The United States District Court, District of New Jersey recently issued a decision that is helpful in defining the scope of business interruption coverage with respect to “period of restoration” and extended business income coverage. Milk Indus. Mgmt. Corp. v. Travelers Indem. Co. of Am., 2018 U.S. Dist. LEXIS 147743 (D.N.J. Aug. 30, 2018).

The insured in Milk Indus. was a distributor of dairy and other food products. The insured contracted with a supplier of dairy and food products, whereby the insured obtained the right to warehouse and distribute the supplier’s products for a period of five years, and this term automatically renewed for subsequent two year periods (the “Agreement”). The insured then subcontracted its obligation to warehouse the products under the Agreement to a third party (the “Subcontractor”).

Approximately one year later, the Subcontractor’s facility (which was apparently a described premises) was destroyed in a fire. Ten days later, the insured terminated its contract with the Subcontractor. The insured attempted to find another warehouse to continue to fulfill its obligations under the Agreement, but the insured could not locate a suitable alternative. About eight months after the fire, the Subcontractor announced its decision not to rebuild its facility. Approximately seven months later, the insured and the supplier terminated the Agreement.

The insured submitted a claim to its insurer for BI losses and extended BI coverage in the total amount of $9.7 million. The insurer paid approximately $3 million in BI benefits but denied the insured’s claim for extended BI. The insured’s policy, in pertinent part, provided that the insurer would pay the “actual loss of Business Income [the insured] sustain[ed] due to the necessary ‘suspension’ of [the insured’s] ‘operations’ during the ‘period of restoration.’” The policy defined “period of restoration” as the period beginning at the time of a covered loss and ending “on the earlier of: (a) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or (b) The date when business is resumed at a new permanent location.” As respects extended BI, the policy stated that the insurer would pay “the actual loss of Business Income [the insured] incur[s] during the period that: (a) Begins on the date property (except ‘finished stock’) is actually repaired, rebuilt or replaced.”

The insured filed suit and moved for partial summary judgment on the issue of BI coverage contending it was underpaid. More specifically, the insured argued that the period of restoration constituted the entire unfulfilled term of the Agreement, four years plus an additional two years. In response, the insurer contended that the period of restoration should be based on the reasonable time it would have taken the Subcontractor to rebuild its facility, which the insurer estimated to be 23 months. The court observed that the policy unambiguously stated that the period of restoration ends on “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.” The court noted that “[b]ecause [the insured] never resumed operations at a new permanent location, the [period of restoration] is based on when the ‘property at the described premises’—[the Subcontractor’s] facility—‘should be’ rebuilt,” and the court denied the insured’s motion.

Separately, the insurer moved for partial summary judgment on the basis that there was no coverage for extended BI.  The court noted that the extended BI provision in the policy “does not rely upon estimations, but rather when the property is actually repaired, rebuilt or replaced, and when operations are resumed.” The court pointed out that “[t]his difference between ‘would have’ and ‘should have’ in the BI provision and ‘actually did’ in the [e]xtended BI provision comports with the purpose of [e]xtended BI, which is to provide a cushion for the time after the [p]eriod of [r]estoration when the insured is back in business but still not doing business at the same volume as before.” (internal quotations omitted). Because the Subcontractor’s facility was never rebuilt and the insured’s operations were never resumed, the court held that the insured was not entitled to extended BI coverage and granted the insurer’s motion.

The interpretation of business interruption coverage provisions is likely to turn on the specific language of each provision. Milk Indus. provides a helpful interpretation of unambiguous policy terms in the context of the purpose of business interruption coverage.

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