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Insurance Coverage for Food Service Industry Losses & Business Interruptions

he New York region recently has been battered by severe weather conditions, resulting in the perfect storm for the food service industry. Sales at New Yorks fine-dining establishments were down 50 percent for the last week of October, and casual-dining restaurants saw sales drop by onethird. But even these statistics belie the devastating financial impact visited on the New York dining scene. Many restaurants sustained extensive damage to their facilities and equipment from water or various contaminants. For example, at the Alphabet City eatery Edi and Wolf, owner Laura Tribuno estimated that the cost of replacing equipment and merchandise will total about $80,000, essentially wiping out a full years profits. Meanwhile, thousands of additional establishments were subject to lengthy power outages, resulting in widespread property damage, lost income, and other business interruption losses. Christophe Hille, the owner of Northern Spy Food Company in the East Village, offered a conservative cost estimate of $40,000 in lost income, $6,000 in carried payroll, and $6,000 in lost inventory following the late October storms. Joe Bastianich, the co-owner of eight New York restaurants, claimed that all six of his downtown businesses suffered food spoilage when they lost power, and that the resulting costs at just one location totaled between $50,000 and $70,000.

in mind that they may be able to recover under their property insurance policies for some or all of their storm-related losses. Many policies cover losses to real property caused by all perils, or by all causes not expressly excluded. These are known as all risk policies, and are designed to afford broad property coverage. Named peril policies, on the other hand, cover only specific, expressly listed causes of loss. Property policies may purport to exclude losses caused by weather conditions, but not all policies contain such language, and those that do often use such unclear or ambiguous language that coverage may still be available. This article analyzes controlling case law in light of several common types of damage that resulted from severe weather conditions with the goal of assisting food service industry insureds in assessing the scope of available coverage to them and maximizing any potential recovery. Coverage for Physical Damage to or Destruction of Property

B. Coverage for Costs Incurred to Prevent Loss


Property policies also typically contain provisions covering preventative measures taken by the insured to avoid loss. This provision, often called the expenses to prevent loss provision, applies whenever the insured spends money to protect otherwise covered property from damage or destruction by a covered peril. For example, when an insured boards up its windows to prevent damage, it is entitled to reimbursement for these costs regardless of whether the covered property suffers damage from a covered peril. Cf. Royal Indem. Co. v. Grunberg, 553 N.Y.S.2d 527, 529 (App. Div. 1990) (holding that an insured was entitled to coverage under its homeowners policy for expenses incurred to prevent imminent collapse of its home because the policy places an affirmative duty on the insured to maintain and repair all covered property in the event of any loss). This expenses to prevent loss clause supplements ordinary property coverage, so deductibles potentially applicable to other types of coverage should not apply, and the insured should receive full reimbursement from the insurer for these expenses. See, e.g., GTE Corp. v. Allendale Mut. Ins. Co., 372 F.3d 598, 617-18 (3d Cir. 2004); Berns & Koppstein, Inc. v. Orion Ins. Co., 170 F. Supp. 707, 719 (S.D.N.Y. 1959).

A. Coverage for Real Property

First-party property policies generally provide insurance for direct physical loss of or damage to property. Traditional losses under first-party property policies involve tangible property, including buildings, machinery or equipment, and inventory, but typically not loss to property not physically injured. In some As the region recovers and cases, property that is rendered In the absence of such a clause, attempts to return to normal unusable, such as by the presence common law rules regarding operations, food- and beverage- of contaminants, may be covered mitigation of damage or loss may industry insureds should keep by a first-party property policy. allow the insured to recover from

its insurer the costs it incurred to avoid insured losses. Courts long have recognized that if an insured takes steps to prevent or minimize damage to covered property, its insurer should pay. See, e.g., Winkler v. Great Am. Ins. Co., 447 F. Supp. 135, 142 (E.D.N.Y. 1978); see also McNeilab, Inc. v. N. River Ins. Co., 645 F. Supp. 525, 551 (D.N.J. 1986); Seward Park Hous. Corp. v. Greater N.Y. Mut. Ins. Co., 836 N.Y.S.2d 99, 103 (App. Div. 2007).

Coverage for Lost Business


Whether due to evacuation orders, water damage, transportation shutdowns, or utility outages, thousands of the regions bars and restaurants experienced prolonged business disruptions that resulted in significant income losses. Many property insurance policies also provide time element coverages that protect against losses caused by such interruptions. Policy language varies greatly in this area, and the specific language used in any particular insurance policy will be the most important factor in determining an insureds recovery. Insureds should consider seeking the advice of experts with experience addressing issues arising out of multiple policy provisions and coverages, including experienced counsel.

typically provide two different methods for calculating business interruption and CBI loss: (1) gross earnings--the net reduction in earnings less the expenses that do not necessarily continue during the interruption; or (2) business income--the profit that would have been earned plus continuing normal operations expenses during the period of interruption. Business interruption insurance is designed to indemnify the insured against losses arising from inability to continue normal business operation and functions that result from damage caused by a covered peril. Howard Stores Corp. v. Foremost Ins. Co., 441 N.Y.S.2d 674, 676 (1st Dept 1981), affd, 439 N.E. 2d 397 (N.Y. 1982). This coverage applies even after relocation if the business at the new location does business at a below-normal level. See, e.g., Am. Med. Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F.2d 690, 692-93 (3d Cir. 1991).

2008); Sloan v. Phoenix of Hartford Ins. Co., 207 N.W.2d 434 (Mich. Ct. App. 1973); Allen Park Theatre Co. v. Mich. Millers Mut. Ins. Co., 210 N.W.2d 402 (Mich. Ct. App. 1973). Insureds should carefully evaluate the terms and conditions of their policies and even retain their own counsel rather than accept blanket statements by an insurer as to whether coverage exists.

2. Coverage for Restoration or Extended Period of Indemnity

A. Business Interruption
Business Interruption coverage typically reimburses the insured for the amount of gross earnings minus normal expenses that the insured would have earned but for the interruption of the insureds business. Business interruption insurance policies

Insureds also should be aware that the period for which they can recover for interruption losses does not automatically end at the time the business is reopened. The period of recovery for interruption losses ordinarily extends coverage until business returns to normal (or until a stated period of time set forth in the policy). This coverage often is found in policy provisions for restoration or an extended period of indemnity, 1. Coverage Without Physical which are separate from the Damage business interruption provisions, meaning they may be overlooked Insurers frequently take the by insureds. position that business interruption insurance cannot apply if the Further, extended coverage is insured itself does not suffer possible even without a policy physical damage. Far from being provision expressly providing for a forgone conclusion, courts have an extended recovery period. For found that in some circumstances example, an insured restaurant business interruption coverage in Texas was able to recover its exists even in the absence of business interruption loss caused physical damage to the affected by months of reduced volume location. See, e.g., Cincinnati following a storm. See Lexington Ins. Co. v. Washer & Refrigeration Ins. Co. v. Island Recreational Dev. Supply Co., No. 07-0330-CG-B, Corp., 706 S.W.2d 754 (Tex. App. 2008 U.S. Dist. LEXIS 112464 (S.D. 1986); see also Am. Med. at 692. Ala. Aug. 8, 2008); RTG Furniture Any other rule would discourage Corp. v. Indus. Risk Insurers, 616 F. businesses from trying to get Supp. 2d 1258, 1264-66 (S.D. Fla. back on their feet, which is not the

type of activity the court wishes to encourage. See Orrill, Cordell, & Beary, L.L.C. v. CNA Ins. Co., No. 07-8234 SECTION B(5), 2009 U.S. Dist. LEXIS 20867, at *7-8 (E.D. La. Mar. 16, 2009).

B. Contingent Business Interruption


Restaurants and other businesses should not overlook the possibility of Contingent Business Interruption coverage following severe weather. Contingent business interruption coverage typically covers two types of business interruption. First, it protects against economic losses caused by a direct suppliers inability to get its goods to the insured due to damage to or

destruction of the suppliers property by an insured peril. See Park Electrochemical Corp. v. Contl Cas. Co., No. 04-CV-4916 (ENV) (ARL), 2011 WL 703945 (E.D.N.Y. Feb. 18, 2011). Second, it protects against economic losses caused by damage to or destruction of a customers property that prevents the customer from accepting the insureds products. See Childrens Place Retail Stores, Inc. v. Fed. Ins. Co., 829 N.Y.S.2d 500 (App. Div. 2007). This type of coverage also applies if an insureds distributor suffers damage that prevents the distribution of the insureds goods. Contingent business interruption coverage is triggered by damage to the property of a third party, not the insured. Therefore, it is often overlooked as an avenue

of recovery. Once identified, contingent business interruption claims are complex, and require coordination with the third party in order to establish the extent of the loss. Insureds are encouraged to consult with professionals regarding such losses if they suffer any supply or distribution chain disruptions.

C. Civil Authority
Businesses that find themselves unable to operate because of evacuation orders, policy actions, or other governmental activities may be able to recover for losses caused by those interruptions. Civil Authority insurance provides an avenue for insureds to

recover business losses if access to an insureds premises is prohibited by an act of the government. In preparation for Superstorm Sandy, many areas were subject to evacuation orders from state and local governments. Following the devastation, access to many areas remained restricted because of the dangers posed by high waters and damage to trees, structures, and lost utilities. The availability of civil authority coverage will depend upon the particular language used in the insurance policy at issue. Additionally, civil authority coverage often only applies for a specific and limited period of time that may be as short as two weeks.

Insureds must be careful to review its insurance policy as

normal because of the acts of civil authority. See 54th St. Ltd. Partners, L.P. v. Fid. & Guar. Ins. Co., 763 N.Y.S.2d 243 (App. Div. 2003). Similarly, following the attacks of September 11, one New York court found that civil authority coverage only applied to the period of time when access to all of lower Manhattan was restricted, and did not apply to the time period when police presence and roadblocks may have confused employees and others about their ability to access the insureds premises. See Abner, Herrman & Brock, Inc. v. Great N. Ins. Co., 308 F. Supp. 2d 331 (S.D.N.Y. 2004). A slowdown in business may not trigger the

ingress to or egress from insured premises is prevented because of a covered peril. Recently, many businesses have been unable to operate because millions of tristate area employees could not access business locations. Many roads were unusable or otherwise blocked and mass transit was entirely halted. Insureds should check to see whether their insurance covers loss sustained due to the necessary interruption of the Insureds business due to prevention of ingress to or egress from the Insureds property, whether or not the premises or property of the insured shall have been damaged if the interruption

a whole in determining whether utility service, spoilage, or any other coverage may provide them with some recovery for storm-related losses.
coverage because a policy only responds when a civil authority prohibits access to the insureds premises resulting in a total loss of business income. N.Y. Career Inst. v. Hanover Ins. Co., 791 N.Y.S.2d 338, 342 (Sup. Ct. 2005). resulted from damage of a type insured against by the policy. See City of Chicago v. Factory Mut. Ins. Co., No. 02 C 7023, 2004 WL 549447, at *2-3 (N.D. Ill. Mar. 18, 2004)(citation omitted or quoting policy). Policies may also provide ingress and egress coverage by protecting against an interruption of business as a consequence or denial, prevention of, or reduction in access to or use of highways, bridges, causeways . . . or terminals . . . or the means of access thereto caused by an insured peril. Some ingress and egress coverage will require that damage be in close proximity to an insured location. For instance, a policy may cover an interruption when as a result of loss, damage or an event not

New York courts have found that civil authority coverage may be available for catastrophic events that shut down portions of New York City. For instance, in Zurich American Insurance Co. v. ABM Industries, Inc., 397 F.3d 158, 171 (2d Cir. 2005), the court found that an insured could potentially recover for business losses resulting from impaired access to its facilities caused by actions of civil and military authorities following the September 11 attacks. But New York courts also have strictly construed language requiring that access be prohibited. One court found no coverage when limited access to an insureds premises existed even though such access was restricted to levels below

D. Ingress or Egress
Similar to civil authority coverage, Ingress or Egress coverage may be available when access to (ingress) or from (egress) an insureds premises has been prevented or made more difficult because of a storm. Unlike civil authority coverage, no governmental act is required to trigger coverage. Many insurance policies cover losses when

excluded . . . at an insured location or within two (2) miles of it, ingress to or egress from real or personal property is prevented. Policies may also cover interruption during the time period that access to or egress from real or personal property is impaired but only for ingress/egress impairments . . . located within one (1) mile of the Insureds premises. The availability of ingress or egress coverage for the impact of storm conditions will vary greatly depending upon the policy language.

E. Service Interruption
Significant portions of the tri-state area suffered a disruption of utility service following Superstorm Sandy. The disruption of utilities, such as water and electric services, is an important cause of business losses, and companies often are without utility service for days or even weeks after a storm has passed. Most businesses find it impossible to operate without utility service, but restaurants without electricity do not merely miss out on business, they suffer massive destruction.

power or water. However, many property policies issued to restaurants provide additional spoilage coverage that covers the costs of loss or damage arising out of Power Outage, meaning change in temperature or humidity resulting from complete or partial interruption of electrical power, either on or off the described premises, due to conditions beyond [the policyholders] control. Importantly, such provisions are subject to separate limits of insurance, may include separate exclusionary provisions, and might also be subject to other exclusions contained in the policy.

future. Restaurants in particular have been hit very hard, suffering not only interruption losses, but extensive inventory losses due to intrusion of the elements and lack of power. The availability of insurance proceeds to help reduce these business losses is a complicated matter, and insureds should carefully examine their entire policy for any possibility of a recovery that might help alleviate their losses.
John E. Heintz is a partner in Dickstein Shapiros Insurance Coverage Practice. A veteran in the fields of corporate insurance coverage and complex litigation with more than 30 years of experience.

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