Can Record-Keeping Save Your Business Interruption Claim?

Originally published by Law360 (June 2015)

Decisions made by a company in the days and weeks following an unforeseen event — think flood, fire or equipment breakdown — bear directly on the success of a claim for business interruption losses. Business interruption insurance, also known as business income insurance, is usually included as part of a first party (i.e., nonliability) commercial property insurance policy. It's essential for any hospitality business, for which business income is directly related to the functioning and appearance of the business's structures.

The typical insuring clause states something similar to the following:

We will pay for the actual loss of business income you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property.

Business interruption coverage is designed to replace income that would otherwise have been earned by the business had no loss occurred. Over the last year, at least three federal court decisions reminded policyholders that the success of a BI claim is contingent on promptly identifying and documenting the losses related to an interruption.

In Pyramid Technologies Inc. v. Hartford Casualty Insurance Company, 752 F.3d 807 (9th Cir. 2014), a flood prompted Pyramid to notify Hartford of potential damage to electronic components a customer had recently committed to purchase. Hartford found no evidence of water-related damage and denied coverage under Pyramid's BI policy. Pyramid sued for declaratory relief as to coverage, but Hartford prevailed on summary judgment. The Ninth Circuit affirmed because Pyramid failed to show that it actually lost business as a result of the flood. The court noted the "commitment" to purchase the components was still subject to the approval of the customer's quality control department. It pointed to evidence that the customer may have rejected Pyramid as a supplier anyway because the facility lacked a humidity control system. The Court of Appeals refused to allow the business interruption claim to go to trial when doing so would require the jury to "speculate" about whether the customer would honor its commitment to buy from Pyramid.

Just two months before the appellate court's decision in favor of Hartford in the Pyramid Technologies case, Hartford had prevailed on summary judgment in another business interruption claim within the Ninth Circuit. In...