Business interruption coverage protects against income loss when a business suffers property damage from an insured peril (e.g., fire, water loss) that disrupts business operations. A typical business interruption policy states that the insurer will pay the insured for the actual loss of business income sustained during the required suspension of operations during the “period of restoration.”

Determining A Period Of Restoration For Business Interruption Claims

Business interruption claims typically cover “extra expenses” incurred during the restoration period that would not have been incurred if the loss had not occurred. This coverage pays for the additional expenses incurred to avoid or minimize business interruption and to continue operations at the business premises described in the insurance policy or at replacement premises or temporary location, including relocation costs and costs to equip and operate the replacement premises.

The key theme in both coverages is that coverage is dependent on the period of restoration. In other words, the coverage grant specifies that the insurer is only obligated to pay for lost business income and additional expenses incurred during the restoration period.

Definition of Period of Restoration

  • The time it should take a reasonable insured to repair, rebuild, or replace the property using due diligence and promptness; or
  • The amount of time it takes the insured to repair, rebuild, or replace damaged property, or to resume operations in a new location.

If the property is rebuilt, replaced, or repaired, the restoration period should be calculated using the actual repair, rebuild, or replacement time. However, insurers have persuaded courts to apply a theoretical restoration period where the insured failed to move with reasonable speed or failed to repair, rebuild, or replace with due diligence and dispatch.

Insurance companies and policyholders frequently disagree about what constitutes a reasonable restoration period. In fact, insurers frequently argue that 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 disconnected from any actual facts and circumstances.

However, courts have extended the restoration period when insurers’ behavior, whether in payment or adjustment activity, caused the delay.

Different Aspects of Period of Restoration

Courts have also extended the restoration period due to delays caused by circumstances beyond the policyholder’s control. Contingencies including but not limited to construction delays that extend the time it takes an insured to return to business, as well as delays beyond the insured’s control, will serve to extend the period of restoration.

The period of restoration cannot and should not be judged in a vacuum without regard to the particulars of a claim. The end of the restoration period must be determined based on the specific facts of the case. Insureds should not be penalized if the delay in repairing, rebuilding, or resuming operations was caused by events beyond their control.

Commercial policyholders who submit business interruption claims should not be surprised if their insurers insist on a theoretical approach to determining the length of the restoration period while ignoring the actual circumstances and facts. Policyholders, their advocates and public adjusters must be prepared for the insurers’ initial pushback and be aware that courts have extended the restoration period to account for delays that are beyond the insured’s control. As a result, policyholders filing business interruption claims should be wary of accepting an insurer’s theoretical restoration period, which does not account for delays in repairing, rebuilding, or replacing insured property caused by factors beyond the insured’s control.