Earlier this month, I woke up to the sound of sirens and the smell of smoke. My neighbors and friends from around the block suffered a catastrophic fire, and lost their home and all of their belongings, escaping with literally the shirts on their back (and their dogs). Fortunately, no one was injured, but now they have to go through the time-consuming and laborious process of having their insurance claim adjusted. The important thing was (and always is) that everyone was okay.

When you suffer a catastrophe in business, the impact can obviously be similarly enormous, especially if your income flow is cut off while you’re trying to get back up and running. That’s why business interruption and extra expense insurance are so critical. But, like many things insurance-related, they can be as clear as mud.

(Short lesson here for those not familiar with insurance lingo:  Business interruption insurance, also known as business income insurance, is a type of insurance that covers the loss of income that a business suffers after a disaster. The income loss may be due to disaster-related closing of the business facility, or due to the rebuilding process after a disaster. The loss is generally measured over a time known as the “period of restoration,” or the reasonable time it would take to repair the property, although policyholders can add coverage  for loss of income suffered during a specified period of time after the damaged property has been repaired, also.)

Back in September 2013, five years to the date that my neighbors lost their house,  an 11-alarm fire destroyed  a food warehouse down in Burlington County, owned by a company known as Black Bear. At the time, a company called MIMCO had stored a whole lot of dairy products in the warehouse, because it had a five-year distribution contract with a milk marketing cooperative called Dairy Farmers of America.  As a result of the fire, the dairy products and the contract all went up in smoke.  (You can read about the fire here.)

MIMCO terminated its contract with Black Bear, which said it would not be rebuilding the warehouse.  MIMCO then couldn’t find sufficient warehouse space to continue the contract with DFA, so that contract had to be terminated, too.

Travelers paid MIMCO $11.6 million for the loss of business property, business income (approximately $3 million), and extra expense. MIMCO argued, however, that Travelers still owed $7 million in business insurance coverage, and for extended business income loss.

Travelers contended that the period of restoration for the business interruption coverage was based on the reasonable time it would have taken Black Bear to rebuild the facility, which Travelers said was 23 months. MIMCO, on the other hand, argued that the proper method to determine the period of restoration was based on its unfulfilled contract term with DFA – 48 months, plus an additional 24 months in extended business interruption coverage – because Travelers shouldn’t be allowed to measure the loss by using a hypothetical restoration period, when MIMCO had no control over the rebuilding process.

The Court didn’t buy what MIMCO was selling, writing:  “The Court is not unsympathetic to MIMCO’s observation that it is ultimately entitled to less coverage for a more severe loss over which it had no control. Perhaps there is [a type of available] insurance to cover the total cessation of business or a contract that cannot be fulfilled, but that is not what the Travelers’ Policy provides to MIMCO. The Policy affords BI based on a period of restoration from the date MIMCO suspended operations until ‘[t]he date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality’… The [period of restoration] based on an estimation of rebuilding governs the amount of BI MIMCO is entitled to.”

So, “poof” went MIMCO’s claim for addition business interruption coverage.

You can read the Court’s decision here.

Especially in the federal court system, judges tend to read insurance policies very restrictively, and tend to look for the most conservative position on coverage that they can find. (There are exceptions, depending upon the case.) Stuff happens in life, and it would be a good idea, when your policies come up for renewal (or sooner), to review your business interruption coverage, and to consider whether, in the event of a catastrophe, you’d be in a position to keep the “milk” flowing.