MICHAEL R. DOMINGUEZ—While insurance may seem mundane to the layperson, it serves as a critical mechanism through which businesses operate, allocate risk, and manage liability. During my first summer internship at an international insurance defense firm, I was tasked with answering a deceptively simple question: if an apartment building suffers a covered loss to one unit or amenity, but a second unit remains undamaged, can the insured recover under the policy for losses associated with both spaces?
This question implicates business interruption insurance, a subcategory of time-element coverage designed to compensate insureds for lost income when disaster strikes. After a fire, hurricane, or other covered event, these policies provide coverage for lost income during the repair period. In recent years, business interruption coverage has been heavily litigated, particularly during the COVID-19 pandemic, where courts grappled with whether viral contamination and government-mandated shutdowns constituted “direct physical loss or damage.” The issue remains especially salient in light of the recent onset of the war in Iran.
This post, however, focuses on a narrower but recurring issue: what happens when only one part of a business suffers physical damage while another part remains intact? This question often arises when a single business operates in multiple units or buildings under the same insurance policy. If one location is damaged and operations decline at another undamaged location, policyholders may attempt to recover lost income for both spaces. Federal courts in Florida, however, have taken a notably narrow view of business interruption coverage in this context.
Courts begin, as they do with any contract, by looking to the policy language. Insurance policies are contracts, and their terms govern the scope of coverage. If a policy defines separate premises collectively as an “insured location,” courts will generally honor that designation as reflecting the parties’ intent.,, Likewise, if the policy expressly extends coverage to adjacent, undamaged areas, courts will enforce that language as written.
But what happens when the policy is less clear? In such cases, the burden falls on the plaintiff to establish entitlement to business interruption coverage. The Eleventh Circuit has reiterated that, to recover such losses, a plaintiff must show that (1) covered property sustained direct physical loss or damage; (2) the loss resulted from a covered cause; (3) the insured’s operations were necessarily suspended; (4) that suspension was caused by the covered damage; (5) the insured suffered an actual loss of business income during the period of restoration; and (6) that loss of income resulted from the suspension of operations. At its core, business interruption coverage is triggered by an inability to use the premises where the damage occurs.
Consistent with this framework, the Eleventh Circuit held in Ramada Inn Ramogreen, Inc. v. Travelers Indemnity Co. of America that a mere diminution in business at one location caused by damage to another does not constitute a covered interruption. Courts have rejected attempts to recover for undamaged portions of a business, even where those portions suffer reduced demand as a result of damage elsewhere. Texas courts have taken a similar approach, declining to extend coverage where damage to one structure merely diminishes the value or occupancy of others, absent a true suspension of operations in those undamaged premises. In short, operation of the undamaged premises must cease.
There is, however, a limited exception. The Eleventh Circuit has recognized that business income coverage may extend to an undamaged section when it is mutually dependent on the damaged portion for its operation and use. This concept, known as mutual dependency, applies where the functionality of one part of a business is so intertwined with another that damage to one effectively halts operations in both. Not all jurisdictions have embraced this doctrine, however. Texas, for example, has been less receptive to such arguments.
A classic illustration of mutual dependency appears in Studley Box & Lumber Co. v. National Fire Insurance Co., where a fire burned the insured’s horses that were essential to operating a lumber plant. Because the business could not function without them, the New Hampshire Supreme Court held that the insurer was liable under the policy. The loss of the horses, though not damage to the plant itself, rendered the entire operation inoperable.
Ultimately, whether business interruption coverage extends to undamaged property depends on both the policy language and the relationship between the damaged and undamaged portions of the business. Courts, particularly in Florida, have been reluctant to broaden coverage beyond the site of physical damage, emphasizing the requirement of actual suspension of operations. While doctrines like mutual dependency offer a potential pathway to recovery, they remain limited and jurisdiction-specific. For insured persons/entities, the lesson is clear: careful drafting and a precise understanding of coverage provisions are essential. Without direct damage or a compelling showing of operational interdependence, claims for losses tied to undamaged property are unlikely to succeed.
