Business Interruption Claim:
Recovery Increased Nearly Four Times Above Insurance Company’s Initial Offer

Problem

Memorial Day weekend is a time for remembrance, friends and family, and backyard BBQ’s to officially welcome the beginning of summer. Unfortunately for our client, he was called away from these festivities by his building’s property manager, who indicated that a pipe had burst in the building and subsequently flooded his law firm’s office space.

Although the policyholder and insurance company would eventually agree on the replacement cost values for damaged property, there was a two-fold difference in their calculation of the business interruption (“BI”) value. As a result, the client engaged Hoover Hull LLP as insurance coverage counsel, who in turn retained LLM to prepare an independent calculation of the BI value and an update of the overall claim.

Financial Analysis & Legal Efforts

LLM calculated the BI value and compared it to the insurer’s analysis. LLM and Hoover Hull identified two fundamental flaws in the insurer’s analysis that accounted for the vast majority of the difference in the two values:

1. The insurer’s analysis calculated loss of business income based on an average hourly billable rate that included non-billable and administrative time, significantly understating the insured’s average hourly billable rate.
2. The insurer assumed a Period of Restoration (“POR”) of two months when it actually took the insured three months to resume normal operations.

In addition to these measurement issues, the policy provided coverage for Loss Adjustment Expenses. The adjuster argued that the policy only provided such coverage to the extent is was pre-approved by the insurance company and initially denied coverage.

LLM prepared an updated claim with supporting documentation for its calculations and reconciled it to the insurer’s calculations after correcting the flaws. Hoover Hull then used these analyses to negotiate with the adjuster and try to persuade them that 1) the insurer’s BI value was incorrectly calculated and that, by fixing those issues, their calculation was the same as the insured’s, 2) that the appropriate POR was three months, not two, and 3) that the Loss Adjustment Expenses were necessarily covered under the policy, especially given the issues identified in the insurer’s original calculations.

Results

The insurance company immediately accepted the correction to their methodology, resulting in 100% agreement with LLM’s BI calculations. In addition, Hoover Hull prevailed on the length of the POR and the coverage of the Loss Adjustment Expenses.

Ultimately, the client recovered nearly four times more than the initial offer from the insurer for its BI loss, and nearly two times more than its own original claim submission based on an alternative methodology. In addition, the insured recovered the entire sublimit for claim preparation fees, resulting in very low out-of-pocket costs for the client to achieve these recoveries.

Key Take-Aways for Policyholders

• Insurance claim recovery requires diligence and patience. BI calculations from insurers should be critically reviewed to ensure the methodology accurately reflects the insured’s business model and financial results. Similarly, coverage positions put forth should be thoroughly examined for applicability with related case law.
• Insurers have significant resources to review and assess the value of a claim, while insureds may not. Although some claims can be effectively resolved without outside assistance, it is often in the policyholder’s best interest to utilize the services of a claim consultant to properly calculate a BI loss.
• Law firms specializing in insurance coverage can be vital to the insured’s overall claim recovery. Interpretations of policy provisions, knowledge or related jurisdictional case law, and subsequent negotiations with the insurer often sway issues of coverage that have the greatest impact on the value of a claim.
• Some policies provide coverage up to a separate sublimit to pay the insured’s expenses to utilize this outside assistance when preparing a well-documented claim, greatly reducing associated out-of-pocket costs. Where appropriate, insureds should request this provision when placing their coverage, and review their policies carefully to see if it is afforded if they are facing a claim.