Business Interruption Claim – A Case Study

The insured, ABC Convenient Mart, Inc. (“ABC”), has received a letter dated February 6, 2010 from Scarcity Insurance Company (“Scarcity”) denying the ABC’s claim (the “Claim”) in part (the latter hereinafter referenced as the “Claim Denial”). As set forth more fully below, ABC is now demanding that on or before July 17, 2011 Scarcity rescind the Claim Denial and pay the Claim in full in the amount of $3,046,187.00. ABC is threatening that Scarcity’s failure to do so will result in legal action being taken against Scarcity for the amount of the claim, plus attorneys’ fees and such amounts as are allowed by law pursuant to 215 ILCS 5/155 for Scarcity’s vexatious and unreasonable action in this matter.

Statement of Facts

On or about September 9, 2009 there was a theft (the “Theft”) at ABC’s place of business at 11444 South Michigan Avenue, Chicago, Illinois 60628 (the “Store”). George Jetson (“George”), the president of ABC, started the Store “from scratch” in November 2008. At that time ABC moved into a storefront at the location of a former clothing store in Roseland, a high crime neighborhood on Chicago’s southeast side. George rented the space for $900 per month. He installed new flooring and a new ceiling. He purchased and installed new neon lights, a new bathroom and a new air conditioning unit. He repaired the heating. He purchased and installed shelving and coolers and bought inventory. He cut out and removed old piping from the basement, and cleaned out quantities of trash from the basement. He opened the Store for business January 18, 2009. The Store stood out as a bright and welcoming place of business amongst a neighborhood populated by dark and dingy storefronts.

All profits from the Store were used to purchase more inventory. Profits from February 2009 were used to purchase and install security cameras in March 2009. ABC needed that improvement because on February 29, 2009 ABC had just entered into a contract with ReadyCash Payment Systems, Inc. (“ReadyCash”) to act as a currency exchange and money transferor. In those capacities, ABC accepted cash from customers seeking to make money transfers, kept that cash in its in-Store safe, and ReadyCash debited ABC’s bank account in the same amount and transferred the funds to the intended destination. Until ABC made a deposit of the cash into its bank account, the cash remained in the safe.

In April 2009 George purchased and installed a meat counter, cooler and grinder and began to carry meat and produce. In May 2009 he added a larger checkout counter and two cash registers behind bullet-proof glass. He also installed a locking security overhead door and new locking glass front door.

ABC’s profits grew exponentially from approximately $3,000.00 in February, 2009, to $22,470.60 in June, 2009, to $46,827.60 in July, 2009, to $49,661.40 in August, 2009. ABC was doing so well that George was seriously considering expanding operations into the empty storefront next door. On August 15, 2009 George, because the business was doing so well, decided to take a vacation out of the country. He left his manager in charge, and asked his brother, Billy Jetson (“Billy”) to check on the Store every other day.

On September 11, 2009 George received a telephone call from Billy, who informed him that there had been a break-in at the Store during the overnight hours, that the front overhead security door was broken, the aluminum glass front door was smashed, the cash registers were broken, the security cameras were stolen, the ReadyCash equipment was partially stolen and partially broken, the safe, containing $57,959.00 of ReadyCash cash, $6,000.00-$7,000.00 of ABC cash-on-hand, and valuable papers documents, was stolen, and everything, including the candy counter, was turned upside down. Broken glass was everywhere. Billy told him that he had to close the Store. He had reported the incident to the Chicago Police Department. Billy also immediately telephoned Scarcity, speaking with Scarcity Field Claims Representative, Vivian Vox (“Vivian”), and informed her of the Theft. Billy bought a lock to place on the front door. Representatives of Scarcity came to the store a day or two later.

George returned on September 15, 2009 and spoke to Vivian. He informed Vivian that he had spent all his money while on vacation and could not reopen the store without payment of his Claim or an advance against payment of the Claim. In particular, he demanded cash in the amount of $10,000-$12,000 to replace broken overhead and aluminum doors, cash registers and security cameras in order to restart the business. (The overhead door would only stay open when propped up with a two-by-four.) Vivian asked for the receipts for the stolen property and overhead and aluminum doors. George submitted the receipts on or about September 25, 2009.

In or about the beginning of October 2009 Vivian told George that Scarcity would pay the entire amount of the Claim, including for the overhead door, after George executed a proof of loss. Vivian then sent the proof of loss form under cover of her letter dated October 15, 2009. George completed the Proof of Loss and submitted it to Scarcity on October 22, 2009. George spoke with Vivian a couple of days later, who assured George that “everything is fine” and she would call him back to discuss the payments. Vivian also told him that because so much cash was taken, Scarcity would waive the $5,000.00 deductible. Then Vivian told him that she spoke with a supervisor who said she could not go ahead with the payments.

Towards the end of October 2009, Vivian was replaced on the Claim by Sammy Skinflint (“Skinflint”). George phoned Skinflint, and Skinflint then told George that Skinflint had the file, would read it and get back to George. George asked again for payment of the Claim, but Skinflint informed George that Scarcity needed to undertake yet another investigation which would be completed within 62 days of September 11, 2009, i.e., by November 12, 2009. Skinflint promised that Scarcity would pay the Claim by that date.

This new investigation consisted of Scarcity sending out Scarcity’s Senior Special Investigator, David Skeptical, at the end of November. Mr. Skeptical met George at the Store to take a recorded statement. Before he could enter the Store, both he and George attempted to open the overhead door to let Mr. Skeptical inside, but it would open, with great difficulty, only about two to three feet above the ground. Accordingly, Mr. Skeptical was forced to crawl on his belly underneath the overhead door to go inside the Store. Once inside the Store, Mr. Skeptical accused George of owning another new grocery store two blocks away at 116th and Michigan, and demanded George’s keys to see of any of them would open the door to that new grocery store; they did not. (Mr. Skeptical returned to the store at 116th and Michigan every other day for about two months.) During the recorded statement Mr. Skeptical demanded to know where he got the money to open the Store, demanded to speak with George’s ex-wife, wanted to know the birth dates and social security numbers of his ex-wife, sister and brother-in-law, and wanted all phone records of incoming and outgoing calls and text messages during August 15, 2009 through September 15, 2009. After taking the recorded statements Mr. Skeptical went up and down the street and asked every business owner about George’s reputation. When George left the Store, Mr. Skeptical, for the next 15 minutes followed George around the neighborhood in a white Chevrolet. Despite all of these machinations, no fraud was ever discovered in the making of this Claim and none is set forth in Claim Denial. So far as ABC has been informed, Mr. Skeptical never attempted either to find out who actually perpetrated the Theft or to obtain the return of the stolen property.

During this time period, George had no money for living expenses. All of his/ABC’s monies had been stolen in the Theft. By December 2009, George was so desperate for money to live on, that he sold ABC’s coolers and shelves. Instead of being paid by Scarcity as promised, no part of this Claim was paid until receipt of the Claim Denial on or about February 6, 2009. On that date Skinflint also telephoned George and said that George should have reopened the Store using his own funds within 72 hours of the break-in, i.e., on September 14, 2009, the day before he returned from out of the country! George replied that he had no funds to open the Store. Skinflint told him that that was his problem, that he should have put a plywood sheet over the aluminum door, purchased a $500 cash register, and opened for business.

As a result of the delay of payment of this Claim and denial of payment of loss of business income, George has been left destitute, is in debt, has lost his home, could not pay his rent, is homeless, and has lost his girlfriend. He has gone from being a successful business owner to being homeless and looking for a job, which he cannot find. Further, as a result of the Claim Denial, ABC has been ejected from the former Store location at 11444 South Michigan Avenue, Chicago, Illinois 60628, which is now the site of another furniture store, and is no longer in operation.

ABC’s Claim for Loss of Business Income, Extended Business Income and Extra Expense Coverage is Covered

ABC’s Claim for Loss of Business Income and Extended Business Income is Covered pursuant to Sections A(5)(f)(1) and (2), respectively, Business Income and Extended Business Income, ISO Form BP00021299 of the Business Owners Special Property Coverage Form, ISO Form BP00021299 of the Policy. The Claim Denial denied the claim for Business Income. Specifically, the Claim Denial at 2 states that:

You reported…loss of business [income]. … The business income will not be considered due to a failure to mitigate your damages and that the period for the restoration would be less than 72 hours.

Thus, the Claim Denial asserts without explanation two purported bases for Scarcity’ denial of the Claim for loss of business income. The first such purported basis is that “[t]he business income will not be considered due to a failure to mitigate your damages.” The second purported basis is that “the period for the restoration would be less than 72 hours.” Both of these purported bases are addressed below.

The Policy contains two provisions that address loss of business income. These are set forth under Sections A(5)(f)(1) and (2), respectively, Business Income and Extended Business Income, ISO Form BP00021299 of the Business Owners Special Property Coverage Form, ISO Form BP00021299 of the Policy. Section A(5)(f)(1) provides in pertinent part:

Business Income

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss…

We will pay for loss of Business Income that you sustain during the “period of restoration” and that occurs within 18 consecutive months after the date of direct physical loss or damage. We will only pay for ordinary payroll expenses for 60 days following the date of direct physical loss or damage.

Business Income means the:

(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred…

(ii) Continuing normal operating expense incurred, including payroll.

Section A(5)(f)(2) provides in pertinent part:

Extended Business Income.

If the necessary suspension of your “operations” produces a Business Income loss payable under this policy, we will pay for the actual loss of Business Income you incur during the period that:

(a) Begins on the date property except finished stock is actually repaired, rebuilt or replaced and “operations” are resumed; and

(b) Ends on the earlier of:

(i) The date you could restore your “operations”, with reasonable speed, to the level which would generate the Business Income amount that would have existed if no direct physical loss or damage had occurred; or

(ii) 30 consecutive days after the date determined in (2)(a) above.

Loss of Business Income must be caused by direct physical loss or damage at the described premises caused by or resulting from any Covered Cause of Loss.

This Additional Coverage is not subject to the Limits of Insurance.

Section H of the Business Owners Special Property Coverage Form, ISO Form BP00021299 of the Policy contains the definitions pertinent to these provisions. Specifically, Section H(2) provides that:

“Operations” means your business activities occurring at the described premises.

Section H(3) provides that:

“Period of restoration” means the period of time that:
a. Begins:

(1) 72 hours after the time of direct physical loss or damage for Business Income Coverage; or

(2) immediately after the time of direct physical loss or damage for Extra Expense Coverage;

Caused by or resulting from any Covered cause of Loss at the described premises; and

b. Ends on the earlier of:

(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or

(2) The date when business is resumed at a new permanent location.

The expiration date of this policy will not cut short the “period of restoration”.

Accordingly, the Policy provides for two types of business income. The first, for Business Income under Section A(5)(f)(1), provides for “the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’” The “period of restoration” applicable to Business Income Coverage begins “72 hours after the time of direct physical loss or damage” and ends “[t]he date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or [t]he date when business is resumed at a new permanent location.”

The second, for Extended Business Income under Section A(5)(f)(2), provides the actual loss of Business Income you incur during the period that begins on the date property is actually repaired, rebuilt or replaced and “operations” are resumed; and ends on the date you could restore your “operations” i.e., your business activities occurring at the described premises, with reasonable speed, to the level which would generate the Business Income amount that would have existed if no direct physical loss or damage had occurred. One of the salient features of “Extended Business Income” coverage is that it is “not subject to the Limits of Insurance.”

Business interruption insurance is insurance under which the insured is protected in the earnings which insured would have enjoyed had there been no interruption of business. Quality Molding Company v. American National Fire Insurance Company (“Quality Molding”), 272 F.2d 779, 780 ((7th Cir. 1959). A business interruption policy is designed to do for the business what the business would have done for itself had no loss occurred. A & S Corporation v. Centennial Insurance Company, 242 F. Supp. 584, 589 (N.D. Ill. 1965). The purpose of business interruption insurance is to protect the prospective earnings of the insured business. Quality Molding, 272 F.2d at 780. A recovery should provide the insured with net profit which he/she would have earned during the interruption, plus cash expenditures which were necessary so that he would be able to reopen after the interruption. Cohen Furniture Company v. St. Paul Insurance Company of Illinois, 214 Ill. App. 3d 408, 415 (3rd Dist. 1991).

As set forth above, the Claim Denial asserts without explanation two purported bases for Scarcity’ denial of the Claim for loss of business income. The first such purported basis is that “[t]he business income will not be considered due to a failure to mitigate Your damages.” The second purported basis that “the period for the restoration would be less than 72 hours.”

The second of these contentions, i.e., that “the period for the restoration would be less than 72 hours,” will be addressed first. As set forth above, Section H(3) provides that the “‘Period of restoration’ means the period of time that [b]egins 72 hours after the time of direct physical loss or damage for Business Income Coverage. (Emphasis added.)” Thus, first of all, under the provisions of the Policy, there is no such thing as “the period for the restoration.” To say that Scarcity is denying coverage on the basis of a provision of the Policy which does not exist is unsupportable and unlawful. Specifically, it is an improper claims practice to misrepresent to claimants and insureds the relevant policy provisions relating to coverages at issue. 215 ILCS 5/154.6(a).

Secondly, no explanation is stated in the Claim Denial for the conclusion that “the period for the restoration would be less than 72 hours.” It is an improper claims practice for an insurer to fail, in the case of the denial of a claim, to promptly provide a reasonable and accurate explanation of the basis in the insurance policy or applicable law for such denial. 215 ILCS 5/154.6(a). Thus, the denial on this stated basis is unlawful for this reason, as well.

Thirdly, assuming arguendo that the Claim Denial’s statement that “the period for the restoration would be less than 72 hours” is an attempt to state that the period of restoration “would be less than 72 hours,” that statement is simply contrary to the express terms of the Policy. The Policy, at Section H(3), states in no uncertain terms that the “‘Period of restoration’… [b]egins 72 hours after the time of direct physical loss or damage for Business Income Coverage. (Emphasis added.)” If the period of restoration begins 72 hours after the time of physical loss, then, ipso facto, it cannot have ended in “less than 72 hours.” Under that reasoning, the period of restoration ended before it began. That is obviously an absurd result, a totally arbitrary determination, and a misrepresentation of the terms of the Policy. As set forth above, it is an improper claims practice to misrepresent to claimants and insureds the relevant policy provisions relating to coverages at issue. 215 ILCS 5/154.6(a).

The fourth possible interpretation of the statement that “the period for the restoration would be less than 72 hours” is that the Claim Denial is attempting to state that ABC should have repaired the property within 72 hours. Not only is the assertion that the “the period for the restoration would be less than 72 hours,” i.e., that ABC should have repaired the property within 72 hours, contrary to the terms of the Policy, it is contrary to law. The “period of restoration” has a commonly accepted legal meaning. That meaning was set forth in Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Company (“Duane Reade”), 279 F. Supp. 2d 235, 239 (S.D.N.Y. 2003). There the court construed a definition of “period of restoration” similar to that here, in that it referred to the “time as would be required…to rebuild, repair or replace such property that has been destroyed or damaged.” The court held that “[o]nce [the insured] could resume functionally equivalent operations…the Restoration Period would be at an end.” Thus, the period of restoration ends, not at the end of some arbitrary period chosen by the insurance company, but, instead, when the insured “could resume functionally equivalent operations.” Nowhere in the Claim Denial did Scarcity make a determination of when ABC would have been able to “resume functionally equivalent operations.” Clearly, with the overhead door stuck a couple of feet from the ground, and all of the Store’s operating equipment destroyed, and the Store being without both operating and ReadyCash cash, ABC was not able to resume functionally equivalent operations, and could not be expected to resume functionally equivalent operations, through at least the foreseeable future. Moreover, given that ABC has been ejected from the premises, it is unable to resume “operations,” i.e., “Your business activities occurring at the described premises,” whatsoever.

Had Scarcity complied with its duties under the Policy as set forth herein, that period may have ended sooner. However, Scarcity chose not to do so. The applicable period extends through any period of delay caused by the actions of the insurer in failing to perform its duties under the policy. Couch on Insurance 3d, §167:18 (2006).

Moreover, ABC also qualified for Extended Business Income under Section A(5)(f)(2) because those funds are payable after “the date property except finished stock is actually repaired, rebuilt or replaced and ‘operations’ [at the described premises] are resumed” a date that has not yet occurred. As set forth in Duane Reade, 279 F. Supp. 2d at 239 in explaining a similar provision in the policy at issue there:

Once [the insured] could resume functionally equivalent operations…the Restoration Period would be at an end….Any losses continuing beyond that point would be addressed by the “Extended Recovery Period” provision in the Policy…not by the Restoration Period clause.

Similarly, here, once at some future point, assuming Scarcity fully compensates ABC for its loss of property and loss of business income pursuant to the terms of the Policy and ABC is then able to “resume functionally equivalent operations,” the Extended Business Income provisions are triggered, and ABC is thereby entitled additional compensation for loss of business income until, as set forth under Section A(5)(f)(2)(b)(i) “you…restore your ‘operations’…to the level which would generate the Business Income amount that would have existed if no direct physical loss or damage had occurred.”

ABC’s Claim for Cash to Restart the Business, ReadyCash Cash, and Operating Cash are Covered under the Extra Expense Provisions of the Policy

Immediately following the Theft, ABC submitted demanded $10,000.00 to $12,000.00 cash to restart business operations. ABC also demanded payment of stolen ReadyCash cash in the amount of $57,959.00 and stolen operating cash in the amount of $6,000.00 to $7,000.00. None of these claims were denied and Scarcity, in fact, on February 6, 2013, pursuant to the terms of the Claim Denial, paid $5,000.00 of the ReadyCash cash. These claims are covered in full as Extra Expense pursuant to Section A(5)(g) of the Business Owners Special Property Coverage Form, ISO Form BP00021299 of the Policy.

Section A(5)(g) provides in pertinent part:

Extra Expense

(1) We will pay necessary Extra Expense you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss…

(2) Extra Expense means expense incurred:

(a) To avoid or minimize the suspension of business and to continue “operations”:

(b) To minimize the suspension of business if you cannot continue “operations”.

(c) To:

(i) Repair or replace any property; or

(ii) Research, replace or restore the lost information on damaged “valuable papers and records”:

To the extent it reduces other amount of loss that otherwise would have been payable under this Additional Coverage or Additional Coverage f. Business Income.

We will only pay for Extra Expense that occurs within 12 consecutive months after the date of direct physical loss or damage. This Additional Coverage is not subject to the Limits of Insurance.

Section H(3) provides that:

“Period of restoration” means the period of time that:
a. Begins:

(2) immediately after the time of direct physical loss or damage for Extra Expense Coverage;

Thus, Section A(5)(g) provides for “necessary Extra Expense you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property at the described premises.” Extra Expense” includes “expense incurred [t]o avoid or minimize the suspension of business and to continue ‘operations’, or “[t]o minimize the suspension of business if You cannot continue ‘operations’” and “[t]o [r]epair or replace any property.” One of the salient features of “Extra Expense” coverage is that it is “not subject to the Limits of Insurance.” Extra Expense Coverage starts pursuant to a “period of restoration” that “[b]egins…immediately after the time of direct physical loss or damage for Extra Expense Coverage.”

Given that under Section H(3) of the Business Owners Special Property Coverage Form, ISO Form BP00021299, the “period of restoration…[b]egins…immediately after the time of direct physical loss or damage for Extra Expense Coverage, the statement in the Claim Denial that “the period for the restoration would be less than 72 hours” is actually an admission by Scarcity that the Claim qualified for Extra Expense Coverage under Section A(5)(g) of the Business Income and Extended Business Income, ISO Form BP00021299. That is so, because the so-called “period for the restoration” coincides precisely with the “period of restoration” under the Extra Expense Coverage, Section H(3)(2). In other words, by asserting that “the period for the restoration would be less than 72 hours,” Scarcity is taking the position that the period of restoration began within the 72 hours “immediately after the time of direct physical loss or damage,” i.e., the identical period set forth under the Policy for Extra Expense Coverage.

ABC thereby qualified under Extra Expense Coverage for payment of expenses, including for the repair and replacement of all property, including the overhead door and those items that were ultimately paid for by Scarcity as set forth in the Claim Denial. Further, since Extra Expense Coverage “is not subject to the Limits of Insurance” under the Policy, the full amount of monies stolen, including ABC’s operating cash of $6,000.00-$7,000.00 and the ReadyCash cash of $57,959.00, should have been replaced. Specifically, as admitted by Scarcity in the Claim Denial, these monies qualified for the Money and Securities exception to the “Property Not Covered” definition under Section 2(b)(1) of ISO Form BP00021299. These monies normally would have been subject to the Money and Securities limits of $5,000.00 under Section G(3)(c)(1) of the Optional Coverages, Money and Securities, ISO Form BP00021299 and under the Declarations. However, since Extra Expense Coverage “is not subject to the Limits of Insurance” under the Policy, the stolen monies were not subject to limits of insurance under Section G(3)(c)(1) and the Declarations. Accordingly, the full amount of these monies should have been payable because they were subject to Scarcity’ obligation under the Extra Expense Coverage “[t]o [r]epair or replace any property.” Additionally, these monies should have been payable because they were required “[t]o avoid or minimize the suspension of business and to continue ‘operations’, or “[t]o minimize the suspension of business if You cannot continue ‘operations.’” These amounts are set forth on the enclosed Supplemental Proof of Loss.

Furthermore, ABC’s claim for $10,000.00-$12,000.00 to restart the operations of the Store immediately following the Theft are covered under the Extra Expense provisions as under Extra Expense coverage under Section A(5)(g)(2)(a), (b) and (c)(i) of ISO Form BP00021299 to repair or replace any property and to minimize the suspension of business since, without such an immediate cash infusion, ABC could not restart or continue operations. This amount is also set forth on the enclosed Supplemental Proof of Loss.

Since Certain of ABC’s Losses Were Paid by Scarcity, Then Scarcity has Admitted That “Failure To Mitigate” is Not a Bar to Coverage.

The other basis stated in the Claim Denial for denial of loss of business income was a purported “failure to mitigate your damages.” Again there is no explanation stated in the Claim Denial for that conclusion. As set forth above, “It is an improper claims practice for an insurer to fail, in the case of the denial of a claim, to promptly provide a reasonable and accurate explanation of the basis in the insurance policy or applicable law for such denial. 215 ILCS 5/154.6(a). Thus, the denial on this stated basis is unlawful for this reason, as well.

Presumably, the statement that there was a purported “failure to mitigate your damages” is a reference to Section E(3)(a)(9) of the Business Owners Special Property Coverage Form, ISO Form BP00021299 of the Policy, which states:

Property Loss Conditions

3. Duties in the Event of Loss or Damage

a. You must see that the following are done in the event of loss or damage to Covered Property:

(9) Resume all or part of your “operations” as quickly as possible.

As set forth above, Section H(2) provides that:

“Operations” means your business activities occurring at the described premises.

Thus, while the Claim Denial fails to explain the meaning of the phrase, “failure to mitigate your damages,” for the sake of argument one will assume Scarcity intended that phrase as a reference to the provision at Section E(3)(a)(9) that ABC had a duty to resume all or part of its business activities as quickly as possible. Thus, the provision requiring an insured to “[r]esume all or part of your ‘operations’ as quickly as possible” is being utilized by Scarcity here as a condition barring coverage for business losses.

Yet, nowhere, either under the Policy or under law, does this provision operate to bar coverage. Instead, this duty to resume operations, together with the others in Section E(3), has been specifically interpreted as “duties bearing on the amount of recovery. (Emphasis added).” Auto-Owners Insurance Company v. Hansen Housing, Inc., 2000 SD 13, 604 N.W.2d 504, 516 (2000).

Moreover, as set forth above, ABC is entitled to receive compensation for loss of business income until “[the insured] could resume functionally equivalent operations.” Duane Reade, 279 F. Supp. 2d at 239. Scarcity’ actions in failing to perform its duties under the Extra Expense, Business Income and Extended Business Income provisions of the Policy extends the applicable period of Business Income through any period of delay caused by the actions of the insurer in failing to perform its duties under the policy. Couch on Insurance 3d, §167:18 (2006).

Scarcity Owes ABC $2,968,633.00 for Business Income and Extended Business Income under the Policy.

Given, then, that the two purported justifications set forth in Your Letter for denial of ABC’s claim for Business Income are without basis in law or fact, then what is the amount that Scarcity’ owes ABC under the Policy for Business Income and Extended Business Income? To determine the answer to that question, ABC engaged the services of the certified public accounting firm, Smith & Jones Associates, LLC (“S&J”) and Certified Public Accountant, Michael D. Smith of S&J. Mr. Smith was asked to determine the lost business income incurred by ABC as a result of the Theft and as a result of the failure by Scarcity to meet its obligations to ABC under the Policy. Mr. Smith set forth his findings in “Michael D. Smith’s Report On ABC Food Mart, Inc. Lost Business Income After The September 11, 2009 Robbery” (the “Smith Report”), a copy of which is enclosed.

In analyzing the amount that Scarcity owes ABC under the Policy for Business Income and Extended Business Income, the Smith Report examined the following periods of Scarcity’ failure to meet its obligations to ABC under the Policy:

• Period One: September 14, 2009 through November 21, 2009, which is the period from 72 hours after the date of the Theft through the date Scarcity should have paid ABC’s claim, i.e., the date 30 days after October 22, 2009, the date ABC submitted the Proof of Loss (“Period One”);
• Period Two: November 22, 2009 through March 13, 2011, which is the remaining period of the 18 months of ABC’s Business Income coverage (“Period Two”); and
• Period Three: the period of Extended Business Income coverage beginning March 14, 2014 (“Period Three”).

With respect to Period One, the period September 14, 2009 through November 21, 2009, the Smith Report determined that the present value of the lost Business Income is $125,872.00. That amount was calculated by subtracting all expenses from the monthly revenue reported in August 2009 of $82,789.00, and applying monthly growth to that net amount. That amount is covered under Section A(5)(f)(1) of the Business Income and Extended Business Income, ISO Form BP00021299.

With respect to Period Two, the period November 22, 2009 through March 13, 2011, the remaining period of ABC’s Business Income coverage, the Smith Report determined that the present value of lost Business Income is $804,790.00. That amount was calculated by subtracting all expenses from the monthly revenue reported in August 2009 of $82,789.00, plus applied monthly growth.

With respect to Period Three, the period from on and after March 14, 2011, the Smith Report determined that ABC’s lost Business Income is $2,037,971.00. That amount was based upon monthly future lost business income of $48,341.00. Therefore, the total amount of ABC’s lost Business Income and Extended Business Income under the Policy is $2,968,633.00. The lost Business Income and Extended Business Income totaling this amount are set forth on the enclosed Supplemental Proof of Loss.

Scarcity Has Breached the Policy by Failing to Pay for Covered Loss or Damage Within 30 Days After Receipt of the 10-22-09 Proof of Loss.

There is no dispute that ABC submitted its 10-22-09 Proof of Loss to Scarcity on October 22, 2009. There is also no dispute that Scarcity made no payment towards the Claim until February 6, 2010, a period of three and a half months following submission of the 10-22-09 Proof of Loss. During that period ABC was unable to resume business operations and George was forced to sell ABC’s shelving and coolers to generate funds to live on. Eventually, he became homeless. This time period also followed ABC’s demands to Scarcity for an immediate cash payment when he first communicated with Scarcity regarding the loss in order to restart ABC’s business at the Store.

Section E(6)(g) of the Business Owners Special Property Coverage Form, ISO Form BP00021299 of the Policy provides as follows:

We will pay for covered loss or damage within 30 days after we receive the sworn poof of loss, provided you have complied with all the terms of this policy, and

(1) We have reached agreement with you on the amount of loss; or

(2) An appraisal award has been made.

Thus, Scarcity is obligated under Section E(6)(g) to pay for covered loss or damage within 30 days of submission of the proof of loss unless (1) the insured has not complied with the terms of the policy, and (2) Scarcity has reached agreement with the insured on the amount of loss, or (3) an appraisal award has been made.

Here, the Claim Denial does not assert that ABC has failed to comply with the terms of the Policy, so that provision is not an issue. Additionally, Your Letter does not assert that there has ever been a dispute with ABC regarding the amount of loss. The only disputes asserted are (1) whether the overhead door “was…damaged as a result of the loss” and (2) whether there was a purported “failure to mitigate…damages” and a period of restoration of “less than 72 hours” which purportedly justified Scarcity’ denial of coverage for the overhead door and Business Income. Finally, Scarcity has never demanded an appraisal, and its payments for those items of property loss and damage under Section A of the Business Owners Special Property Coverage Form belie that an appraisal was ever contemplated or needed. A demand for an appraisal must be made within a reasonable time. Lyon v. American Family Mutual Insurance Company, 617 F. Supp. 2d 754, 758 (N.D. Ill. 2009). Since a demand for appraisal was never made, any right Scarcity may have had to one, at this juncture, has been waived.

Under such circumstances, in this instance Scarcity was obligated to pay the Claim within 30 days of submission of the 10-22-09 Proof of Loss on October 22, 2009, i.e., by November 21, 2009. Yet, Scarcity failed to pay until February 6, 2013 and February 20, 2013, and then it only paid part of the Claim and purported to deny the rest. The impact of this delay upon the insured, as set forth above, was not only foreseeable, but also disastrous. It is well settled under Illinois law that payment under a policy insuring for property loss must be made within the time provided under the contract of insurance. Peoria Marine and Fire Insurance Company v. Lewis, 18 Ill. 553, 563 (1857); accord, DiLeo v. Untied States Fidelity and Guaranty Company, 109 Ill. App. 2d 28, 44-45 (1st Dist. 1969). In fact, the Illinois legislature has declared the failure to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed to be an improper claims practice. Dickman v. Country Mutual Insurance Company, 120 Ill. App. 3d 470, 472 (3rd Dist. 1983). Certainly, that finding must be made here.

Conclusion

In conclusion, ABC demands payment of the amount of the Claim in the total amount of $3,034,554.00, set forth on the Supplemental Proof of Loss and comprised of the following:

1. Damaged overhead door: $5,595.00;

(covered as “covered property” under the provisions of the Policy, Section A of the Business Owners Special Property Coverage Form, ISO Form BP00021299);

2. Funds to Restart Business: $12,000.00;

(covered under Extra Expense coverage under Section A(5)(g)(2)(a), (b) and (c)(i) of ISO Form BP00021299,

3. ReadyCash cash: $52,959.00;

($57,959.00 minus $5,000.00 already paid February 6, 2013, covered under Extra Expense Coverage under Section A(5)(g) of ISO Form BP00021299 since Extra Expense Coverage “is not subject to the Limits of Insurance” under the Policy, and the Money and Securities exception to the “Property Not Covered” definition under Section 2(b)(1) of ISO Form BP00021299, and not subject to the Money and Securities limits of $5,000.00 under Section G(3)(c)(1) of the Optional Coverages, Money and Securities, ISO Form BP00021299 and under the Declarations);

4. Operating cash: $7,000.00;

(covered under Extra Expense Coverage under Section A(5)(g) of ISO Form BP00021299 since Extra Expense Coverage “is not subject to the Limits of Insurance” under the Policy, and the Money and Securities exception to the “Property Not Covered” definition under Section 2(b)(1) of ISO Form BP00021299, and not subject to the Money and Securities limits of $5,000.00 under Section G(3)(c)(1) of the Optional Coverages, Money and Securities, ISO Form BP00021299 and under the Declarations);

5. Business Income, Period One: $125,872.00;

(covered under Section A(5)(f)(1) of the Business Income, ISO Form BP00021299);

6. Business Income, Period Two: $804,790.00

(covered under Section A(5)(f)(1) of the Business Income, ISO Form BP00021299);

7. Extended Business Income, Period Three: $2,037,971.00

(covered under Section A(5)(f)(2) of the Business Income, ISO Form BP00021299);

8. Total: $3,046,187.00

ABC is now demanding that on or before July 17, 2011 Scarcity rescind the Claim Denial and pay the Claim in full in the amount of $3,034,554.00. Scarcity’s failure to do so will result in legal action being taken against Scarcity for the amount of the claim, plus attorneys’ fees and such amounts as are allowed by law pursuant to 215 ILCS 5/155 for Scarcity’ vexatious and unreasonable actions in this matter.