The new coronavirus or COVID-19 has continued to have a major impact on business owners worldwide. Even as certain industries in the U.S. slowly begin the reopening process based on state regulations, business interruption coverage has only continued to be a subject of contention as the pandemic continues to spread. Another topic to consider as business interruption insurance claims rise is an important concept contained in nearly every business interruption policy known as the period of restoration.
Understanding the Period of Restoration
When discussing business interruption coverage, it’s important to remember that it provides protection against the loss of income and extra expense incurred when a business suffers property damage from an insured peril or event that interrupts the operation of the business. But this coverage is not for an indefinite time period; it extends only within the “period of restoration.” In measuring the period of restoration, most policies are very specific as to what constitutes a beginning point and an endpoint. The beginning point is usually pretty easy to determine; the endpoint is where it gets complicated and contentious.
When does the period of restoration begin?
The beginning point of the period of restoration varies, but it is usually within 72 hours of loss of or damage to the property at issue. As we discussed previously, sometimes the “property at issue” is a property other than that owned by the insured. The 72-hour “waiting period” is a common feature in many policies that makes clear business interruption coverage will not kick in until that time has passed.
When does the period of restoration end?
The endpoint calculation is where the bulk of litigation on the subject has occurred. In a typical policy, the period of restoration ends with the earlier of the date when (1) the property at issue should be repaired, rebuilt, or replaced with reasonable diligence and similar quality, or (2) the business resumes operations at a new, permanent location. The idea behind this language is to compensate the business owner for losses sustained during the time it takes to get the business back up and running – whether in the original or in a new location – but not any longer.
In theory, this makes sense. Business interruption insurance, like all insurance, is not designed to provide the policyholder with a windfall, but to make them whole. Unfortunately, insurance companies have manipulated this language in their favor. Particularly, the measure of when a property “should” be repaired, and what constitutes “reasonable diligence” in making those repairs, has been subject to much dispute. Insurance companies have sometimes successfully argued in court for a “theoretical” period of restoration. As the argument goes, the restoration period is always the “theoretical” time it should take an insured to complete repairs and resume business—even when the theoretical approach is completely removed from any of the actual facts and circumstances of the claim at hand. Examples include when repairs are ongoing, or when repairs are deemed impossible.
When can the period of restoration be extended?
In certain cases, businesses may not be able to fully reopen at the same working capacity they had prior to the event that triggered the business interruption coverage. When this happens, a period of indemnity endorsement can be used to extend the time needed for the covered loss period beyond the ‘theoretical’ time required to restore the property – usually a more specific timeframe of 30, 60, or 90 days.
The period of restoration is so critical because the full operating costs remain during that time but with little to no corresponding income. Because this revenue shortfall will likely keep businesses from resuming operations as before, the period of indemnity endorsement extends this time, allowing the insured to be indemnified for the shortfall. The period of indemnity also enables a policyholder to recoup significant pre-opening expenses accrued to restore revenues to their pre-loss levels.
Period of Restoration, Civil Authority, and COVID-19 Insurance Claims
The question arises, how will the period of restoration be measured in the COVID-19 context? As we discussed before, most business interruption and civil authority coverage extensions will require proof of “direct physical loss of or damage to” some property. The challenge in determining the actual period of restoration is most properties will not need to be “rebuilt” in the traditional sense – e.g., after a hurricane destroys a physical structure. Rather, policyholders and their representatives must get creative with policy language to show the “restoration” of the property – opening back up for business – suffices to start the period of restoration clock ticking.
Civil authority coverage adds an additional twist to the period of restoration during COVID-19, likely bringing about many complex questions to be raised during court proceedings. Since – aside from required cleaning – there are not physical repairs to deal with during COVID-19, should the period of restoration be tied to lifting the stay-at-home order(s)? Since physical damage to the property is required in order for coverage to apply and most insurers wont recognize COVID-19 as physical property damage, the answer is likely no.
Qualified public health experts, physicians, hygienists, and others highly recommend slower re-openings to contain the spread of the virus. If abided by, coupled with the time stipulations contained within period of restoration language, the claims period would most likely lapse. Additionally, unless the insured is able to prove an order of civil authority directly caused property damage at or near its premises, the civil authority provision would not apply.
This is uncharted territory, insofar as there is not much (if any) case law measuring the period of restoration with respect to viral contamination. But if business interruption coverage is triggered, then the language of the particular policy is then likely to guide the period of restoration calculation in the policyholder’s favor.
Houston COVID-19 Claims Attorneys
Business interruption claims can be incredibly complex and difficult to navigate, especially when considering a viral pandemic like COVID-19. As claims continue to rise while businesses remain closed, having the insight of a skilled insurance claims attorney can help. If your business has been impacted by COVID-19, contact the team at Raziner Law today to discuss your needs.