The Aftermath of Catastrophes: Valuing Business Interruption Insurance Losses

With the onslaught of tornadoes, hurricanes, and floods in recent years, business interruption losses have been staggering. Many businesses do not survive such catastrophes. Even business owners that purchased business interruption insurance, which is intended to ensure that a business’s revenue stream continues during an interruption in its operations, often find that their insurers have dramatically different views regarding the amount of the losses that should be reimbursed. The reason for this disparity in views is that the loss valuation provisions in business interruption insurance policies provide very little guidance regarding how business interruption losses should be calculated. Thus, disputes regarding the valuation of business interruption losses frequently arise and courts and juries are forced to resolve such disputes with widely varying, inconsistent, and unpredictable results. This lack of predictability has placed a burden on the legal system because far more business interruption cases are tried than are necessary. This Article analyzes the origins and purpose of business interruption insurance, as well as the courts’ inconsistent interpretations of the standard form business interruption loss valuation provisions. The Article then offers an interpretation of the existing loss valuation provisions under the rules of policy interpretation and considers whether the result would be different if the language were analyzed from a product liability perspective in light of the fact that policies are non-negotiated contracts of adhesion sold on a take-it-or-leave-it basis. The Article concludes with an analysis of the public policy considerations related to the payment of business interruption insurance losses and proposes alternative loss valuation formulas to be used in the future that should provide for consistent, fair and predictable loss valuations and payment of claims without litigation.