Richard Lewis thinks insurers want to have it both ways.

Lewis is an attorney with Anderson, Kill & Olick, P.C., New York City, a firm representing energy companies in disputes with carriers over business income claims arising from the 2005 hurricanes in the Gulf of Mexico.

According to Lewis, insurance companies are contesting business income claims submitted by companies whose Gulf facilities suffered damage during the storms.

His firm claims that its energy clients were told that, because of price hikes and huge profits following hurricane-induced disruptions of supply, those companies actually profited from the storms and could not claim a loss.

“[The insurers] are trying to consider the wider effects of a disaster” in weighing these claims, says Lewis. “That is not something allowed other policyholders.”

With that last statement, Lewis was referring to provisions added to standard business income forms in recent years. Those provisions seek to exclude compensation for additional profits an insured could have earned if a disaster had occurred but not interrupted its operations.

For example, the latest AAIS Businessowners forms include the following restriction:

We do not pay for any increase in net income that might have been earned by your business as a result of conditions created by the effect of the covered peril.

Thus, under standard policies, business income (BI) coverage is intended to reimburse an organization for earnings and continuing expenses it would have under normal circumstances (plus extra expenses needed to limit losses and resume operations).

The new provisions are designed to clarify that BI coverage is not intended to guarantee a windfall to an insured due to a surge in demand for its service following a general disaster.

The case of the energy companies turns the scenario on its head, however.

In that case, a windfall has been reaped, in the opinion of the insurers. The energy companies did collect huge profits during a period when oil supplies were acutely constrained by physical losses to refining and distribution facilities.

Questions

Lewis and his firm decline to identify the energy companies or insurance carriers involved in the negotiations, so we don’t have policies to review, and we don’t know key details that would be critical to addressing the claims.

“I think insurers are taking the view that not only the affected part, but the entire performance of all operations be examined when considering business income claims,” Lewis says.

“Does GM have to suffer a loss if Saturn goes down?,” he asks rhetorically.

That’s a key consideration for large organizations, which often insure all branches and subsidiaries under a single master policy, according to Linda Robinson, senior research analyst for the International Risk Management Institute (IRMI).

In such cases, it is possible that reliance solely on policy language would require that a parent organization demonstrate a loss of income to itself before being able to collect on a BI claim.

According to Guevara, it is often easier to write income coverage on a blanket basis, even if the building and personal property coverage is scheduled by location. That’s because an organization would have to develop separate income statements for each insured location to write scheduled income coverage effectively.

Did the insured entity suffer a quantifiable loss of income for a defined period?

Experts consulted for this article agreed that, under standard forms and common understandings, an insured typically has to demonstrate an actual loss during a defined period of time to make a valid business income claim.

“Obviously, the insured must have an ‘actual loss sustained’ if the policy so stipulates,” says Tom Mallin, president and CEO of the Property Loss Research Bureau, Downers Grove, Ill. “Such a requirement is almost universal.”

“If the insured cannot demonstrate that it sustained a loss of expected insured business income, there will be no recovery under a form requiring actual loss of income.”

Were the increased profits reaped during the period of restoration or afterward?

Whether a windfall can reduce or cancel out a BI claim payment usually depends on when it was reaped, says Robinson at IRMI.

“If the windfall is reaped during the indemnity period, then I think typical policy language allows it to be netted out [from the claim payment],” she says.

None of the experts were aware of any provisions in existence today that would allow a carrier to cancel out an income loss with a subsequent windfall profit, even if it was related to the same event.

“I don’t recall anything in policies to allow insurers to look outside the restoration period” when considering a business income claim, Robinson says.

Scenarios

While this discussion was prompted by the experience of large oil companies, the questions raised are not limited to large organizations. Inquires for this article considered three hypothetical scenarios:

• An HVAC contractor that suffers a brief interruption due to windstorm damage to equipment and inventory, but earns increased profits after restoration due to heightened demand.

• A restaurant that is closed for some time due to windstorm damage, then reaps a windfall upon reopening because competing restaurants have been completely destroyed.

• A distributor of bottled water that must shut down a facility due to windstorm damage, but is able to truck in water from other locations, generating increased profits due to increased demand.

In the absence of other facts, Robinson sees nothing in our hypothetical cases regarding the HVAC contractor and the restaurant that would preclude them from claiming a business income loss under standard forms.

The hypothetical bottled water distributor is a different story.

According to Robinson, if the increased profits for trucked-in water were earned while the damaged facility was being restored, common policy language could be interpreted to “net out” the profits and extra expenses.

If the increased profits were greater than the income loss there might be no business income recovery.

Principle

Whatever the specifics of individual claims, a larger question has been raised concerning the principle of indemnity: Is it appropriate to pay “losses” for a sequence of events that ultimately results in substantial gains for an insured?

Again, Lewis might turn the question around, and ask if it is appropriate to deny a substantiated BI claim--a loss of income at an insured location due to damage by a covered peril--because an organization managed to conduct other business successfully.

The resolution of income claims has been, by nature, more dependent on negotiation and less prescribed by policy provisions than other types of property insurance.

What is an “expected” level of earnings? What extra expenses are “necessary”? What is a “reasonable” period of restoration, especially when a community is in the midst of upheaval?

But the environment is changing, according to Lewis. “The pace of litigation in this area has increased dramatically,” he says.

Flexibility and ambiguity in income coverage provisions serve the purposes of negotiation, he adds, but “now that we’re litigating this more, the language complicates things.”

If that’s true, insurers and advisory organizations may have to address how income claims followed by windfall profits resulting from the same event can be reconciled with the principle of indemnity.