February 27, 2017 Articles

Is There Coverage for Time Element Losses Incurred or Ascertained (Arguably) Outside the Period of Recovery?

Courts have split on whether such losses are covered

by Erica J. Dominitz, Dorothea W. Regal, and Ezra S. Gollogly

Time element coverage provisions typically state that the policyholder can recover time element losses incurred during the period of recovery (also known as the period of indemnity, the period of interruption, or the period of restoration), which generally is defined as the period of time necessary to repair or to replace the covered property damage. Many policies also provide for an extended recovery period, which provides time element coverage for an additional period of time to allow the policyholder’s operations to return to pre-loss levels. While this often is a relatively straightforward and non-controversial concept, disputes tend to arise when, due to the nature of the policyholder’s business operations, a physical loss that interrupts the policyholder’s business operations takes place during the recovery period but the directly associated revenue loss is not actually sustained or ascertained until after the recovery period has ended. For example, sometimes there is a substantial lag time between production of a product or a component part of a product and the policyholder’s ultimate sale of or receipt of payment for the product or service it sells to others. In these situations, production losses during the recovery period can result in revenue losses outside of the recovery period. Additionally, for policyholders that sell goods or services through installment contracts, loss or damage during the recovery period can result in a loss of contracts that would have generated revenue during but also beyond the recovery period. Courts addressing these types of claims have split on whether such losses are covered.

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