Does Business Interruption Insurance Cover Partial Shutdown?

Interruption in the Business Life

What happens if your business suffers property damage or a supply chain disruption and is forced to stop operations either fully or partially? Will your insurance cover the work stoppage or slowdown?

It is important to understand how your insurance can protect you from the resulting financial loss. In addition to potential recovery for property damage from your property/casualty policy, you may be able to recover lost revenue from your business interruption coverage. If your operations are disrupted – completely or partially – the language of your policy will determine if, and for how long, your insurance company will cover the loss.

In the best scenario, your insurance should cover income loss not only when operations are completely shuttered, but also when your business is partially suspended.

Historically, many business interruption provisions required a “necessary suspension” of operations. The problem is that these older policies and forms did not define “suspension” or state whether a complete shutdown was necessary. Courts have wrestled with this issue, and have often come down on the side of a “complete shutdown.”

The precedent in California is the case of Buxbaum vs. AETNA Life & Cas. Co. , which held that a “necessary suspension” of operations “connotes a temporary, but complete, cessation of activity.”

In this case, the court said that business interruption coverage for a law firm was not triggered because there was no complete cessation of operations when evidence showed that its attorneys continued to bill hours following a water damage incident in its offices.

The key here is that if “suspension” is not defined in a policy, the policyholder will likely not recover lost income due to a partial cessation or slowdown of business.

The catch-22 in this type of interpretation is that the business interruption policy will usually include a clause obligating the policyholder to mitigate losses.

Slowdown coverage in new forms

In light of other states’ court decisions that were similar to the California case, the industry has developed new forms that also cover slowdowns.

One such form is the Insurance Service Office-approved “Business Income (and Extra Expense) Coverage Form.” It was updated to define “suspension” as “[t]he slowdown or cessation of your business activities.”

Fortunately, most insurance companies use forms that affirmatively state the policy “shall cover the loss resulting from complete or partial interruption of business.”

If you are renewing your business interruption policy or purchasing a new policy, ask us if the form the insurer uses includes the above language. If not, we can find an insurer that includes such wording.

That specific language can ensure that you get paid for any lost business income due to a partial shutdown of your operations.

Why Your Firm May Need Professional Liability Coverage

A majority of companies are leaving themselves exposed in one crucial area as they take on high-end professional services work.

As more companies’ work is intangible, many firms are missing a critical element of protection for their professional services.

Professional liability insurance in the past was mainly purchased by architects, accountants and lawyers, but with more work like coding, programing and other ventures spawned by technology, the need for this type of protection has grown.

In fact, a recent report by Forbes Insights and The Hanover found that 40% of small business owners believe they face professional risks, yet they have not purchased professional liability coverage as part of their overall insurance package.

Many more firms are in the business of consulting or providing hi-tech services. In addition, the rampant growth of social media has also fueled the need for this type of coverage.

Professional liability insurance, also called errors and omissions insurance (E & O insurance), protects your business if you are sued for negligently performing your services, even if you haven’t made a mistake.

Businesses that need professional services coverage include:

  • Technology and software firms
  • Health, beauty and well-being services
  • Therapists
  • Architects and engineers
  • Real estate agencies
  • Consultants
  • Marketing and advertising firms
  • Medical professionals
  • Wedding and event planners.

Coverage gaps

If you are relying solely on a general liability policy, it may not cover you in the event of a lawsuit over an issue with the services that you have rendered.

Professional liability coverage can be especially important if you have customers who sue you for non-performance of your products or services, or withhold payment due to a contract dispute.

This is especially true if you are:

  • Performing consulting work, training or other services for customers.
  • Involved in work requiring special licenses.
  • Designing, recommending, installing or testing products.
  • Designing software or apps to a client’s specifications.

What it covers

Negligence – Professional liability insurance coverage can protect you and your business against actual or alleged errors and omissions that may occur while providing your professional services.
These claims can include anything from giving incorrect advice or omitting a piece of information, to failing to deliver your service within a desired timeframe.

Legal costs – The policy includes covering your legal costs in defending against a claim. Some insurers will even appoint an attorney to represent you.

Examples

  • A marketing consultant develops a drip e-mail campaign for a retailer that doesn’t generate the number of leads expected.
  • A management consultant develops an organizational strategy to improve communications in a company, but problems persist at the client and communications don’t improve.
  • A software developer fails to develop an app to the client’s specifications.

In all of these examples, a client may sue for damages. And in every instance, a professional liability insurance policy should help protect you and your firm.