Twenty-five years after the September 11 attacks, one of their most important insurance legacies lies in the questions brokers should ask before placing business interruption coverage.
Business interruption accounted for approximately one-third of the attacks’ estimated $32.5 billion in insured losses, measured in 2001 dollars, according to the Insurance Information Institute.
The resulting disputes tested fundamental issues including how long a business should be indemnified, whether government closures triggered coverage and how policyholders should calculate the income they would have earned. The volume of litigation since then illustrates how contentious those questions have become.
“There is a much greater appetite to litigate business interruption issues than there was prior to 9/11,” noted Richard Lewis (pictured on the left), a partner in Reed Smith’s insurance recovery group. Lewis estimates there were around 400 business interruption cases before 9/11, and upwards of 1,600 non-COVID cases after.
One early lesson concerns ensuring that negotiated terms are fully reflected in the policy. Some litigation involving the World Trade Center operator arose because completed policies were unavailable and the parties were left arguing over binders and which wording applied.
Courtney Horrigan (pictured on the left), also a partner in Reed Smith’s insurance recovery group, said subsequent policy drafting became more specific about whether BI coverage was tied to a particular location.
Brokers can test that wording against the realities of the client’s business. A company may technically be able to reopen elsewhere while remaining unable to recreate the revenue associated with its original premises.
The distinction drove litigation involving Duane Reade’s World Trade Center store. The parties disputed whether the restoration period should reflect the time required to rebuild at the site or the shorter period needed to establish another location. The store’s exceptional profitability complicated the assumption that moving elsewhere would restore equivalent operations.
Similar questions could arise for businesses dependent on airports, transportation hubs, entertainment districts or another property that generates customer traffic. The placement discussion should establish whether the client’s revenue depends on its own premises or on the continued operation of a nearby “leader property.”
Coverage extensions deserve particular scrutiny. Lewis said contingent business interruption, contingent extra expense and leader-property protections had previously been included without substantial underwriting or additional premium.
“After 9/11, I saw a lot of those coverages either dropped or hugely sublimited,” Horrigan said. “One of the things that happened immediately after 9/11, of course, was that nobody had anticipated the scope of the total losses that came out of it.”
A client may consequently have a substantial overall BI limit while receiving far less protection for disruption involving a supplier, customer or attraction property. Mapping those dependencies allows the broker to identify which extensions apply and whether their sublimits and indemnity periods match the potential loss.
Civil authority coverage presents another potential gap. Government restrictions following 9/11 produced disputes over whether closures resulted from existing property damage or fear of further attacks. Wording can distinguish between an official “order” and a broader government “action,” while policies may also impose geographic restrictions and short time or dollar sublimits. Clients should not assume that every mandatory closure will activate coverage.
The final lesson concerns proof. BI claims attempt to establish a counterfactual figure: what the business would have earned without the interruption.
Lewis said insurers have successfully challenged forensic-accounting testimony under the federal Daubert standard, sometimes leaving policyholders without evidence to support their calculations. He recommends developing several potential sources of proof, including expert accountants, the company’s regular accountants and testimony from internal financial personnel. Brokers can raise those requirements during business continuity discussions, while records, forecasts and supporting assumptions remain accessible.
The dispute may also extend to how wider economic conditions should affect the calculation. Lewis recalled insurers arguing after 9/11 that businesses should recover less because customer demand across the affected area had fallen. Similar arguments emerged after Hurricane Katrina, when New Orleans’ population dropped sharply.
Courts have largely accepted that expected performance should be measured immediately before the loss, Lewis said, preventing insurers from using the catastrophe’s broader effects to reduce recovery. Reliable pre-loss financial information remains essential to establishing that baseline.
“Even before there would ever be a claim, spend some time as you purchase the insurance thinking: If I need to use it, what types of evidence will I use?” Horrigan said. “Am I actually keeping evidence in a form that will be readily available? Where is it located?”
