The Business Survived. The Claim Might Not.

A fire shuts down a neighborhood restaurant in Logan Square. Nobody is hurt, and the owner has insurance. The contractor expects repairs to take three months.

However, six weeks later, the insurer is still reviewing the claim. On the other hand, as for the owner, the rent is due, the staff needs paychecks, and equipment orders are on hold.

Meanwhile, 70 miles west, a Rockford manufacturer loses power for three days after a storm damages a nearby electrical substation. Production stops, orders fall behind, and customers take their business elsewhere. Its insurer denies the claim because nothing at the factory was physically damaged.

Both businesses have business interruption insurance. One may be covered, and the other may not. And even the business with coverage may struggle to collect enough to survive.

Why the Location of the Damage Matters

Business interruption insurance, usually called business income coverage in the policy, generally pays for income lost when covered physical damage forces a business to suspend operations.

The restaurant fire is straightforward. A covered fire damages the premises, forcing the restaurant to close.

However, the manufacturer's situation is different. The financial loss may be identical, but the building and machinery are untouched, and many commercial property policies don’t cover losses caused by off-premises utility failures.

Businesses can buy additional coverage for these situations. Utility services coverage can protect against certain power outages. Civil authority coverage can apply when a government order prevents access following nearby damage. Dependent property coverage can address losses caused by damage to a supplier or customer.

When the Damage Is Somewhere Else

Utility services endorsements vary. Some cover only physical damage to the business’s own property caused by an outage, such as inventory spoiled when refrigeration failed. Others also cover income lost while the business cannot operate.

The endorsement may also limit which parts of the utility system count. Many cover damage to power plants and substations but exclude overhead transmission and distribution lines unless that option was purchased. Since many outages start with downed lines, the same storm could be covered or not depending on which piece of equipment failed.

Most endorsements also require physical damage to utility property from a covered cause; a utility deliberately cutting power to manage demand usually doesn’t qualify. Utility outage reports and restoration records can show what failed and why, and an insurer that denies the claim should identify the specific provision it relies on.

Waiting periods and sublimits can shrink the claim further. A three-day outage subject to a 24-hour waiting period may leave only two days of covered losses. A 72-hour waiting period could eliminate the claim entirely. And a business that lost $200,000 may discover its coverage is capped at $25,000.

The cause of the outage, the equipment involved, and the particular endorsement matter more than the size of the loss.

Lost Revenue Is Not Lost Income

Returning to the restaurant—

If the restaurant normally takes in $100,000 a month, a three-month closure means $300,000 in lost sales, but not $300,000 in lost income.

Business income coverage generally pays lost net income plus continuing expenses, with the goal of putting the business where it would have been without the loss. During the closure, the restaurant may have avoided food purchases and some hourly labor while still paying rent, loan payments, premiums, and key salaries. Accounting for these items, the restaurants' lost income may be much smaller than its lost revenue.

This is why financial records matter. The insurer's estimate and the business owner's estimate may differ substantially, even when both agree the fire is covered. Thus, the policyholder should try to preserve the sales history, payroll records, operating expenses, seasonal patterns, and evidence of lost orders can all affect the amount recovered.

Sometimes Spending More Saves Money

To mitigate the damage, the restaurant could rent a temporary kitchen. In the manufacturer case, it could lease a generator or pay overtime to catch up on orders. These expenses may be covered if they satisfy the policy's extra expense provisions.

These expenses must be reasonable, since the insurer may question whether a particular expense was necessary. For instance, a temporary location costing $20,000 a month may be justified for one business and not another. Getting the insurer’s written agreement before a major expense can avoid that dispute.

The Coverage Period Has Limits

Business income coverage generally runs through a defined period of restoration, measured by the time reasonably required to repair or replace damaged property and resume operations, subject to the policy's terms.

Actual delays don't always extend that period. And once the restaurant reopens, customers may not immediately return. Some policies provide extended business income coverage for that recovery period, but others provide limited protection. The difference may be significant.

How Long Does the Insurer Have to Pay?

While insurers are entitled to investigate claims, they are not entitled to delay them without justification. Illinois claim handling regulations impose requirements concerning communications and explanations of delay. Under Section 155 of the Illinois Insurance Code, unreasonable and vexatious conduct may support an award of attorney fees and a statutory additional amount.

However, not every slow investigation qualifies. Thus, keeping records of document submissions, requests, responses, and unexplained delays can make the difference when challenging the insurer's conduct.

Sometimes, however, the problem is simply that the policy doesn’t cover the loss. If the business specifically requested protection against the risk and its broker failed to obtain it, however, the placement of the coverage may warrant a separate investigation.

A business interruption claim is a financial claim as much as a property claim. The businesses that recover the most usually treat it that way from the first week.

If your business interruption claim has been delayed, underpaid, or denied, we can review the policy and the numbers and help you push the claim forward. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our insurance recovery services. Coverage depends on the policy wording, the facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.