Hunton Retail Law Resource

Recent business disruptions have highlighted  the vulnerabilities retailers face when unexpected events force closures.  Whether it’s a utility outage disrupting operations or a fire at a supplier’s facility or neighboring property cutting into sales, insurance may help cover business interruption losses.

Service Interruption Coverage

Retailers should review their property insurance policies, as they may cover losses or expenses stemming from utility outages.  For example, some policies cover power or water outages that prevent normal operations or lead to a loss in sales. 

Key factors to consider:

• Physical Damage Requirements: Some policies require physical loss or damage at the retailer’s premises or the utility provider’s location, but not all policies include such a requirement. Indeed, coverage for losses may be available even if the retailer’s property does not suffer direct physical loss or damage.
• Service Interruption Period: Policies often include specific time parameters for coverage, such as a waiting period (e.g., 24 hours) before coverage begins and an indemnity end point, usually when service is restored. However, retailers should also look for provisions allowing extended indemnity periods, which may provide additional coverage beyond the restoration of service. For instance, the time needed to ramp up operations to pre-loss levels may be covered.

Contingent Business Interruption Coverage

Contingent business interruption (CBI) insurance offers protection when a retailer experiences losses because of damage at a supplier’s facility or at an attraction property critical to driving foot traffic. These off-site locations are often referred to as “dependent properties,” and they may specifically be named in the policy, or coverage may include all such locations.  This coverage is typically triggered by physical damage at the dependent property, even if the retailer’s own premises remain unharmed.

Examples include:

• Supplier Disruption: A fire at a supplier’s facility that halts inventory shipments, preventing the retailer from meeting customer demand and resulting in lost sales.
• Neighboring Business Impact: A neighboring business or attraction property affected by a fire, leading to decreased foot traffic and revenue for the retailer.

Key considerations for CBI coverage:

• Time Deductibles: Most policies include a waiting period following the incident at the dependent property before coverage begins.
• Period of Restoration: Coverage is generally limited to the time reasonably needed to restore operations at the dependent property. Importantly, this period is not cut short by the policy’s expiration.

Action Steps for Retailers

To protect their interests and maximize potential recovery, retailers should:

1. Analyze Policy Language: Every policy is different. A thorough review is essential to understand the specific scope of service interruption and CBI coverage.
2. Promptly Notify Insurers: Failure to provide timely notice can jeopardize coverage. Pay close attention to notice requirements, including deadlines and required documentation.
3. Document Losses: Meticulous record-keeping of sales, expenses, and other relevant financial data is critical to supporting claims.
4. Seek Expert Guidance: Engaging insurance coverage counsel early in the process can help avoid common pitfalls and strengthen claims.

Retailers operate in an unpredictable environment, but proactive measures and careful attention to policy details can mitigate the financial impact of business interruptions. With the right tools, retail companies can position themselves to effectively navigate these challenges.