Your insured’s office, located in a large, multi-office commercial building, has been destroyed by fire.  Among the claims the insured submits is one for business interruption, or loss of business income.  You begin to adjust the loss for business interruption when the question arises as to what is the reasonable period of restoration, or the period of time that the insured sustained an actual loss of business income.  How do you measure the period of restoration? Does the third party landlord’s repair of the entire office building determine the period of restoration as to your individual insured?

Most commercial property policies contain language with regard to business interruption similar to the Insurance Services Office (“ISO”) form.  That standard form provides, in pertinent part, as follows:

We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss or damage to property or premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations.

The “period of restoration” is defined, in relevant part, as the period of time that begins 72 hours after the time of direct physical loss or damage for Business Income Coverage, or immediately after the time of direct physical loss or damage for Extra Expense Coverage, caused by or resulting from a Covered Cause of Loss at the described location.  The “period of restoration” ends with 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.  Typically, the “period of restoration” is an estimated, and sometimes hypothetical, period of time that it will take to restore the property to a point where operations should be “up and running.” Factors which may affect the duration of the “period of restoration” include the time of adjustment of any other claims being made in conjunction with the business interruption claim, the cooperation and/or delay of the insured, and the ability of landlords, builders, contractors and others to repair the site.  The “due diligence” of the insured is relevant to the determination of the “period of restoration.”

Issues concerning the “period of restoration” have been extensively litigated.  Most parties do not dispute the date on which the period of restoration begins.  However, the date on which the period of restoration ends oftentimes develops into a hotly contested issue.  While issues can arise in adjusting any business interruption claim, numerous and more complex issues arise when your insured is a tenant in an office building where the location itself is paramount to the success of your insured’s business and relocating to another site is an inadequate alternative.  These issues are highlighted by a series of cases arising out of the collapse of the World Trade Center.

Some courts have held that the period of restoration is tied to when the insured premises should be repaired or rebuilt.  In Lava Trading, Inc. v. Hartford Fire Ins. Co., 365 F. Supp. 2d 434 (S.D.N.Y. 2005), the plaintiff insured maintained offices at the World Trade Center but had a back-up center in another building in Manhattan.  See id. at 437.  Within two months of the loss, the plaintiff insured was generating its business at pre-loss levels.  The Lava Trading policy defined the period of restoration as ending on the “date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.”  Id. at 439.  The insured plaintiff alleged that it was entitled to additional lost income for a period of restoration that included “time actually required to rebuild the entire complex,” the World Trade Center.  See id.  The court disagreed and held that the period of restoration ends “when the property necessary to resume operations should have been repaired, rebuilt or replaced with reasonable speed and similar quality, and not when operations have been actually resumed, whether to their pre-loss levels or otherwise.”  Id. at 442 (emphasis in original).  The court further held that the subject policy’s period of restoration does not look to the resumption of a policyholder’s operation as a measuring stick but “when the property at the described premises should be repaired, rebuilt or replaced.”  Id.  (emphasis added).

By contrast, other courts have linked the period of restoration to what is necessary to resume the business, not necessarily the repair or rebuilding of the physical structure.  In Streamline Capital, L.L.C. v. Hartford Cas., No. 8123, 2003 U.S. Dist. LEXIS 14677 (S.D.N.Y. Aug. 25, 2003), the insured plaintiff argued that it was entitled to the maximum time for business interruption of twelve months plus thirty days which could only be cut short by the rebuilding of the World Trade Center.  Id. at *23.  In its holding, the court noted that “the business income coverage only applies to the suspension of the plaintiff’s operations . . . [and] is dependent only on replacing what is necessary to resume those operations – namely, the plaintiff’s personal property not a specific office at a specific location.”  Id. at *26.  The court further noted “such a construction makes logical sense.  It is wholly unreasonable to think that the period of restoration should be tied to the rebuilding of the real property over which neither the insured nor the insurer had any control instead of tying into a process that the plaintiff controlled: the acquisition of replacement office space and the installation of the plaintiff’s personal property in the space.”  Id. at *27.

In Duane Reade v. St. Paul Fire & Marine, 411 F.3d 384 (2d Cir. 2005), yet another case involving the World Trade Center, the subject policy insured 200 stores but did not make reference to a specific insured location.  See id. at 395.  In agreeing with the court in Streamline, the U.S. Court of Appeals rejected the plaintiff insured’s argument that the restoration period extended until the World Trade Center was rebuilt.  In so holding, the court modified the district court’s declaration to read that the:

The Restoration Period clauses envision a hypothetical and constructive (as opposed to actual) time frame for rebuilding, repairing and replacing as evidenced, for example by their use of the subjective “would.” Moreover, what is to be hypothesized is the time it would take to rebuild, repair or replace the functional equivalent of the store Duane Reade lost, not the WTC complex that once surrounded it. Once Duane Reade could resume operations in a permanent location reasonably equivalent to the site of its former store at the WTC, the restoration period would be at an end. Any losses continuing beyond the point would be addressed by the “Extended Recovery Period” provision in the policy not by the Restoration Period clause.

Id. at 399 (emphasis in original).

The Duane Reade holding focused on the time it should take to repair or rebuild a functional equivalent.  However, some courts have taken a literal approach to interpret the period of restoration to extend until the insured premises, specifically identified in the policy, has been rebuilt.  See Int’l Office Ctrs Corp. v. Providence Wash. Ins. Co., No. 990, 2002 U.S. Dist. LEXIS 20494, *17 (D. Conn. Sept. 14, 2005) (holding that the period of restoration lasts until the insured can resume its operations, “namely providing temporary office space at the World Trade Center.”).

In the context of business interruption coverage, the determination of the “period of restoration” can give rise to complex factual and legal issues.  Resolution of the issue as to what constitutes a reasonable period of restoration will implicate several factors specific to each individual claim, and it ultimately will be based upon the policy language and consideration of the question when the insured building, office, and/or plant should be repaired, replaced or rebuilt.  In this context, the word “should” cannot be emphasized enough.