Introduction

Many businesses in Oklahoma have been impacted by the devastating tornado that hit that state on May 20, 2013.  Early estimates indicate the tornado caused upwards of $2 billion in damage.  Numerous national and local businesses and other entities, ranging from retailers to schools and hospitals, reported significant damage and an interruption in their business operations due to the tornado.

If your business suffered physical damage to tangible property, your property policies should indemnify you for that loss.  Even greater than any such property loss, however, may be the loss of income that your business may experience.  If your business does, in fact, experience a loss of income due to the tornado, the business interruption (BI), contingent business interruption (CBI), extra expense (EE) or contingent extra expense (CEE) provisions of your property policy may reimburse you for such losses. 

Real and Personal Property

This Update focuses on coverage for a loss of profits stemming from an interruption of business, but it is very likely that your company’s property policy covers damage to any real and/or personal property that the tornado caused.  Most property policies provide coverage for “all risks,” unless certain risks are expressly excluded.  Typical property policies provide broad coverage for wind-related property damage associated with tornados.  It is crucial, therefore, to review your property policies carefully to ascertain the extent to which your company is covered for property damage caused by the tornado.

Business Interruption Insurance Coverage

If the tornado physically damaged your business’ facilities or equipment, any revenue that was lost due to an interruption of your business may be covered under the BI provision of your property policy.  BI coverage, also known as business income insurance, reimburses the insured for the amount of revenue it would have received had the covered event and the ensuing physical damage never occurred.  This type of coverage is not sold as a separate policy, but typically is an additional grant of coverage in a property policy.

To recover a BI loss, the insured must prove that (i) it sustained damage due to a covered loss (wind); (ii) there was an interruption of business (suspension of operations) caused by the property damage; (iii) there was an actual loss of business income during the period of interruption; and (iv) the loss of income was caused by the interruption of business and not some other factor(s).

Contingent Business Interruption Insurance Coverage

If your business did not suffer any property damage because of the tornado but still experienced a slowdown or correction of operations because a supplier’s facilities or equipment were damaged by the tornado, you may be entitled to reimbursement of lost profits under the policy’s CBI provision.  CBI coverage compensates the insured for lost revenue resulting from an interruption of business stemming not from damage to its own property but from damage to a customer’s or supplier’s property.  For example, if your business depends upon goods produced by a manufacturer that had its operations interrupted by damage to its factory, any loss of income that you experience due to the failure of that manufacturer to supply you with the necessary goods may be covered under your business’ CBI provision.

However, in order for CBI to be covered, the type of peril and type of physical damage that the supplier suffered must be the same type of peril and damage covered under your company’s policy.  In other words, your business’ insurance policy must provide coverage for tornados as well as for damage to property, such as buildings or production facilities. 

Extra Expense and Contingent Extra Expense Insurance Coverage

A policy’s BI provision may also provide coverage for extra expenses.  EE insurance indemnifies the insured for costs in excess of normal operating expenses that the business incurs in order to continue operations while its damaged property is repaired or replaced.  Such expenses typically include the cost to rent substitute facilities, move equipment and personal property, and pay overtime wages.  Similarly, contingent extra expense coverage reimburses the insured for expenses that result from a contingent loss, such as a CBI loss. 

Notice, Proof of Loss and Filing a Claim

Virtually all property insurance policies require the insured to perform certain duties within a specific period of time following a loss.  For example, most policies require the insured to:

1. Give a notice of claim as soon as practicable;

2. Submit a proof of loss within 60 to 90 days of the loss; and

3. If necessary, file suit against the insurance company within 12 to 24 months of the loss.

Failure to comply with these technicalities and timelines may operate as a complete bar to coverage.  If your business intends to submit a claim for business interruption and/or damage to real or personal property but is unable to meet the deadlines specified in the policy, it should contact the insurance carrier immediately and ask for an extension. 

Conclusion

The devastating tornado that struck Oklahoma on May 20, 2013 may continue to challenge all residents impacted by it for years.

Businesses with operations in the path of the tornado may have suffered significant property damage and an interruption of business.  Businesses elsewhere may have suffered contingent business interruption losses due to the inability to obtain supplies, among other things, from businesses in Oklahoma that suffered direct physical property damage.  If your company experiences a loss in revenue, it may be entitled to indemnification under the BI, CBI, EE or CEE provisions of its property insurance policy.  In order to secure coverage, it is important that your company submit a timely notice of claim and proof of loss and, if necessary, initiate any legal action against your insurance carrier within the specified period of time.

© 2013 Perkins Coie LLP