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Law firms, like other businesses, need insurance. The potential for personal and professional damage that could be caused by a legal malpractice or employment claim has caused most law firms to pay particular attention to their liability insurance programs related to their errors and omissions and employment practices. In the wake of the terrorist attacks of Sept. 11, 2001, and recent natural disasters such as power outages and weather-related interruptions, this is a good time to take a second look at property insurance. Not because property insurance replaces lost buildings and equipment, but because it also typically replaces lost profits — something vitally important to any service-sector business. Property insurance is one of the oldest, and perhaps least understood, forms of insurance. Originally designed to cover merchants who needed a way to replace ships captured at sea by pirates, this basic product also met the needs of an ever-expanding manufacturing-based economy during the Industrial Revolution. Even in those early days, policyholders wanted more from their property insurance than just to replace a lost factory. They also wanted to replace lost profits resulting from a disaster. Business interruption insurance was designed to fill this void and was often attached as an add-on to the standard property insurance form. Used in the context for which it was designed, property insurance, with its business interruption component, can indeed make a manufacturing business whole. While the business of law is not identical to manufacturing, there are enough similarities to allow insurers to sell products designed for manufacturers to law firms. In a law firm, like a typical manufacturing enterprise, there are finished products, parts and equipment used to manufacture that finished product. Of course, the end products at law firms are often ideas and papers containing these ideas instead of widgets. And the parts that go into making the products sold are legal research and ideas, not tangible nuts and bolts. Law firms do own equipment, mainly machines that help lawyers perform, such as computers, servers, printers, fax machines and communications equipment, along with furniture and perhaps lease improvements. Yet, unlike manufacturing, these pieces of property do not make up the core of the enterprise in the sense that factories do. In the law firm setting, the traditional property insurance portion of this coverage may work to replace lost or damaged items, but the business interruption portion does not function as seamlessly with respect to lost profits. What lawyers need most is protection of their future revenue stream. Unfortunately, obtaining that level of coverage from a manufacturing-based insurance product is a bit like cramming a square peg into a round hole. The peg may eventually go into the hole, if forced, but the fit is never ideal. And making it fit takes some finesse, both before the loss and after. If a law firm intends to protect its future profits, it needs to do a lot more than just agree to the basic business interruption form, which could offer little protection. Look for and consider purchasing a number of nontraditional add-ons or enhancements to the standard package. In designing a program, first look to what type of property is covered. Because the value of a law firm is more than just its hard assets, replacement-cost coverage should be explicitly provided in the property damage portion of the policy for other, less tangible things, such as computer data, accounting records, written and printed documents, accounts receivable, and loss of use of data processing systems. When purchasing a policy, also pay particular attention to the scope and type of a number of additional business interruption coverages, which were added over the years in an effort to fill gaps potentially created in standard coverage provisions. These include: • Contingent business interruption coverage, which can cover lost profits caused by the loss of a client’s or supplier’s property. • Extra expense coverage, which covers out-of-pocket relocation and emergency expenses. • Contingent extra expense coverage, which can cover emergency expenditures incurred to address the loss of property of firm clients and suppliers. • Utility services coverage, which can cover business interruption losses caused by loss of power or communication services. • Prevention of ingress/egress coverage, which can cover business interruption losses caused by the inability to enter the work premises. • Civil authority coverage, which can cover business interruption caused by governmental intervention, such as the closing of an area of a city following a disaster. There are two areas of caution with respect to these extra provisions. First, the fact that a policy contains a given provision may not be enough. Coverage provided under these provisions varies greatly, and actual language needs to be reviewed in detail to determine what coverage, if any, is being offered. Second, each of these separate provisions may be subject to separate limits, and often the limits are set so low that they render the extra coverage essentially useless. Both limits and language are negotiable, but negotiation may require input from firm lawyers knowledgeable of coverage issues. Also, pay special attention to how the policy treats the period in which business interruption coverage is afforded. A standard policy may cover only lost profits during the time period in which property is unusable or in need of repair. Business interruption losses, however, may continue long after the damaged property has been replaced — for example, if the disaster caused the loss of a key client. “Extended income” provisions address this situation, offering coverage that continues for a specified time period after operations have been physically restored. Extended income coverage can vary from a number of days to a number of years, depending on the scope of coverage purchased. In the event of a loss, immediately investigate coverage afforded under your policy and the amount of losses incurred. If the decision is made to make a claim, the policy likely provides specific deadlines for providing notice of the claim, providing a notarized proof of loss, setting forth the total amount of the loss and filing suit. Because some courts honor these deadlines in the property insurance context, do not assume that an insurer has to prove prejudice in order to escape its coverage obligations, as is often the case with other types of insurance. In addition, because property and business interruption policies were designed to cover risks very different from those faced by service-sector companies, it is not uncommon for law firms to face problems in the adjustment of claims. Although coverage should be provided for whatever it takes to make a firm whole, that is not always the way claims are processed. Adjusters, intimately familiar with the adjustment of claims in the manufacturing sector, may apply manufacturing-sector logic to the processing of claims in the service sector. It is not uncommon to have an adjuster question the claim by stating: • Nothing tangible was physically destroyed, so there is no covered loss. • The whole economy was impacted by the disaster, and your losses resulted from that rather than from anything covered under the policy. • Your lawyers could have worked from home, so there should not be any claim for lost profits. In the end, these types of comments should not affect the actual coverage afforded. But they can, and often do, deflate expectations. Another way that expectations are deflated is for the insurer to hire an accountant who will likely value the loss at an amount drastically lower than the amount the firm has calculated. Successful resolution of a claim requires stamina, persistence and skill. Insurers should be reminded of policy language and cases interpreting that language, which is generally quite favorable to policyholders. Policyholders, in turn, should provide all reasonably necessary information in a timely manner. Policyholders may obtain a quick resolution of the loss of hard assets. But the resolution of covered lost profits will likely take considerably longer and prove much more difficult, especially if the firm expects to be made whole for its entire loss. Unfortunately, there is no easy solution for this business insurance problem. Professional services with business interruption claims will continue to struggle with adjustment issues until a new insurance product is designed, from the ground up, specifically to address service-sector businesses on their own terms. And this will require more than just changing the name of a policy to address its target industry. Until then, the process of negotiating coverage and the process of filing a claim both require considerable thought and effort. Mark E. Miller, a partner in the Washington, D.C., office of Greenberg Traurig, represents policyholders in a wide variety of insurance coverage disputes and insurance-related negotiations.

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