rank business interruption as the
most significant corporate threat to businesses globally. Of late, business interruption
claims brought about by cyberattacks and global pandemics have been of interest to
industry participants. Understanding the history of this important source of coverage in
the private insurance market and its development is important to insurance regulators
and other policymakers who are wrestling with the way forward.
OBJECTIVES The objectives of this paper are to:
1.
Chronicle the development of BI insurance in the U.S. by providing an exposition
of the various forms of this insurance in the order in which they emerged.
2. Describe the major policy formats that have been available to provide cover for
the disruption of business.
3. Identify significant legal rulings and insurance catastrophes that have served as
inflection points in the development of BI insurance.
RELEVANCE Although the theoretical premise of BI insurance is quite simple, the
accurate determination of covered losses for this type of insurance has proven to be
challenging in practice. The complexity of BI insurance was highlighted most recently in
the context of the COVID- global pandemic, with the vast majority of COVID-related
insurance litigation arising from BI insurance policies. Many of these cases are yet to
be concluded, and new cases continue to be filed, further emphasizing the economic
importance of this insurance to society.
The businesses covered by BI insurance are non-static. As the modern economy
continues to grow more complex, the intricacies of BI insurance continue to deepen.
The comprehensive review of the history of BI insurance provided in this paper offers a
firm foundation for ensuring thoughtful product development and insurance regulatory
decisions that will support the continued evolution and availability of this important
coverage.
Journal of Insurance Regulation
TIMELINE AND SUMMARY
Early records indicate that the practice of insuring anticipated
profit has long been accepted in maritime insurance, as it was
recognized that the loss of property had financial consequences
beyond the direct value of the lost property itself.
Minerva Universal Insurer introduces
additional coverage for consequential
costs to a fire insurance policy in the United
Kingdom (UK).
Use and occupancy endorsements
to fire insurance become the first
commonplace form of business interruption
cover in the U.S.
Per diem insurance policies that
pay out an agreed amount per day of
suspension are introduced in New England.
The first standard fire insurance
policy to be used across multiple states is
introduced in New York. Cover for business
interruption continues to be provided based
on the period of suspension.
The concept of “actual loss sustained”
is introduced with the aim of offering
compensation that more accurately
indemnifies losses brought about by
disruption of business.
A second standard fire insurance
policy is introduced in New York and widely
adopted in other states. It introduces an
analytic rating schedule for the use and
occupancy hazard.
The two item contribution plan is
launched to allow ordinary payroll to be
insured separately from net profits and
continuing expenses.
The single item gross earnings policy is
introduced to cover lost sales for mercantile
business under a single amount of insurance.
Similar policies for non-mercantile business
soon follows.
A third standard fire insurance policy
is introduced in New York and adopted
nationwide. The endorsement for business
interruption recognized that there may be
no relationship between the extent of direct
physical damage and the value lost due to
the interruption of business.
A simplified earnings plan, which
places a monthly limit on loss recovery, is
introduced for non-manufacturing risks. It
becomes available to manufacturers in 1972.
1797
1880
1887
1918
1929
1938
1943
1953
Mid-
1800s
Mid-
1800s
Journal of Insurance Regulation
Several endorsements to standard
business interruption policies are
introduced. Most notable is the civil authority
clause, which provides insurance cover in
instances where authorities denied access
to insured properties due to civil unrest and
other perils.
The nationwide implementation of the
businessowners policy program packages
a range of insurance coverages for smaller
businesses at an indivisible premium.
Business interruption (BI) insurance is
included as a mandatory part of the package.
The Insurance Services Office (ISO)
introduces the business income coverage
form as the first stand-alone business
interruption policy. The concept of “actual
loss sustained” is retained and losses are
calculated as the net profits, if not for the
interruption, plus continuing fixed expenses.
Following Hurricane Andrew, Economy
Considered and Economy Ignored are
highlighted as two competing approaches
to measuring business interruption losses.
Business interruption losses constitute
the largest part of the insurance industry
losses resulting from the Sept. 11, 2001,
terrorist attacks.
Natural disasters plague the U.S. in the
first decade of the new century, bringing
into contention policy language and the
valuation of losses.
Business interruption consistently
ranks as the top concern among risk
managers globally. Cyberattacks and the
resultant business interruption losses grab
the attention of the insurance industry, and
several forms of new cover are introduced.
Hurricane Katrina inflicts devastating
damage and sparks several instances of
litigation concerning the interpretation of
policy language and valuation of business
interruption coverage.
1960s
1986
1992
2001
2005
2010s
Early
2000s
1976
The History and
Development of Business
Interruption Insurance
David L. Eckles
+
Robert E. Hoyt
+
Johannes C. Marais
++
ABSTRACT
This paper chronicles the development of business interruption (BI) insurance in
the U.S. The origin of modern-day BI insurance is traced as it evolved from so-called
“profits insurance” in the United Kingdom (UK) and an endorsement to basic fire
insurance policies in the U.S. to stand-alone BI insurance as it is known today. This
paper identifies significant legal rulings and insurance catastrophes that have served
as inflection points for the development of BI insurance, as well as major policy formats
that have provided cover for the disruption of business.
More recently, various forms of BI insurance have become commonplace. Stand-
alone policies provide cover for “standard” perils, while endorsements to risk-specific
policies (e.g., cyber risk) provide business income coverage for non-standard risks. Of
late, business interruption claims brought about by cyberattacks and global pandemics
have been of interest to industry participants.
The comprehensive review of the history of BI insurance provided in this paper
offers a firm foundation for ensuring thoughtful product development and insurance
regulatory decisions that will support the continued evolution and availability of this
important coverage.
Date: November ,
+
Risk Management and Insurance Program, Moore-Rooker Hall A, S. Lumpkin
St., Terry College of Business, University of Georgia, Athens, GA .
++
Senior Lecturer in Actuarial Science, Faculty of Commerce, University of Cape Town.
The authors acknowledge financial support of this research provided by Chubb
through a grant to the University of Georgia Research Foundation Inc.
Journal of Insurance Regulation
Introduction
It is well established that the financial consequences of damage or destruction to
property may extend far beyond the property’s value alone. Whether insured or
not, disruption to normal business operations can be particularly devastating to
commercial enterprises, as highlighted by COVID--related disruptions (Bartik, et
al., ). Similarly, the Federal Emergency Management Agency (FEMA) expects
% of companies not to reopen following a natural disaster and an additional %
to fail within one year (Insurance Information Institute, ). Business interruption
has thus grown to be regarded as the most significant threat to business solvency by
global risk management experts and business continuity professionals (Allianz Global
Corporate & Specialty, ; World Economic Forum, ).
Business interruption (BI) insurance aims to offset the subsequent financial con-
sequences of a disruption to normal business operations by a covered peril. The
insurance indemnifies the insured during a period of partial or total shutdown for the
profits (and some expenses) the business would have made (incurred) if no interruption
had occurred.
Consequently, BI insurance has become a fundamental part of all corporate risk
management strategies. Preliminary results from a National Association of Insurance
(NAIC) data call in showed that nearly million commercial insurance policies
included business interruption coverage. Despite the importance of this type of
insurance protection for businesses of all sizes, a review of this coverage and the
history of its development is largely missing from the scholarly and business literature.
In the field of risk and insurance, prior academic work on BI insurance has focused
either on the modelling of expected losses or the accurate estimation of insured losses
from past events (Bisco, Fier, & Pooser, ; Rose & Huyck, ; Zajdenweber, ).
Academic work in the insurance law field has focused on settling disputes relating to
business interruption claims arising from specific catastrophes (French, ; Miller &
Jean, ). In turn, authors in management science have focused on incorporating
BI insurance as part of a comprehensive risk management strategy (Kornegay, Killian,
& Pickens, ).
This paper follows a chronological approach providing an exposition of the various
forms of BI insurance in the order in which they emerged in the U.S. The coverage
was originally known as use and occupancy insurance and eventually evolved into the
business income coverage used today. Various endorsements to standard business
interruption policies developed in response to coverage demands are also considered.
Over time, differing policy formats have emerged with consideration as to the
nature and size of the operations for which the coverage is intended. Policy changes
have predominantly been aimed at producing a more accurate measurement of the
losses brought about by a disruption. This process has not been straightforward,
and critical changes in policy forms have often followed major catastrophes and
legal rulings. These are also examined in this paper. The complexity of BI insurance
was highlighted most recently in the context of the COVID- global pandemic, with
the vast majority of COVID-related insurance litigation arising from business income
insurance policies (Covid Coverage Litigation Tracker, ).
Journal of Insurance Regulation
Ultimately, the importance of BI insurance as it relates to the experience of businesses
following disasters or other significant losses have become clear, as risk management
professionals rank business interruption as the most significant corporate threat to
businesses globally (Allianz Global Corporate & Specialty, ). More than two-thirds
of risk managers indicate that they review their business interruption coverage at
least annually, with % having submitted a business interruption claim in the past
five years (Risk Management Society, ). However, coverage of smaller businesses
remains low, as it is estimated that only %–% of small business owners carry BI
insurance (National Association of Insurance Commissioners, ). The comprehensive
review of the history of BI insurance provided in this paper offers a firm foundation
for ensuring thoughtful product development and insurance regulatory decisions
that will support the continued evolution and availability of this important coverage.
Use and Occupancy Insurance and Profits Insurance
Like so many other modern insurance contracts, the origins of BI insurance can be
traced back to Lloyd’s of London and practices adopted in marine insurance. In turn,
much of the development of the London insurance markets in the mid-th century
stems from Dutch and Italian insurance customs, two of the other major sea-faring
mercantile nations of that period. The practice of insuring anticipated profit has
long been recognized in marine insurance (Hickmott, ). In particular, the Dutch
compilation of laws from , known as the Antwerp Compilatae, presented several
insurance customs in place at the time, including notions related to business interruption
(Rossi, ). In fact, in the context of business disruption, the Antwerp Compilatae
did not refer to the indemnification of losses but instead to a broader concept of the
“making good of losses.”
This was consistent with the general principles of early maritime insurance and
risk transfer as understood by the Venetian mercantile community in the s. In
opposition to a proposed law on a compulsory cost-based valuation of insured cargo,
the Venetian merchants recognized that using an insured value equal to the cost of
the object at risk would mean that if the cargo was lost, only the value at which it
was purchased could be recovered. This would imply a forfeiture of the profit the
merchants hoped to realize upon selling the cargo at its destination. The merchants
thus contended that indemnity should include the entire consequence of a covered
insured event, not only the direct loss (Rossi, ). Though other questions remained
(e.g., valuing property at the origination or destination), it was made abundantly clear
that the loss of an item often had financial consequences beyond the direct value of
the lost item, that consequential losses were significant, and that there was a demand
for insuring such losses.
1
In the London markets, the case of Barclay v. Cousins () resolved that the
profits to be made on the cargo of a ship can indeed be deemed insurable (Hickmott,
). It was ruled that if goods can be insured against a specified peril, the profits
to be realized on the sale of those goods can also be insured against the same peril.
. Not to be confused with the legal concept of “consequential loss” referring to indirect damages resulting
from the breach of contract as established under English law following Hadley v. Baxendale () and American
jurisprudence following Primrose v. Western Union Telegraph Company ().
Journal of Insurance Regulation
Marine insurance policies thus came to be classified as “valued” or “unvalued.” Under
a valued policy, the insured and the insurer agreed on the value of the insured goods,
which typically included anticipated profit, at the commencement of the policy. In
the event of a loss, this “agree value” was binding. On the other hand, with unvalued
policies, no cover for anticipated profit was included.
2
Contrary to marine policies,
establishing an agreed value, which could include an addition for anticipated profit,
was not adopted in early property insurance. The first fire insurance policies were the
marine equivalent of “unvalued” contracts that entitled the insured to recover the
direct value of the insured item that was lost, but no more.
The first insurer to introduce additional coverage for consequential costs to a fire
insurance policy appears to be the United Kingdom (UK)-based Minerva Universal
Insurance, which did so in (Morrison, Miller, & Paris, ). The policy made
an earnest attempt at insuring business profits, but the enterprise ultimately failed,
arguably due to the primitive book-keeping standards of the time (Hickmott, ).
3
Regardless, profits were insurable with Lucena v. Craufurd () determining as much,
though the decision noted that the insured profits should be described.
A notable early American case in which the insured’s claim for loss of profit was not
granted, as it was not explicitly included in the applicable fire policy, was the case of
Niblo v. North American Fire Insurance Company (). The ruling in this case cited
two contemporary British cases in which insurance awards for consequential losses
from interrupted business due to fire were not granted. In Sun Fire Office v. Wright and
Pole (), it was held that rent payable, the cost of renting alternate premises, and
lost profits following a fire at an inn could not be recovered unless expressly covered
by the fire policy. Similarly, in Menzies v. North British and Mercantile Fire Insurance
Company Limited (), a manufacturer failed in its claim for consequential damage
as a result of loss of occupancy, loss of profits, and wages of servants while buildings
were under repair following a fire.
Despite the litigation outcomes of the early s, the concept of consequential
losses was established in the property insurance market. It was recognized that direct
physical damage could result in loss of profits and significant continuing expenses
during the period necessary to repair the damage. Indemnification for indirect losses
could include insurance coverage consisting of two parts, one where the indemnity
involves a time element and one without a link to time (Huebner & Black, ).
An early example of business interruption cover without a link to time was the
“chomage” policy, introduced in Alsace, France, in (Hickmott, ). The term
translates to “enforced idleness” or “stoppage of work,” and the cover was offered as
supplement to property insurance policies providing cover against direct losses. The
additional cover was provided as a fixed percentage of the damaged or destroyed
stock, to compensate for the loss of profits that the sale of that stock would have
generated. Chomage policies were thus valued contracts based on the principle of
marginal cost recovery. Therefore in the event of a partial claim under the direct loss
policy, the same percentage would be applied to an accompanying chomage policy.
. Of course, the notion of agreed value coverages continues to this day in many contexts.
. Consistent accounting standards were not developed until the mid-s with The Institute of Chartered
Accountants of Scotland (ICAS) forming in , The Institute of Chartered Accountants in England and Wales
(ICAEW) in , and the American Institute of Certified Public Accountants (AICPA) in .
Journal of Insurance Regulation
The chomage principle was later adopted in the UK under the names “percentage
of fire loss” and “pay as paid” policies, where it was customary to restrict the sum
insured to % of the value of the covered stock. However, these policies were not
considered to be indemnity-based policies, since an insured’s trading losses are not
necessarily proportionate to the loss of stock and no account was taken of damage
to buildings or machinery.
Although some business interruption-related cover without a time element can
be found in modern insurance products (e.g., selling price valuation, agreed values,
etc.), standard business interruption policies are considered to be “time element
coverages.” In the U.S. insurance market, this distinction was made clear from the
outset, where BI insurance was initially known as “use and occupancy” insurance. In
the UK, however, despite “time loss” policies being introduced as far back as ,
cover for consequential losses were referred to as “profits insurance” well into the
th century. These policies will be discussed further in later sections.
Time Loss Policies
In in the UK, the Beacon Fire Insurance Company introduced the “per diem”
principle of offering fixed daily compensation while the insured firm is prevented
from conducting business. This time loss policy recognized the relationship between
trade losses and the loss in working time and thus introduced a “weekly allowance to
tradesmen and others deprived by fire of the means of pursuing their usual vocations.”
In the U.S., saw the independent introduction of two per diem insurance
policies by an insurance agent in Boston, MA, Henry R. Dalton, and a textile mill
operator from New England, Edward Atkinson (Bardwell, ). The policy that Dalton
developed agreed to pay the insured
⁄ of the policy’s agreed value for each day
of total suspension. Later varieties allowed for benefits of
⁄ per week and in some
jurisdictions
⁄ per month, with further modifications aimed at altering the policy
amount to coincide with seasonal fluctuations in the underlying business. Hence,
policies covering seasonal businesses specified different agreed values for different
parts of the year.
Meanwhile in the UK, a Scottish chartered accountant and amateur archaeologist,
Ludovic MacLellan Mann, developed a system for insuring anticipated trade profits by
combining long-established insurance principles with the progress made in account-
ing precision (LMI Group, ). The consequential fire loss indemnity policy was
introduced in and formulated a “turnover-basis” that covered both the profit and
the “standing charges” of the insured business. Losses were measured by comparing
the turnover (also revenue or output) for the period affected with the turnover for the
corresponding period in the year preceding the damage. These policies where thus
contracts of indemnity which would compensate the insured for losses sustained during
a period of reduced turnover following physical damage. Losses were determined
through a consideration of the accounts of the business during a specified period,
and the policies were later known as consequential loss or profits insurance
Similarly, the American insurance markets of the early s dropped the agreed
value concept in favor of the “actual loss sustained” concept since seasonal fluctuations
characterized by changes in business activity could not adequately be accounted for
Journal of Insurance Regulation
with adjustments in the agreed policy value (Hickmott, ). This necessitated a move
away from the formulaic per diem principle of offering an agreed sum per day, week,
or month of interruption to instead protect the value that the business derived from
the “use and occupancy” of its premises and machinery.
“Use and occupancy” insurance thus became the name by which BI insurance
was first popularly known in the U.S.
4
Until the s, the term “use and occupancy”
especially referenced the loss of production following fire, although in boiler and
machinery insurance, the term survived until the s. However, despite the move
away from time loss policies, in early court cases arising from use and occupancy
insurance, the courts continued to accept use and occupancy policies as providing
indemnity through a per diem valuation.
5
Subsequent policy forms thus explicitly
stated that the subjects of insurance were to be net profits and continuing expenses,
although the term “use and occupancy” remained and in time became synonymous
with BI insurance in the U.S.
Use and Occupancy as an Endorsement to Fire Insurance
At the same time, use and occupancy insurance was established as an extension of
fire insurance in recognition that fire damage may extend beyond the direct loss of
property and also disrupt normal business operations. Throughout the late s and
s, the connection to fire insurance remained strong. Hence, the drive towards
standardized fire insurance contracts also affected standardization of business inter-
ruption policies (Evans, ).
The First New York Standard Policy for Fire Insurance (1887)
Before widespread standardization, each insurer prepared its own insurance form
(including fire insurance forms), which impeded the growth of business interruption
coverage in the same way as the lack of uniformity in accounting standards had done
previously. This condition was not easily resolved, despite earnest efforts to produce
a standard fire insurance policy at the first annual meeting of the National Board of
Fire Underwriters in (Wenck, ).
The first standard policy to be used across multiple states resulted from a statute
passed by the New York state legislature stipulating that the Insurance Superintendent
of the state was to prepare a standard policy, unless the New York Board of Fire
Underwriters did so first (Wenck, ). The Board of Fire Underwriters took the
initiative and filed a standard policy and standard modifying endorsements. The policy
became known as the New York policy (despite becoming effective in ).
During the late s, however, coverage of business interruption using the per
diem concept was still commonplace. Recall that this concept relied on an agreed
value rather than the actual loss sustained. This feature of early BI insurance often
resulted in claim payments exceeding actual losses, a situation bemoaned at the
. Although the term “business interruption insurance” appeared in the U.S. as early as , it came into
popular use much later, as “use and occupancy” insurance and later “gross earnings” insurance were initially the
preferred terms for this type of cover.
. For example, see Michael v. Prussian National Insurance Company (), Tanenbaum v. Simon (), and
Tanenbaum v. Freundlich ().
Journal of Insurance Regulation
above-mentioned inaugural meeting of National Board of Fire Underwriters (National
Board of Fire Underwriters, ).
6
The San Francisco Earthquake (1906)
Although several states had adopted the New York policy as the standard policy, no
standard form was prescribed in California at the time of the San Francisco earthquake
and subsequent conflagration in . (The New York policy was used by some
insurers in California.) The lack of a standard policy led to several complications in the
process of loss adjustment and settlement after the earthquake (Mowbray & Blanchard,
). Some insurers denied liability due to earthquake exclusions, whereas a few
others covered losses, including some Lloyd’s syndicates. The earthquake ultimately
cost Lloyd’s more than $ million in , the equivalent of more than $. billion
in (Carter & Falush, ).
Soon after, a commission comprising various stakeholders was appointed to draft a
standardized fire insurance policy for California. On March , , a revised version
of the New York policy was adopted as the California standard policy for fire
insurance. This remained the standard policy in California until (Mowbray &
Blanchard, ). Although the California standard policy did include coverage for
losses resulting from interruption of business, in practice, insurers were only liable
to compensate for such losses if they were separately insured as “profits” and valued
prior to the loss (Williams, ). The inclusion of rent as a part of profits that could be
insured also bears mentioning. In practice, retail businesses were charged rent based
on a proportion of sales (Hickmott, ). Hence, if a property became untenable
following a fire, it would result in the cessation of rent receivable by the owner—an
insurable interest that could be covered.
The Second New York Standard Policy for Fire Insurance (1918)
The California standard policy was, however, considered to be more insured-friendly
than the New York policy, which led to agitation within the industry and emphasized
the desirability of a uniform policy nationally (Mowbray & Blanchard, ). Following
Paul v. Virginia (), this could not be accomplished by federal legislation. Hence,
in , the New York legislature directed the Superintendent of Insurance of New
York to request that the National Convention of Insurance Commissioners undertake
the preparation of a new standard fire insurance policy.
7
The New York standard
policy was thus adopted in New York on Jan. , . This version either formally or
informally (through widespread adoption) became the dominant form in New York,
as well as in several other states. However, the original policy, as well as a policy
emanating from Massachusetts (the Massachusetts standard policy of ), were also
in use across the states. Thus, the updated New York standard policy resulted in
greater variation across states (Wenck, ).
. The Boards’ Committee of Adjustments thus recommended that claims payments should be delayed for
a period of days following the claim date (referred to as the “date of proofs”) to allow for a rigorous claims
assessment.
. The National Convention of Insurance Commissioners changed its name to the National Association of
Insurance Commissioners (NAIC) in .
Journal of Insurance Regulation
While the form was moving towards standardization, the rating for the general
use and occupancy hazard changed from “open rating” to the use of an analytic
rating schedule. In this regard too, there was no uniformity as it became practice to
assign different business interruption rates to different manufacturing plants, without
any consistency in the interpretation of the rating schedule among different rating
bureaus. The discretion of underwriters, particularly in their responsibility to perform
both rating and loss adjustment duties for business interruption coverage, meant that
such underwriters attracted relatively high compensation. This brought about further
agitation in the market, and the desire for simplification and uniformity ultimately
resulted in a third New York standard policy being introduced in and widely
adopted across the country (Wenck, ).
The Third New York Standard Policy for Fire Insurance Policy (1943)
In , the NAIC appointed a special committee to prepare a standard fire insurance
form. After three years, a form was submitted and approved by the NAIC, but it failed
to be adopted in any state. A new form was adopted in New York on July , ,
and was soon used with little or no modification in all but three states (Mowbray &
Blanchard, ).
8
The standard fire insurance policy provided cover for loss “without
compensation for loss resulting from interruption from business or manufacture,” but
it provided for the additional coverage of consequential losses through endorsement,
which was stipulated as business interruption, rent, leasehold, builders’ risk, and
additional-living-expense. These endorsements thus continued cover where the
standard policy ended.
The preference for bundling BI insurance with fire insurance, or more general
property insurance cover, arguably recognizes that covered losses may cause a partial
or complete interruption of business. However, the magnitude of the covered direct
property loss may be unrelated to the amount of business interruption loss. In the
standard policy for fire insurance, coverage was thus provided by way of endorsement
for interruptions that may result in loss of net profits that would otherwise have been
earned and the incurring of necessarily continuing expenses that are not covered by
continuing income. In time, the policy also became known as the -line standard
fire policy, referring to the physical length of the policy. It was frequently used as a
comparison for the businessowners policy when it was introduced (Policy Form &
Manual Analysis Service, ).
Indemnity and the Question of Business Trends and
Variations
By the s, the practices pertaining to BI insurance in the U.S., where it was now
known as use and occupancy insurance, and the UK, where it was still known as
profits insurance, had diverged considerably. Profits insurance in the UK specified
insurable earnings relative to a predetermined standard based on either the insured
. The exceptions being Maine, Minnesota, and Texas, where the forms in use were either based on or similar
to the New York form (Wenck, ).
Journal of Insurance Regulation
company’s quantity (or value) of output or the turnover of the business (Kahler, ).
9
Losses were expressed as a ratio based on the reduction in this standard following a
business disruption, and policies allowed for periodic payments to be made to the
insured. Losses were assumed to continue until the agreed upon standard had been
restored, and loss adjustments thus continued until the interruption had ceased, in
recognition that normal business operations are typically not resumed immediately
upon the repair or replacement of property.
This differed from the U.S. practice adopted in use and occupancy insurance,
where the loss adjustment process initially did not allow for the payment of losses
in installments over the period of the interruption. It was also recognized that the
rigid application of a predetermined standard would lead to insurance benefits that
were disproportionate to the loss suffered if there had been material changes in the
ratio of insurable earnings relative to the standard that had previously been agreed
upon (Hickmott, ). Insurance adjusters were thus granted a degree of latitude
in determining loss amounts of use and occupancy insurance policies. While this
necessitated better-trained and more competent adjusters, it resulted in insurance
benefits that were meant to be commensurate with the losses suffered (Kahler, ).
The U.S. and UK systems, therefore, each had its own benefits. The U.S. system was
deemed to be superior in determining the value of insured losses, while the UK system
was deemed superior in determining the period of indemnity (Kahler, ). The market
was thus ripe for an insurance product that would combine the relative advantages of
the different practices to provide full consideration of the actual operating conditions
during the period of interrupted business. This would entail the payment of losses
in installments as the interruption continued and holding open the final settlement
beyond the restoration of property until the full effects of interruption had dissipated.
Indemnity thus remained the underlining principle for BI insurance as it developed
in the U.S. as policies stipulated that payment should be made based on the actual
loss sustained following the occurrence of the insured event. In determining this loss,
it became practice to give due consideration to the experience of the business before
the date of damage and the probable experience thereafter had no loss occurred.
It was thus established that insurance cover would be limited to continuing charges
and expenses that would have been incurred had the insured peril not occurred
(Hickmott, ).
10
Further guidance in determining the actual loss sustained was provided by the
ruling in the case of Miner-Edgar Company v. North River Insurance Company ()
argued before the Appellate Division of the Supreme Court of New York. The court
ruled, based on an analysis of several related Court of Appeals rulings from New York
and other states, that in order to bring about complete indemnity, all relevant infor-
mation used for an accurate loss estimate was to be considered (National Association
of Cost Accountants, ).
11
Importantly, this meant that any reasonable method
of valuation could be relied on and that loss estimation would not be confined to a
single method of valuation.
. Alternative standards could also be specified if deemed to be more appropriate for the insured business.
. This was the ruling in Goetz v. Hartford Fire Insurance Company ().
. The notable New York Court of Appeals rulings include those of McAnarney v. Newark Fire Insurance Company
(), Ice Service Company v. Phipps Estates (), and Rickerson v. Hartford Fire Insurance Company ().
Journal of Insurance Regulation
In valuing insured losses, the Maryland Court of Appeals, in the case of Standard
Printing and Publishing Company v. Bothwell et al. (), provided decisive guidance
on what would constitute “fixed charges.” It was ruled that whether or not items should
be included in fixed charges was in no way dependent upon the fact that they were
deducted from selling prices to determine net profit, but that their classification as
fixed charges were instead solely decided based on an examination of their real
nature. It was held that fixed charges were to include necessary expenses incurred
in maintaining the efficiency of the insured’s organization, including those charges
that spread over the entire establishment, such as rent, insurance, taxes, mortgage
interest, depreciation, advertising, etc.—all of which would continue whether or not
the business was operated. It was also determined that fixed charges would include
the salaries of employees whose services could not have been dispensed when the
insured is unable to continue the normal operation of the business following a period
of interruption.
Two Item Contribution Plan
After several years of development, the two item contribution plan was adopted in
to meet the seasonal coverage needs of department stores. The plan moved
away from the per diem principle and was designed to cover seasonal fluctuations by
providing a blanket amount of indemnity for the duration of the interruption, without
a specified maximum liability per day, week, or month (Schultz & Bardwell, ).
The two items of the two item contribution plan specified separately:
1.
The dollar value of net profits and continuing expenses, excluding ordinary payroll
that would not be earned following an interruption; and,
2.
Ordinary payroll, which is to continue during the business interruption until normal
business is resumed, but not exceeding calendar days.
Coverage for ordinary payroll was, however, optional as it referred to the wages of
workers who could theoretically more easily be replaced in the open market and would
not necessarily be retained throughout an interruption (Bardwell, ). In contrast,
the compensation of officers, executives, department managers, employees under
contract, and “other important employees” would form part of ongoing expenses,
and not of ordinary payroll. Ongoing expenses would, however, include a deduction
for the costs of heat, cooling, light, and power, which would not continue following
a loss (Lucas & Wherry, ).
Two versions of the two item contribution plan were available, for manufacturing
and non-manufacturing businesses. The two versions were simply referred to as Form
No. and Form No. since the underwriting process entailed the physical completion
of one of two distinct forms. The material difference between the two forms was the
definition of the lost income under item (i) above, namely net profits and continuing
expenses, less ordinary payroll. For non-manufacturing businesses, lost income was
defined as net sales and other earnings, less the cost of the merchandise sold and
materials directly consumed in supplying a service. For manufacturers, raw and finished
Journal of Insurance Regulation
stock were dealt with separately, and the lost income was based on the net sales value
of production (Huebner & Black, ).
Although the two item contribution plan was widely adopted in its standard form,
it also allowed for modification by endorsement. Endorsements were made either
by the physical attachment of a supplementary form to the standard policy or by
the specifications made in the clauses contained in the standard form. In lieu of the
time limits that existed under per diem policies, the two covered items each had a
separate coinsurance clause stipulating the percentage of income that should be
covered. Initially, all policies specified a minimum of % coinsurance, but later %
coinsurance was introduced, particularly in jurisdictions on the west coast (Schultz
& Bardwell, ). The coinsurance percentage for item (i) would be applied to the
sum of the annual net profits and all ongoing expenses (excluding ordinary payroll)
that would have been incurred in the months immediately following the date of
damage had no loss occurred.
Although the insured event had to occur within the period of the policy, the losses
were not limited to the policy term. Hence, an interruption commencing in the last
month of the annual policy could result in losses that were covered for as long as
months after policy inception (Bardwell, ). Since premiums for the two item
contribution plan were based on projected earnings for the full months following a
potential loss, this meant that earnings had to be projected two years into the future on
annual policies, as were typical (Huebner & Black, ). In the event of underinsurance,
the principle of averaging would be applied so that the insured would receive a lower
amount than the full value of the loss, even if the loss was partial.
The two item contribution plan remained popular among manufacturers for several
decades, though not for mercantile risks (Lucas & Wherry, ). The principal concern
among mercantile operations was that the plan would provide excessive coverage,
as the buildings occupied by such businesses could often be replaced or repaired in
much less than a year, but the coinsurance clause would require large limits (based
on long duration of losses) or impose penalties on the insured’s recovery in the event
of such a partial loss (Bardwell, ).
Single Item Gross Earnings Policy
As an alternative to the two item contribution plan, the single item gross earnings policy,
or simply the gross earnings plan, was introduced for mercantile businesses in .
The key difference was that the two item contribution form treated ordinary payroll
separately from the balance of the risk, which allowed for a split basis of coinsurance,
to be applied separately to the two parts. Under the gross earnings plan, however,
there was only one item and consequently a single basis for coinsurance (Lucas
& Wherry, ). Similar plans followed for non-manufacturing businesses in
and finally for manufacturing businesses in . (It was still common to underwrite
manufacturing business on the two item form and mercantile business on the gross
earnings form.)
12
In parallel to the two item contribution plan underwritten on either
. Over time, the “plans” became known as “forms,” thus indicating the close link between the policies and
the standardized forms on which they were underwritten.
Journal of Insurance Regulation
From No. or Form No. , gross earnings insurance was available on either Form No.
or Form No. .
Form No. offered BI insurance for mercantile and non-manufacturing businesses,
and Form No. offered the coverage to manufacturing risks. Form No. thus replaced
lost sales, while Form No. replaced lost production and required a “sales value of
production” to be established prior to the loss. Both forms provided a single amount
of insurance that covered all earnings, with the option to exclude or limit the coverage
for ordinary payroll. The market had also grown beyond manufacturing and mercantile
risks to include coverage for lost earnings of mining concerns and lost tuition fees at
academic institutions following property damage (Bardwell, ). BI insurance was,
however, not yet offered as a stand-alone product and continued to be regarded as
extensions to property insurance policies.
The “single item” insured under the gross earnings plan was once again the actual
loss sustained, which described the loss sustained by the insured resulting directly
from the interruption of business. Indemnity was thus not governed by a formula, as
was the case in the UK at the time, but limited by the stipulation that the loss covered
was not to exceed the reduction in gross earnings, less charges and expenses, which
do not necessarily continue during the interruption of business (Huebner & Black,
). Benefits were reduced if the insured could continue operations, either at the
damaged or alternate properties. Cover was also included for expenses incurred in
reducing the loss, as long as these did not exceed the amount by which the loss was
reduced (i.e., extra expenses).
A consideration of the business experience before the insured event, during
the interruption, and probable experience had no loss occurred was thus required.
This requirement, instead of a formula-based calculation, has remained in place for
the subsequent forms of BI insurance. It later became a contentious issue, as the
interpretation of loss valuation language and the evidentiary standard under which
actual losses sustained were to be determined often became the focus of litigation
between policyholders and insurers, with various outcomes (Hickmott, ).
The gross earnings plan also stipulated that the period of interruption (later, period
of restoration) would be considered to be the length of time that would be required to
repair or replace the damaged property to the extent necessary to resume operations
with the same quality of service as existed immediately preceding the loss. Reasonable
time was allowed for architects to draw plans, contractors to submit estimates, and
for delays in obtaining specialized machinery (Bardwell, ). Abnormal weather
conditions holding up operations, delay from strikes away from the premises, and
other matters outside the insured’s control were also covered. Similar to the two item
contribution plan, the period of interruption commenced on the date of damage and
was not limited by the date of policy expiration (Hickmott, ).
Although not formally defined, consideration was also given to continuing standard
charges and expenses, including payroll expenses. However, the reference to ordinary
payroll was less explicit under the gross earnings plan than was the case with the
two item contribution plan, and the choice between the two plans often depended
on the cover desired for ordinary payroll. While the two item form separately stated
the coverage for regular payroll, regular payroll could either be fully insured or fully
Journal of Insurance Regulation
excluded under the gross earnings plan and was subject to a single coinsurance
stipulation applied to the entire policy (Phelan, ). Coverage for wages, however,
was not intended to be a form of social benefit but required the insured to establish
the need to retain specified employees.
For the gross earnings plan, the coinsurance clause of the two item contribution
plan was renamed the contribution clause and allowed for similar coinsurance with
greater flexibility. In practice, however, it was often the case that the coinsurance
percentage chosen under a gross earnings plan would be lower than that of a two
item contribution plan. Options for coinsurance percentages of the gross earnings
plan often ranged between % and % (in increments of %).In comparison, the
coinsurance options for the two item contribution plan would be % or % (Lucas
& Wherry, ). For the gross earnings plan, additional coinsurance options were later
introduced in many jurisdictions, and the combination of the coinsurance percentage
and estimate of future earnings were relied on to ascertain what the appropriate
amount of insurance would be and to ensure that sufficient coverage was bought.
The sum insured under gross earnings plans was determined by the use of work-
sheets, which were to be completed annually to provide an updated declaration of
the gross earnings to be insured. Worksheets were used for premium calculation
and the stipulation of coinsurance percentage in the contribution clause, but they
were not further relied on in establishing the actual loss sustained (Lucas & Wherry,
). Gross earnings were defined separately for manufacturing and mercantile risks
but essentially took a top-down approach that entailed subtracting input costs from
revenue. Cover was provided up to the sum insured, and indemnity was limited to
the period of interruption, as described above.
It was thus no longer necessary to forecast daily or weekly fluctuations in busi-
ness, as was required under the per diem forms of the previous century. Instead, the
anticipated period of interruption had to be estimated. This was particularly relevant
for selecting the coinsurance percentage since an accurate specification of future
earnings combined with a % coinsurance clause would provide reimbursement
(without penalty) for losses as short as six months.
To illustrate the value of BI insurance to business owners, insurance underwriters
would often calculate the “annual earnings exposed to loss” under a gross earnings
policy to recommend a suitable level of coverage (Bardwell, ). Such a calculation
would be conducted by completing a BI insurance proposal form or a BI insurance
appraisal form.
To allow for flexibility in coverage, several modifications to the standard policy
were allowed by way of endorsement. A gross earnings plan would, therefore, not
necessarily be a self-contained contract, but often it would include attached forms
dealing with additional cover. For example, to protect the receiver of rental income,
the gross rental form might be attached to provide cover for the loss of income
following damage and include cover for additional costs necessary to expedite the
repair work to the extent that this would reduce the loss. Contingent BI insurance
offers another example of an endorsement. This provided cover against interruptions
arising from property damage at customers’, suppliers’, and manufacturing locations
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(Bardwell, ).
13
Cover was only provided for “contingent properties” listed on the
policy form and when the interruption was due to a peril included in the primary
insured’s property insurance policy. Further forms would often be attached to cover
the commission of selling agents and extra expense insurance, both of which were
not part of the standard gross earnings plan.
Other notable extensions included blanket policies, which allowed for multiple
buildings at distinct locations to be covered under the same policy, and premium
adjustment plans, which were designed for businesses with growing earnings (Huebner
& Black, ).
14
The premium adjustment endorsement thus entailed purchasing
more coverage than was strictly required under an % contribution clause and for
the insured to report on actual gross earnings at the end of the year so that a refund
of the excess premiums paid could be made. This endorsement thus prevented the
application of averaging at the time of the loss.
Following the widespread riots of the s, and in particular , it also became
commonplace to extend business interruption coverage for up to two weeks in sit-
uations where damage to other premises adjacent to the insured property resulted
in civil authorities denying access to the insured property (Bardwell, ). To ensure
that policies kept to the original intent of coverage, the standardized forms in most
territories added a specification in that the order of civil authority must be the
direct result of damage or destruction of property. Later, as the wave of demonstrations
continued across the country, such disruptions became insurable separately under an
interruption by civil authority clause, with cover typically commencing hours after
the initial disruption and extending to a maximum of four weeks.
15
Since the intention of the gross earnings plan was to cover the loss of future
earnings as a consequence of property damage, the profits lost on finished goods
were dealt with separately (Schultz & Bardwell, ). For manufacturing businesses,
it was assumed that finished goods would have no influence on production and that
only damages affecting the productive ability of the business, including raw stock and
stock in process, were covered. This was done to avoid moral hazard, as finished stock
often takes longer to turn over than to produce, so that a period of interruption based
on the longer turnover period would lead to excess cover when the lost stock could
be reproduced in a shorter period. The profits lost from the damage or destruction
of finished goods were thus excluded, as such losses could be insured separately
through endorsement as profits and commissions insurance.
Simplified Earnings Plan
Initially, marketing of the single item gross earnings plan produced lackluster results,
as it was aimed at larger operations and was ill-suited for small and medium-sized
enterprises. For mixed manufacturing and mercantile businesses, it also became a
. Later policies were extended to also cover “leader properties,” which are defined as nearby flagship
businesses that attract customers to the insured business. Secondary contributing and recipient locations were
also later allowed to be unnamed.
. Under simplified earnings plans, however, blanket policies were only permitted if the insured buildings
were located on the same premises.
. The -hour “waiting period” would become the norm for all business interruption policies in the mid-s.
Journal of Insurance Regulation
rather involved procedure of determining which form to use and, coupled with the
required contribution clause, did not result in widespread adoption. A survey from
the early s of more than , firms, conducted by the National Association
of Credit Men, indicated that % of manufacturers did not carry any form of BI
insurance, and % of the surveyed businesses had never been offered this form of
insurance (Miller, ).
Consequently, a simpler policy was designed for smaller mercantile and other non-man-
ufacturing risks, with the first version being launched on the west coast in November
.
16
The new policy was known as the simplified earnings plan, or simply the earnings
plan, it and combined the concept of the single-item form with the older per diem
principle (Bardwell, ). It was soon adopted nationwide with minor modifications.
The key difference between the simplified earnings plan and the gross earnings
plan was that the former had no contribution clause in which a coinsurance percent-
age was stipulated.
17
Instead, the simplified earnings plan limited insurer exposure
by introducing a monthly limit on loss recovery, specified as a fixed percentage of
the total policy amount. The policy amount was based on projected gross earnings,
and the insured suffered no penalty if these were underestimated (other than being
underinsured). The benefits that the insured could collect for any single month of
interruption were typically specified as % of the total policy amount, and monthly
limits were not cumulative. This shielded the insurer against underinsurance ensuring
policyholders carried sufficient insurance.
18
In contrast, under gross earnings plans
with a contribution clause (also coinsurance clause), the insured would be penalized if
the insured limit did not equal an agreed percentage of the total amount at risk, which
in turn was based on the revenue that the insured business would have produced if
no interruption had occurred (Huebner & Black, ).
Both plans referred to the “actual loss sustained” in the coverage calculation, but the
simplified earnings plan estimated the loss amount through a bottom-up calculation to
provide a minimum level of coverage, while the gross earnings plan took a top-down
approach with the aim of providing full indemnity. Under the simplified earnings plan,
the “earnings” that were to be insured were calculated by adding to net profits the
payroll and other operating expenses of the insured business. Although the cover
provided was based on projected earnings, it was not a valued policy and included
no provision that the monthly limit was to be prorated if the interruption was for less
than days (Bardwell, ).
Thus, by the late s, there were three business interruption policies available in
the market: ) the two item contribution form; ) the single-item gross earnings plan;
. John D. Phelan of the American States Insurance Company in Indianapolis was particularly instrumental in
the development of the simplified earnings plan in the early s. At the time, this form of coverage was also
known as the “earnings insurance form.”
. In time, the simplified earnings plan also became known as the “noncontribution form,” thus making clear
its distinction from the gross earnings plan.
. This is similar to the monthly limit of indemnity option, which currently allows insureds to delete the
coinsurance provision.
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and ) the simplified earnings plan.
19
The ease of use of the simplified earnings plan,
however, meant that additional complexity (through a coinsurance requirement), if
desired (perhaps for a lower rate), could only be introduced via the gross earnings
form. Consequently, the gross earnings form soon allowed for greater flexibility in its
approach to ordinary payroll and, as this was previously the distinguishing feature of
the two item contribution form, the latter fell out of favor during the s.
The gross earnings form thus offered the most complete form of business inter-
ruption coverage, although the standard policies made no allowance for business
volumes prior to the interruption and merely provided coverage up to the day of
reopening, without recognizing that pre-disruption volumes were unlikely to be
regained immediately upon reopening. Later, the limit applied to the replacement
of raw stock or stock in process was stipulated as days longer than it took to
repair the damaged property or equipment. This limit could be increased through an
endorsement to extend the period of indemnity, with a commensurate adjustment in
premium, and was later removed in several territories. In its place came a requirement
to resume business with “due diligence and dispatch” (Phelan, ).
The simplified earnings plan was not available to manufacturers prior to December
and could only be used to cover non-manufacturing risks (Bardwell, ). Due to
the absence of a coinsurance clause, the simplified earnings plan was also relatively
more expensive, although the rates for both the gross earnings plan and simplified
earnings plan were typically derived from the building rates on fire insurance policies.
Throughout the s, the various business interruption policies were still not
available on a stand-alone basis but only as an endorsement to property insurance
policies covering damage by fire, windstorm, or other direct damage. In practice,
however, this limitation could be overcome. Since the policyholder insured against
direct loss is not necessarily the same business owner that has an interest in the use
and occupancy of the property, the business interruption endorsement could be
attached to a “blank” property insurance policy that did not place a value on the
insured property but described the location of the property and the perils covered.
The description of the perils covered were particularly important, as most business
interruption policies limited cover to perils that directly caused loss of or damage to
physical property. The practice of attaching a business interruption endorsement to
a blank property insurance form also meant that the (direct) property insurance and
business interruption coverage of a business could be provided by different insurers.
The link to property insurance meant that the developments in that line naturally
spilled over to business interruption coverage, with the result that policies for terms
exceeding one year became available, although an annual examination of earnings was
required. For larger businesses, split policies with multiple insurers insuring parts of
the same policy were also introduced. Legislative changes of the late s and s
also permitted insurance companies to operate as multi-line carriers and, therefore,
to combine different types of coverage under a single policy.
20
This notably led to
. An alternate form of the simplified earnings plan, known as the “specified time plan,” was also popular
on the west coast. It included an endorsement to extend cover to the additional time required to demolish the
undamaged parts of a building where a fire had occurred, specifically where this was required by legal ordinance
(Bardwell, ).
. Multi-line carriers were first authorized in New York in , and all other states soon enacted similar legislation.
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special multi-peril (SMP) policies, which included a loss of earnings endorsement. This
provided business interruption coverage that was almost identical to that available
under the simplified earnings plan.
Endorsements to Business Interruption
By the s, several endorsements to standard business interruption policies were
available. These endorsements satisfied the five criteria as summarized in Borghesi
():
1. Physical damage;
2. To insured property;
3. Caused by covered peril;
4. Resulting in a measurable loss due to interruption; and,
5. For the period required to expeditiously restore the damaged property.
To ensure that adequate premiums were charged, the various forms of coverage
continued to include limits to reimbursements. Typically, a contribution clause (i.e.,
stipulating coinsurance) would be made part of the policy (Society of Chartered
Property Casualty Underwriters, ). The most common endorsements, and a short
description of each, are discussed below.
Extra Expense Insurance
Whereas BI insurance covers additional expenditures only to the extent the insured’s
total loss is reduced, extra expense insurance covers the extraordinary expenses
incurred by an interrupted business (due to a direct physical loss) that wishes to
continue operations during the rehabilitation period even if that is more costly than
discontinuing operations (subject to policy terms and limits). This endorsement was
specifically introduced to cover industries where discontinuity in service is expected
to result in a permanent loss, such as newspaper circulation (Lucas & Wherry, ).
Extra expense coverage, therefore, provides additional coverage to BI insurance,
with BI insurance generally being more appropriate when the business would not
be expected to continue during the interruption, while extra expense insurance is
appropriate when a business is expected to remain operational under emergency
conditions. Extra expense insurance is also known as “surplus charges” or “additional
charges and expense” insurance and has the same requirement of direct physical loss
required in business interruption policies.
21
Leasehold Interest Insurance
This cover protects a lessee against loss resulting from the cancellation of a favorable
lease because of a covered peril (Bardwell, ).
22
The insurer’s liability is limited to
. Extra expense coverage was ultimately added to standard business interruption policies, and “extra expense
(only)” policies were introduced as separate policies.
. If for any reason the rental value of property increases beyond the amount of rent that the lessee must pay,
they are in possession of a favorable lease. The value of this leasehold is the difference between the rent payable
for the remaining term of the lease and the present value of the property. This endorsement also now exists as
a separate stand-alone policy.
Journal of Insurance Regulation
the discounted value of the leasehold at the time of the loss, and the insurance is auto-
matically reduced on a pro-rata basis each month, decreasing as the leasehold value
or profit decreases. The insurer’s risk depends largely upon the ease with which the
lease in question may be cancelled. For this reason, a verbatim copy of the cancelation
clause is made a part of the policy, and changes in the clause without the consent of
the insurer are prohibited. Two types of leasehold insurance were commonly written,
either for the undiscounted amount of the leasehold interest or for the discounted
present value of leasehold interest.
Rent and Rental Value Insurance
As the phrase “use and occupancy” fell out of favor, rent insurance became regarded
as a separate class of insurance, distinct from general BI insurance. Cover was still
provided to protect a property owner against the loss of rental income (or occupancy
if self-occupied) due to the property becoming “untenable” from an insured peril
covered under a property insurance policy (Mowbray & Blanchard, ). Based on the
terms of the underlying rental agreement, the tenant may also be the one purchasing
the cover. Hence, cover was either provided for loss of income (by the owner) or loss
of use (by the tenant).
Profits and Commissions Insurance
Since BI insurance indemnifies for the loss of future earnings from interrupted pro-
duction and property insurance indemnifies the cost of repairing/replacing damaged
goods (but not their profits), this product covered the unrealized profits on damaged
goods (Lucas & Wherry, ). This extended to goods that had been sold but not
delivered. Policies either specified that the insured would recover the full profit on
the lost goods (including partial loss) or only in proportion to damage sustained.
This assumed that the same rate of profit can be realized on salvaged goods as on
undamaged goods.
23
Selling Agent’s Commission Insurance
An endorsement to business interruption policies applied only to sales agents, which
covered the loss of net income resulting from an interruption in the business operations
of the providers of the merchandise to be sold. This endorsement often supplemented
the gross earnings form as the manufacturing property (or properties) on which the
sales agent was reliant had to be specified (Bardwell, ).
Coverage for Loss of Personal Income
This coverage was an endorsement that provided indemnity against loss of remuner-
ation that would have been received by employees if it were not for the suspension
of the employer’s operations (Bardwell, ). This provided cover for employees not
covered under the basic business interruption coverage, either due to being part of
excluded ordinary payroll, subject to time limits, or coinsurance clauses.
. Endorsements allowing for the valuation of finished goods on a “selling price” basis are now available to
affect similar coverage (Huebner & Black, ).
Journal of Insurance Regulation
Tuition Fees Coverage
This endorsement covers actual loss of tuition fees sustained by academic institutions
following damage or destruction of buildings by insured perils (Lucas & Wherry, ).
If the damaged buildings or contents could not be rebuilt, repaired or replaced less
than days prior to the start of a new academic year, the period of interruption
would be extended to the start of the subsequent academic year.
Specified Time Plan
This was an alternative to the gross earnings policy that was available from the late
s on the west coast (only). Under these plans, three items of coverage were
specified. Item I specified the coverage of net profit whereas Item II enumerated two
groups of expenses, namely the remuneration of personnel, and fixed charges and
expenses. To avoid ambiguity in the interpretation of the phrase “fixed charges,” Item
III allowed for the identification of specific expenses that were to be excluded from
the fixed charges of Item II and insured separately (Bardwell, ). The full amount of
the expenses enumerated under Item III were covered (as would be the case under
a % contribution clause), subject to a limited period of interruption that was
determined at policy inception.
Rain Insurance
As a precursor to event insurance, the s also saw a novel consequential business
interruption product known as rain insurance come to market. This policy was, however,
not an endorsement to a standard property insurance policy and did not require direct
physical damage or loss. Instead, the policy covered consequential losses arising
from the cancelation or rescheduling of events due to rain, snow, sleet, or hail (Lucas
& Wherry, ). Policies were often purchased to cover sporting or entertainment
events, and in time, the insured perils became much broader than mere downpours.
Similar consequential loss policies in place at the time would cover losses arising out
of the interruption of power, light, and water facilities.
Losses Resulting from Electronic Data Processing Damage
As computers became commonplace in commercial activities, they brought with them
new perils to be insured. During May and June of , BI insurance forms of most
jurisdictions were revised to include a limitation for the loss of earnings resulting from
the damage or destruction of media that were to be used in electronic data processing
(EDP) (Bardwell, ). This media initially referred to paper tapes, punch cards, and
magnetic disk, all of which were highly susceptible to destruction by physical perils.
Coverage of the lost earnings while the pertinent media was being replaced or restored
was initially limited to days, although additional cover was available to extend this
period to either or days or to waive the limit altogether.
Businessowners Policy Program
May , , saw the nationwide implementation of the businessowners policy (BOP)
program, which bundled BI insurance alongside basic property and liability cover for
Journal of Insurance Regulation
small and medium-sized businesses (Policy Form & Manual Analysis Service, ).
24
When first introduced, it was seen as a novel product that took a homeowners insurance
approach to the packaging of a broad range of insurance coverages at an indivisible
package premium. It was thus viewed as an alternative to the SMP policy program that
was in place at the time, which was more suitable for larger business that required
greater flexibility in coverage.
25
The initial BOP program offered two forms, either the standard or special form,
with the crucial difference being that the standard form covered named perils whereas
the special form covered all risks. Both forms included mandatory cover for loss of
income, which was stipulated as “the actual business loss sustained by the insured
and expenses necessarily incurred to resume normal business operation resulting
from the interruption of business or untenability of the premises when building or
personal property is damaged by an insured peril.” It was further stipulated that the
actual business loss may not exceed the reduction in gross earnings (less charges
not necessarily continuing during the period of operation) and that loss of income
benefits would be payable for the period required to resume normal operations,
but not exceeding the period required to restore the damage and not exceeding
months from the date of loss. The loss of income coverage was thus not limited by
the expiration of the policy period, nor did it include a stated limit or contribution
(i.e., coinsurance or deductible) clause. It did, however, require the insured to resume
normal operation as promptly as possible and use all available means to eliminate
any unnecessary delay.
A notable shortcoming of the first standardized BOP form was that premium rating
did not include a consideration of the past financial performance of the prospective
insured, despite the mandatory loss of income coverage. The only rating factors
of the original businessowners application/worksheet that had financial relevance
concerned the safekeeping and depositing of cash, as well as a subjective opinion
by the underwriter as to the financial stability of the business (Policy Form & Manual
Analysis Service, ). This shortcoming was soon addressed, at least in part, with
the application form recording the potential policyholders’ gross earnings and
rental income for the prior months (Policy Form & Manual Analysis Service, ).
However, it is not clear whether these figures were used in the premium calculation
or instead recorded for the purpose of claims adjusting and future use.
By the early s, there was another noteworthy modification to the original
BOP coverage relevant to BI insurance. In particular, coverage for loss of earnings
resulting from the damage of EDP media was limited to days.
26
Both the standard
and special forms of BOP policies stated that “(t)he widespread use of mini-computers
. Nationwide implementation was six months later than intended, as the initially proposed boiler and machinery
coverage was reviewed with the result that cover for the explosion of steam boilers and pressure vessels became
available as an optional addition only.
. For example, cover for sprinkler leakage, employee dishonesty, and personal injury liability were included
as part of the unendorsed BOP, while such cover was only available through endorsement of the SMP policies
available at the time. The standard BOP also included automatic inflation and seasonal adjustments of cover limits,
which were not part of the standard SMP policies.
. It is noteworthy that the gross and simplified earnings plans, which were intended to cover relatively large
businesses, covered losses resulting from EDP damage from as far back as , whereas the BOP program,
designed for small and medium-sized operations, first included this endorsement in .
Journal of Insurance Regulation
and EDP terminals in smaller business accounts for this limitation.” In a sense, this
then ushered in a new era such that by the time of the revision of the BOP,
time-element coverage with an annual aggregate of $, was included for the
suspension of operations brought about by computer viruses and harmful code that
disrupted computer and network operations (Krauss, ).
Business Income Insurance
On Jan. , , the Insurance Services Office (ISO) introduced the business income
coverage (BIC) form as an alternative to the gross earnings form (French, ). The
BIC was designed to serve as an independent stand-alone policy, without the need to
be attached to an underlying property insurance policy (although direct physical loss
to property was and still is required). Thus, it was the first formal stand-alone business
interruption policy in the U.S. Following the introduction of the BIC, BI insurance was
often referred to as business income insurance, as many believed that this gave a
clearer indication of what this coverage protected.
The perils insured against under the BIC, together with limitations and exclusions,
were specified in the three standard property cause of loss forms (i.e., Basic, Broad,
and Special forms). Each of these forms constituted a list of perils and/or exclusions
for which cover would be provided and, hence, offered policyholders a choice of
coverage (Bisco, Fier, & Pooser, ).
27
Amendments to these forms were also allowed.
BI insurance further retained the concept of actual loss sustained, although the first BIC
form of recognized the difficulties in determining actual losses exactly and thus
referred to the “actual loss of business income you sustain.” The gross earnings and
the business income forms remain the two most common business interruption forms
in use. In theory, the amount of insurance coverage under the two policy forms should
be equivalent, although the loss calculation methods differ significantly (French, ).
For business income policies, business interruption losses are determined as they
were for simplified earnings plans, namely as the net profits (if not for the interruption)
plus continuing expenses. In contrast, business interruption losses for gross earnings
policies are determined as gross earnings (if not for the interruption) less saved
variable expenses. The fact that neither policy is formula-based has led to litigation
between policyholders and insurers, particularly on the issues of:
• The state of the economy.
• Trends in particular industries.
• The impact of a particular catastrophe on the local business climate.
Despite the move away from standardized forms, the insurance industry continued
to categorize business income policyholders as either manufacturing or mercantile
business entities, with the distinguishing difference being the use of the insured
property. The inability to use or occupy property to raise sales or lease income would
affect mercantile operations, while the inability to produce stock would affect the
profits to be derived from the manufacturing process.
. The special cause of loss form is an “open-peril” agreement that only lists exclusions.
Journal of Insurance Regulation
Smaller businesses continued to purchase BI insurance either through independent
insurance agents or directly from the sale forces of insurers. The stronger negotiating
power of larger business, however, meant that these business owners could work
with insurers to develop manuscript policies, which offered broader coverage and
addressed the perils specific to the operations of the business (Borghesi, ). These
manuscript policies particularly proved their value during , a year that would be
known for several unrelated catastrophes from both man-made and natural perils that
resulted in significant business income losses due to the disruption of operations—not
all of which were covered by standard business interruption policies.
The Catastrophes of 1992 and Measurement of Business Interruption
Losses
In April , as the Chicago River breached an underground tunnel system, civil
authorities ordered the electrical power supply to downtown Chicago to be shut off
and the area to be evacuated until the flooding was alleviated.
28
Later in the same
month, widespread riots across Los Angeles led to a dusk-to-dawn curfew being
instituted.
29
Although property damage was arguably curbed by the curfew, it meant
that many retailers could not operate during what would normally be their most
profitable business hours because customers and employees could not access their
stores. Still in , the widespread power outages and contaminated water supply
following Hurricane Andrew in August resulted in an extended disruption to several
businesses, long after the wind and rain had passed.
30
Hurricane Andrew, in particular, emphasized the significance of post-loss economic
factors in measuring business interruption losses and stressed the two competing
approaches: ) the Economy Considered; and ) the Economy Ignored (Miller & Jean,
). The Economy Ignored principle looks to the past to measure an insured’s loss
relative to pre-loss business levels, without appreciation for post-loss market conditions.
An example of this principle arising from Hurricane Andrew is the case of American
Automobile Insurance Company v. Fisherman’s Paradise Boats Incorporated () in
which the insured (Fisherman’s) filed a claim for lost profits following closure of its store
as a result of significant damage at the hands of the hurricane. Fisherman’s submitted
evidence that the increase in demand for boating equipment following the hurricane
would have significantly increased its sales had the store not been damaged but
instead positioned to reap benefit from the post-hurricane economic conditions. The
U.S. District Court for the Southern District of Florida, however, ruled that net income
projections should not itself be affected by the peril and lead to the insured gaining
windfall profits. Thus, conditions of the post-loss economy were ignored by the court.
In contrast, however, is the case of Stamen v. Cigna Property & Casualty Insurance
Company () in which the same court followed the principle of Economy Considered
. The first businesses were allowed to reopen after three days, but some buildings remained closed for multiple
weeks. Several insurance disputes revolved around whether the water damage was caused by a flood or a leak.
. The Los Angeles riots were sparked by the acquittal of four Los Angeles Police Department (LAPD)
officers, who were charged with using excessive force in the (videotaped) arrest of Rodney King. The riots ultimately
led to deaths and the arrest of more than , people.
. The casualties in Hurricane Andrew’s path included , homes in South Florida, power lines in Louisiana,
and oil platforms in the Gulf of Mexico.
Journal of Insurance Regulation
and endeavored to place the insured in the post-loss position that it would have
held had it been able to continue its operations (Miller & Jean, ). The insured
convenience stores of Stamen also suffered physical damage as a result of Hurricane
Andrew and remained closed for differing periods of time. Most of the stores produced
increased profits after reopening, and in seeking recovery for business interruption
losses, Stamen thus factored in the profits the stores would have made if they had
opened immediately after the hurricane. The court ruled that in estimating the profits
that the insured would have made had the loss not occurred, the term “loss” refers to
the property damage suffered and not to Hurricane Andrew, and that there was thus no
threat of windfall profits as the insured sought only to recover actual losses sustained.
Subsequently, the courts have continued to apply both the Economy Ignored and
Economy Considered principles to BI insurance in measuring business interruption
losses, based on the actual policy language under consideration (French, ).
Neither approach has been found to consistently benefit either insureds or insurers,
as the facts and circumstances of every loss differ.
Business Interruption Insurance in the 21st Century
In the first decade of the st century, the U.S. experienced a series of unprecedented
catastrophes that highlighted the interdependencies of the modern economy. On
Sept. , , the U.S. experienced the largest terrorist challenge to date in an event
that had a permanent impact on the global economy. In August , more than
million North Americans in the northeastern part of the continent were deprived of
electricity for several days as a result of a failure in the power distribution infrastructure
that was attributed to a software error in a control room in Ohio. Within a -month
period in and , seven major hurricanes made landfall in the U.S.
31
The
costliest of these was Hurricane Katrina, which inflicted lasting damage and led to a
spate of litigation concerning BI insurance (Kunreuther & Michel-Kerjan, ). In turn,
the financial crisis had worldwide repercussions that affected both the capacity
and risk management strategies of the writers of BI insurance.
In the next decade, business interruption proved to be the most significant risk to
business operations around the globe. This was made clear by the fact that business
interruption and supply chain disruption ranked as the most significant threat to
businesses among the surveyed panel of global risk management experts in eight
out years, according to the Allianz Risk Barometer (Allianz Global Corporate &
Specialty, ).
32
During this decade, cyber incidents also emerged as a major cause
of business interruption.
The ascent of business interruption to be regarded as the most significant threat to
commercial operations occurred against a backdrop of disputes over loss-valuation
language in business interruption policies. This has often resulted in the inefficient
resolution of claims, excessive litigation, and conflicting decisions, which have given
rise to varying payments to policyholders under similar policy language and events.
. Charley, Ivan, Frances, and Jeanne in . Katrina, Wilma, and Rita in .
. The Allianz Risk Barometer is an annual report identifying the top corporate risk for the next months
and beyond, based on the insights of risk management experts. In and , business interruption ranked
second, behind economic risk and cyber incidents, respectively.
Journal of Insurance Regulation
On the other hand, insurance rates for BI insurance have shown evidence of an
underwriting cycle that follows the general economic environment prevailing in the
U.S. throughout the st century, as can be seen in Figure (Council of Insurance
Agents & Brokers, ). The / catastrophe and related business interruption losses
brought about a significant increase in the rates for BI insurance, which lasted well
into , while the modest upward trend in rates for BI insurance that started in the
latter half of gained momentum in and .
Figure 1: Quarterly Rate Changes, Q3 2001 to Q4 2020
-15 %
-10 %
-5%
0%
5%
1 0%
1 5%
2 0%
2 5%
3 0%
3 5%
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
3Q19
1Q20
3Q20
Business Interruption Insurance Rate Changes
Constructed from Council of Insurance Agents & Brokers (CIAB) data.
While it has been understood for decades that business interruption is one of the
most important risks facing most businesses, the challenges associated with the
economic disruptions of the COVID- pandemic have created new appreciation
for the relevance of this exposure. Although new COVID--related cases continue
to be filed, the vast majority of COVID--related insurance litigation is arising from
business income insurance policies, thus highlighting the prominence of this form
of insurance (Covid Coverage Litigation Tracker, ). Insurers have predominantly
denied COVID--related BI insurance claims due to a lack of physical damage from
a named peril. To date, most court rulings have upheld this decision (Klein & Weston,
). Consequently, the BI insurance claims resulting from the / terrorist attack,
Hurricane Katrina, and cyberattacks have had the most significant impact on the
insurance industry thus far in the st century.
The 9/11 Terrorist Attack
It is well known that despite the significant property damage resulting from the Sept.
, , terrorist attack, the majority of losses (insured and uninsured) resulting
from the attack were ascribed to business interruption losses (Insurance Information
Institute, ). Many of these losses arose in the New York City area in instances
Journal of Insurance Regulation
where an insured peril prevented access to the insured premises. However, disputes
as to whether all of these losses were insured arose.
Significant litigation pertaining to the interpretation of civil authority clauses arose
from the Federal Aviation Administration’s (FAA’s) nationwide ground-stop order of
the entire aviation system (Moses, ).
33
The litigation centered on policy limitations,
which specified either a causation or a purpose requirement for business interruption
losses to be recoverable. The bone of contention was whether the notice to close all
operations at all airports was a result of the physical damage that had occurred or
the fears of further attacks.
In some instances, such as the case of The City of Chicago v. Factory Mutual Insurance
Company (), this question was easily resolved, as the condition for recovery of
business interruption losses under the civil authority clause was based on purpose, and
losses resulting from actions intended to prevent impending physical damage were
explicitly excluded. In contrast, in the case of United Airlines Incorporated v. Insurance
Company of the State of Pennsylvania (), recovery of business interruption losses
under a property terrorism and sabotage insurance policy were based on a causation
requirement. In this case, it could not be demonstrated that the extended closure of
Ronald Reagan Washington National Airport was a direct result of the physical damage
at the “adjacent premises” of the Pentagon, as opposed to fear of future attacks. Thus,
recovery of the losses was denied by the court.
Contingent business interruption (CBI) coverage was also not extended to instances
where cover was found to be nonexistent, as the case of Zurich American Insurance
Company v. ABM Industries Incorporated () proved. Despite providing janitorial
and related services for most of the World Trade Center (WTC) complex at the time of
its destruction, ABM Industries was denied its claim for CBI coverage as the applicable
policy did not clearly identify the WTC as a dependent property (Kornegay, Killian,
& Pickens, ).
34
Notwithstanding the above examples, a vast amount of business
interruption losses were recovered by insureds. The Insurance Information Institute
(III) estimates that industry losses amount $. billion at price levels, a third
of which is attributed to insured business interruption losses (Insurance Information
Institute, ).ce industry thus far in the st century.
Valuing Business Interruption Losses Resulting from Hurricane Katrina
In late August , Hurricane Katrina swept through the southeastern parts of the
U.S. to become one of the deadliest natural disasters in American history. It led to
approximately $. billion in insured damage at the time of the loss, which, after
adjusting for inflation, more than doubled the previous record for insured losses in
the U.S. of Hurricane Andrew (Miller & Jean, ). From the start, the question of
whether damage was caused by wind or water became a key focus of Katrina-related
litigation, and the first lawsuit was filed just days after the event. This was a critical
issue, as a tremendous storm surge followed Hurricane Katrina in several coastal
areas. Flood damage resulting from such storm surges are typically excluded under
. The ground-stop order included a notice to close all operations at all airports, nationwide, and was lifted
on Sept. , .
. Dependent properties are typically described as premises operated by those either directly supplying or
receiving goods or services from the insured.
Journal of Insurance Regulation
standard commercial property insurance policies and insured separately under the
federal government’s National Flood Insurance Program (NFIP) or by endorsement.
A notable case was that of Berk-Cohen Associates, LLC v. Landmark American
Insurance Company (), where the policyholder was the owner of an apartment
complex that suffered a series of unfortunate events. First, a tornado struck the apart-
ment complex two weeks before Hurricane Katrina and inflicted initial damage. Before
any repairs had been made, Hurricane Katrina further decimated the complex. Then,
while the post-Katrina repairs were underway, a fire broke out at the complex, halting
the repair process. Once the repair process had recommenced, a motorist collided
with an electrical transformer that supplied power to the building, causing a power
outage. Ultimately, the repair process took almost two years to complete (Miller &
Jean, ).
When claiming for lost rental income under a business income insurance policy,
however, the insured and insurer could not agree on the value of the loss. The dispute
revolved around the question of whether the Economy Considered principle should be
applied in light of the increased rental values following the housing shortage brought
about by Hurricane Katrina. To add to the conundrum, the policy included wind as a
covered peril but specifically excluded flood as a covered cause of loss. Furthermore,
lost profits due to favorable market conditions brought about by a covered peril, such
as wind, were also explicitly excluded.
In this case, the court allowed for the policy language, apparently intended to
preclude consideration of favorable post-loss business conditions, to be circumvented
and ruled that since the policy did not expressly exclude lost profits from an excluded
cause of loss—in this case, flooding—the favorable post-Hurricane Katrina market
conditions should be taken into account. Similarly, in the case of Sher v. Lafayette
Insurance Company (), the Supreme Court of Louisiana affirmed the intermediate
appellate court’s ruling that in determining the policyholder’s actual loss of business
income, it should be interpreted to mean the amount the policyholder would have
earned if their business had not been damaged by the hurricane, but the area around
their business had been.
On the other end of the spectrum, however, was the ruling in Catlin Syndicate
Limited v. Imperial Palace of Mississippi Incorporated (). The policyholder operated
a casino that was damaged by Hurricane Katrina and subsequently shut down. However,
it reopened while many of the neighboring casinos remained closed. Consequently,
the casino produced revenues after reopening that exceeded pre-Katrina revenue.
The policyholder accounted for this post-hurricane experience in determining their
business interruption loss while the insurer’s calculation was based purely on pre-hur-
ricane experience.
The valuation language in the policy at issue stipulated that “due consideration shall
be given to experience of the business before the loss and the probable experience
thereafter had no loss occurred” (French, ). Ultimately, the court interpreted
the phrase “probable experience thereafter” to mean the probable experience that
the policyholder would have had post-catastrophe, based on the assumption that
post-catastrophe experience would have been identical to pre-catastrophe experience.
Since the valuation of business interruption losses under the existing policy language
Journal of Insurance Regulation
may be speculative, different courts (and in some cases the same court) thus had
different interpretations of how “probable experience” should be determined, often
leaving it to the policyholder to prove what their hypothetical earnings and expenses
would have been.
In addition to disagreement on whether post-loss economic conditions should
be considered, the courts also reached inconsistent conclusions regarding whether
and when certain expenses are recoverable under business interruption policies.
In particular, the costs incurred by a policyholder in determining the amount of an
insured loss, often known as “claim preparation fee allowances,” is often subject to
incomplete coverage. Where provisions relating to claim preparation fee allowances
limited coverage to costs incurred either “at the request of” or “required by” the
insurer, it was left to the insurer’s discretion to determine the extent to which they
would reimburse the policyholder for claim preparation services.
The valuation of business interruption losses in instances where the policyholder had
been operating at a loss prior to the interruption and was projected to continue doing
so if no interruption had occurred also adds complexity. Most unendorsed business
interruption policies specify that the object of insurance is the net income that would
have been earned during a period of suspended business operation if no physical
loss or damage had occurred and the continuing normal operating expenses incurred
during the period of suspended operations (French, ). However, different courts
have interpreted the meaning of the word “and” in the above sentence differently.
For example, in the case of Continental Insurance Company v. DNE Corporation
(), the court ruled (and affirmed on appeal) that the insured loss should be deter-
mined by adding the net income and the continuing operating expenses. The court
stated explicitly that if the net income is a negative number (i.e., a net loss), then the
amount to be recovered should be the continuing operating expenses, reduced by
the amount of the net loss. Thus, the court would allow the policyholder to recover
an amount from the insurer only if the continuing fixed expenses exceed the amount
of the net loss.
In contrast, however, in the case of Amerigraphics Incorporated v. Mercury Casualty
Company (), the court ruled (and also affirmed on appeal) that the meaning of
the word “and” was not the same as “plus,” “offset,” “subtract,” or “minus” and that
the policyholder was entitled to recover its continuing operating expenses without
any offset for projected negative net income. The policyholder thus recovered its
continuing fixed expenses without any adjustment for the net loss that was expected
had its business operations not been interrupted.
The interpretation of loss valuation language for policyholders that are projected
to lose money throughout the policy term became particularly relevant following
the financial crisis. Many insurers contended that policyholders suffering a
business interruption during or shortly after the crisis suffered no loss at the hands
of the interruption, as they would have been operating at a loss even if their business
had not been interrupted (French, ).).
Journal of Insurance Regulation
Cyber Business Interruption and Other New Forms of Business
Interruption Insurance
As companies become networked operations with data warehouses, service platforms,
and customer bases being their primary assets, cyber incidents emerged as a major
cause of business interruption for companies. Whether resulting from basic system
outages or sinister cyberattacks, business interruption following a cyber incident has
become regarded as a key peril to which all businesses are exposed and which can
lead to extensive disruptions in operations. Apart from the loss of revenue resulting
from the interrupted digital supply chain, victims of cyber incidents may also face
liability claims following a data breach, the cost of reinstating digital infrastructure and
restoring data, fines and penalties, and the indirect cost of damage to their reputation.
In and , the malware attacks of WannyCry and NotPetya dominated
the cyber business interruption landscape and disrupted shipping, logistics, and
manufacturing companies (Allianz Global Corporate & Specialty, ). Insurers saw
a growing number of business interruption losses, triggered by cyber incidents,
exceeding $ million from companies as distinct as FedEx and Apple. These attacks
highlighted the risk of interruption and potentially even physical damage from cyber
incidents, which were not necessarily considered in the underwriting processes but
found to be covered under traditional commercial insurance policies (Applegate,
).
35
The non-affirmative cyber exposures, or “silent cyber” exposures, meant that
both insurers and insureds were left uncertain as to the level of protection against
interruption from cyber events, thus giving rise to the creation of a dedicated cyber
insurance solution (Allianz Global Corporate & Specialty, ). Cyber insurance,
which includes cover for resultant business interruption, became available both as
a stand-alone policy and as an endorsement to existing policies, making clear the
coverage for cyber-related risks.
36
As commercial activities have continued to move away from brick-and-mortar
locations, other new forms of BI insurance have also been born. This includes coverage
to exposures presented by vehicles and mobile equipment such as photographic
drones while away from the policyholder’s locations. Endorsements are also available
to restauranteurs to provide cover against service interruptions brought about by food
contamination or utility service disruptions (Klein & Weston, ). Other modifications
have been more pragmatic, highlighting the concept of time element coverage and
stipulating an explicit allowance for post-catastrophe demand surge leading to an
increase in the cost of materials, services, and labor.
Conclusion
The theoretical premise of BI insurance is quite simple to grasp: the indemnification
of losses brought about by the disruption of business caused by a direct physical
loss. In practice, however, the accurate determination of covered losses for this form
. Direct or indirect physical damage resulting from cyber incidents is also known as kinetic cyber. Early
examples include an attack on a water management system, leading to environmental damage in Queensland,
Australia (); a rerouting of trams to cause physical injury in Lodz, Poland (); and infrastructure damage
to a fuel enrichment plant in Natanz, Iran ().
. Cyber insurance is also referred to as cybersecurity insurance or cyber risk insurance.
Journal of Insurance Regulation
of insurance has proven to be challenging, as phrases such as “normal operations,”
“probable experience,” “same quality of service,” and “due diligence and dispatch” have
often led to dispute. In turn, the time element of coverage, the concept of “actual loss
sustained,” and the principles of Economy Considered and Economy Ignored introduce
some subjectivity to the settlement of business interruption claims. Understanding
the history of this important source of coverage in the private insurance market and
its development is important to insurance regulators and other policymakers who are
wrestling with the way forward.
In addition, the businesses covered by BI insurance are non-static. As the economy
has progressed, so too have the specifics of the coverage required and offered. With
each new catastrophe, we are reminded that as the modern economy continues to
grow more complex, the intricacies of BI insurance continue to deepen. While the
policy forms and underlying businesses being covered continue to evolve, a review
of the history and development of BI insurance is quick to reveal that there is indeed
little new under the sun.
Journal of Insurance Regulation
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