In a recent landmark case, Arizona Beverages USA LLC emerged victorious in a lawsuit against a Hanover Insurance Group unit. The dispute centered around coverage for business interruption caused by a computer breakdown. This case has set a precedent, providing clarity on what constitutes extra expenses incurred by insureds to avoid or reduce business interruption.
The Incident and Its Aftermath
In October 2017, Arizona Beverages experienced a power surge at its corporate headquarters, causing a catastrophic failure of its account operating system. Despite regaining software functionality for its present period operations in January 2018, the company was unable to recover its 2016 and 2017 data and functions. This included crucial data used by its auditor to complete its annual audit.
The Audit and the Dispute
Under an agreement with JP Morgan Chase N.A., Arizona Beverages was required to undertake an independent audit each year. The computer failure led to an additional 2200 hours of work to complete the audit, resulting in extra audit expenses totaling $552,573.25. Arizona Beverages sought reimbursement under the “extra expense provisions” of its Hanover policy. While Hanover reimbursed the company $250,000, the sublimit for data restoration under its policy, it refused to reimburse the company for its audit expenses. This led to Arizona Beverages suing Hanover for breach of contract.
The Court’s Ruling
The court had to determine whether the company’s annual audit was part of its usual business operations and if the audit expenses were incurred during the “restoration period,” as required for coverage. The court ruled in favor of Arizona Beverages on both counts, stating that the audit expenses were part of the company’s “usual business operations” and were incurred within the restoration period.
Impact on Business Interruption Insurance Costs and Considerations for Small Businesses
The Arizona Beverages case could potentially influence business interruption insurance costs. Insurance companies may reassess their risk models and pricing in light of this ruling, which could lead to increased premiums, particularly for businesses in sectors vulnerable to similar types of disruption.
For small businesses seeking a new business interruption insurance policy or renewing an existing one, there are several key points to consider:
- Understanding the Policy: It’s crucial to fully understand what the policy covers. This includes the definition of business interruption, the period of indemnity, and any sub-limits that may apply.
- Assessing Risks: Businesses should conduct a thorough risk assessment to identify potential sources of business interruption and ensure they are adequately covered. This could include everything from natural disasters to cyber-attacks or equipment failure.
- Extra Expense Coverage: The Arizona Beverages case highlights the importance of extra expense coverage, which covers the additional costs a business incurs to minimize the impact of a business interruption and expedite the return to normal operations.
- Professional Advice: Given the complexities of business interruption insurance, it may be beneficial to seek professional advice. An insurance broker or legal professional can provide guidance tailored to the specific needs and risks of the business.
- Regular Policy Review: Business interruption risks can change over time, so it’s important to review policies regularly to ensure they remain adequate. This is particularly true for businesses that are growing or evolving rapidly.
In conclusion, while business interruption insurance is a critical safety net for many businesses, it’s essential to understand the specifics of the policy and to ensure it aligns with the unique risks and needs of the business.
Conclusion
The court’s decision in favor of Arizona Beverages has set a clearer standard in New York concerning what constitutes extra expenses incurred by insureds to avoid or reduce business interruption. This case serves as a reminder for businesses to thoroughly understand the terms of their business interruption insurance policies and the potential for disputes over coverage. It also underscores the importance of having robust systems in place to protect against data loss and the resulting business interruption.
