By Phil Zinkewicz

Where were you when the lights went out? That was a question often asked in the late 1960s and one which quickly became a colloquialism after a movie was made to describe the shenanigans that took place during the famous New York City blackout of the middle of that decade.

Another question which might have been asked among insurance agents and executives was: Does business interruption cover the losses that came about because of the blackout? The answer back then might be significantly different than the answer now.

Business interruption insurance indemnifies business firms for loss of income during the period required to restore to useful condition property damaged by an insured peril. It pays the expenses that continue and the profits that would have been earned during a period of interruption.

But, according to Joseph F. Mangan, currently a consultant and freelance journalist but previously an executive with the Insurance Services Office and A.M. Best, independent agents and brokers should be aware that BI today can be a good deal trickier than it was a decade ago. "Business interruption is a coverage that underwriters have always been willing to offer, but the forms specifically designed for that purpose have disappeared. Nobody bought the coverage, so the industry discontinued the forms. Like so many other things that happened during the policy simplification during the middle and late 1980s, the coverage just disappeared into the forms with no clear mechanism for providing it."

Mangan likes to illustrate the vagaries of business interruption insurance with cases in point. For example, there is the story of the risk manager who was sitting around waiting for an important telephone call, but the phone wasn't ringing and wasn't about to. A storm had brought down some telephone lines and left a fairly large city without telephone service. The risk manager realized that the company was missing business opportunities, paying employees to do work they could not do. The absence of outgoing telephone calls meant that expenses would be a little lower, but that was nothing compared to the loss of revenues caused by the telephone outage.

The risk manager's first thought was business interruption insurance. Unfortunately, he was thinking in terms of the BI coverage he had placed for his employer's operations, coverage that was written on standard forms without any specific endorsements. He wondered if there was any coverage for the reduction in the employer's business activities caused by the interruption of telephone service. The answer was "no."

To understand why, it is necessary to understand how the standard business interruption forms work. According to Fundamentals of Risk and Insurance by author Emmett Vaughn, and now in its sixth edition, there are two business interruption forms under the portfolio program: the Business Income Coverage (And Extra Expense) form and the Business Income Coverage (Without Extra Expense) form. Both Business Income forms require a choice of three income coverages: business income including rental value, business income excluding rental value and rental value only. "Rental value" is the anticipated rental income from tenants at the described premises minus expenses that do not continue or the fair rental value of any part of the premises occupied by the insured.

If the business is interrupted, payment is made for the loss of "business income," defined as the net profit that would have been earned (including or excluding rental income) and the necessary expenses that continue during the "period of restoration." In determining the amount of loss, the insurer considers the insured's experience before the loss and probable future experience if no loss had occurred. The definition of business income may be modified to delete or limit coverage on ordinary payroll (roughly, the payroll for rank-and-file workers) if the insured does not wish to collect for this expense in the event of interruption.

Contingent BI and extra expense

Contingent business interruption insurance and contingent extra expense insurance protect a firm against interruption and extra expense losses resulting from damage caused by an insured peril to property that it does not own, operate, or control. There are four situations in which this coverage is used:

* When the insured depends on a single supplier or a few suppliers for materials, the firm on which the insured depends is called a contributing property.

* When the insured depends on one or a few manufacturers or suppliers for most of its merchandise, the firm upon which the insured depends is called the manufacturing property.

* When the insured relies on one or a few businesses to purchase the bulk of its (the insured's) products, the firm to which most of the insured's production flows is called the recipient property.

* When the insured counts on a neighboring business to help attract customers, the neighboring firm is called a leader property.

Mangan tells of another instance where a large skyscraper office building caught fire. The building had to be evacuated, and business for blocks around had to be closed for a period of time. There is a rule called "by order of civil authority" which says that the business had to be compensated for its loss of income for a period of two weeks. But the building has remained closed and unrepaired for some years now, causing a loss of income to the surrounding businesses--diners, news agents, etc. Whether these businesses had sufficient business interruption insurance is open to question.

It is incumbent upon the agent, says Mangan, for the client's benefit and for the agent's own benefit, lest he or she face an errors and omissions lawsuit, to make certain that the proper endorsements to the standard business forms are in place. It doesn't have to take a World Trade Center bombing or buildings falling down on Fifth Avenue in Manhattan for small businesses to face possible disaster without the proper coverage.*