December 2003
Business Interruption Insurance: Are You Covered?
By Todd C. Barsumian

At its most basic, an insurance policy is a contract between the insurer and the insured protecting the insured from certain covered losses. A policy usually defines coverage in general terms and follows with specific exclusions for losses that are not covered.

Business owners are generally familiar with their insurance coverage for loss of or damage to their property occasioned by hazards such as fire or severe weather. However, not all owners are aware that their policy may provide them with coverage for the loss of revenue associated with the property loss or damage, even if the loss or damage only causes a partial cessation of business. Coverage may also be available even if the loss or damage is caused by, for example, a faulty component that aids in the manufacture of an item.

Indiana courts have described business interruption insurance as insurance endorsements designed to do for the insured what the business itself would have done had no interruption occurred. The interest protected is the right to income generated by an operating business enterprise. A business interruption endorsement protects that right by guaranteeing the normal return on investment. Business interruptions coverage is typically measured in terms of lost profits or gross earnings minus non-continuing expenses.

The definition of "business interruption" may vary greatly from policy to policy. Some policies cover insureds for consequential damages flowing from the loss of "use and occupancy" of an insured premises. Others may require a "suspension of operations" to trigger coverage.

Many policies today, however, do not limit coverage for an "interruption of business" to a loss of "use and occupancy", or even a "suspension of operations". Rather, many policies appear to be much more expansive. Some policies can be read to provide coverage any time there is a break in the uniformity or continuity in the volume or amount of commercial enterprise or trade as a result of an insured event. Coverage may exist even if the event does not result in the complete loss of use of a building or complete stop of business. Moreover, a suspension of operations may not necessarily require any loss of use or occupancy to the property.

Indiana courts will interpret insurance policies on their plain terms. If the terms are ambiguous, courts will construe the terms against the insurer and in favor of the policyholder.

Only a few Indiana cases have specifically addressed business interruption claims. In one such case, the court found that business interruption coverage existed for an asphalt plant that suffered a mechanical failure in one of its mixing drums as a result of the failure of the mixing drum tires. This failure caused the insured's business to completely shut down.

The policy specifically excluded coverage for the failure of a "production machine". The insurer argued that the drum tires were a "production machine" because they were required to operate the drum mixer. The court disagreed, even though it believed there was "no doubt" that the drum tires were necessary to make the drum mixer function as a drum mixer. Because the policy defined a "production machine" as a device that "processes, forms, cuts, shapes, grinds, or conveys raw materials, materials in the process or finished products", the court refused to expand the policy's plain language.

In conclusion, companies should carefully consider their insurance policy provisions providing business interruption coverage. Also, pay special attention to the exclusions, which oftentimes are much more extensive than the provision providing coverage. If you have any questions about how your business may be covered for a business interruption or otherwise, contact a KDDK attorney.