Period of Restoration and Extended Business Interruption Coverage

     The U.S District Court of New Jersey recently issued a decision that is useful in outlining the scope of business interruption coverage with respect to “period of restoration” and extended business income coverage. See Milk Industry Management Corp. v. Travelers Indemnity Co. of America, 337 F. Sup. 3d 423 (D.N.J. 2018). The insured, Milk Industry, was a distributor of dairy and other associated food products. The insured contracted with Dairy Farmers of America (DFA), supplier of dairy and food products, and the agreement provided insured with the right to warehouse and distribute the supplier’s product for a five year period with automatic renewal for subsequent two year periods. The insured then subcontracted its obligation to warehouse to a Black Bear Distribution LLC (subcontractor), a third party.

      Around one year later, the Subcontractor’s facility was destroyed in a fire, ten days later, the insured terminated its contract with the Subcontractor. The insured tried to locate another warehouse to continue fulfilling its obligations to DFA, but the insured was unable to find any warehouses that had the capacity to warehouse all of DFA’s product. Insured eventually located an alternate warehouse with space sufficient to maintain a portion of the DFA-required storage, however this alternate location did not provide the ability to fully offer the services it rendered to DFA prior to the fire, and it imposed extra costs as well. About eight months following the fire, the Subcontractor announced its decision not to rebuild its warehouse, seven months later, the insured and the DFA terminated the original agreement.

      The insured submitted a claim to its insurer for business income (BI) and extended business income (extended BI) losses in the total amount of $9.7 million. The insurer paid $3 million in BI benefits but denied the insured’s claim for extended BI. The insured’s policy, provided that the insurer would pay the “actual loss of Business Income the insured sustained due to the necessary ‘suspension’ of the insured’s ‘operations’ during the ‘period of restoration.’” The policy defined [“period of restoration”] as the period beginning at the time of a covered loss and ending “on the earlier of: (a) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or (b) The date when business is resumed at a new permanent location.” Concerning the extended BI, the policy stated that the insurer would pay “the actual loss of Business Income the insured incurs during the period that: (a) Begins on the date property (except ‘finished stock’) is actually repaired, rebuilt or replaced.”

      The insured filed suit and moved for partial summary judgment on the issue of BI coverage contending it was underpaid, the insured argued that the period of restoration constituted the entire unfulfilled term of the agreement, four years plus an additional two years. In response, the insurer contended that the period of restoration should be based on the reasonable time it would have taken the Subcontractor to rebuild its facility, which the insurer estimated to be 23 months. The court observed that the policy unambiguously stated that the period of restoration ends on “the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality . . . or the date when business is resumed at a new permanent location.” The court noted that “because the insured never resumed operations at a new permanent location, the period of restoration is based on when the ‘property at the described premises the Subcontractor’s facility should be’ rebuilt,” and the court denied the insured’s motion.

      The insurer moved for partial summary judgment separately on the basis that there was no coverage for extended BI.  The court noted that the extended BI provision in the policy “does not rely upon estimations, but rather when the property is actually repaired, rebuilt or replaced, and when operations are resumed.” The court stated that the difference between “would have” and “should have” in the BI provision and “actually did” in the Extended BI provision complies with the purpose of Extended BI, which “is to provide a cushion for the time after the ‘Period of Restoration’ when the insured is back in business but still not doing business at the same volume as before.” Therefore, as the Subcontractor’s facility was never rebuilt and the insured’s operations were never resumed, the court held that the insured was not entitled to extended BI coverage and granted the insurer’s motion.

https://cases.justia.com/federal/district-courts/new-jersey/njdce/1:2016cv02403/332425/50/0.pdf?ts=1535704541

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