Determining Business Interruption Claims

The Question: Will my business income coverage apply to losses sustained during the coronavirus crisis?

Short answer: Probably not. The reality is that most businesses will not be covered for losses attributable to COVID-19, unless state and federal authorities enact shutdowns that enable an insurance claim under allowable Acts of Civil Authority.

Here’s why: Business income and contingent business income are the primary insurance coverages designed to replace lost revenue when an external event causes a disruption to business operations. But there’s a caveat: the external event must cause “direct physical loss or damage.”  As damaging as coronavirus is to people, it does not damage property. Some will argue that it corrupts property, as researchers have confirmed the virus can live for up to two weeks on certain surfaces. But the vast majority of business income policies also carry an exclusion for viral and bacterial pathogens, making coverage unlikely, though not impossible.

Sentinel’s Response: The COVID-19 crisis is historic and unprecedented. This still-unfolding crisis will undoubtedly change the way risk is managed and insurance is written going forward.  For now, work closely with your Sentinel advisor. Review and assess each policy in your insurance program—from policy terms and limits, to the unique underwriting language used by each carrier. Don’t assume a business loss will not be covered by insurance, but rather, track losses and expenses with the expectation that a claim will be filed.

Sentinel recommends that you save all related documentation that might support your claim of business loss. Even if your current policy language is clear, we believe that it will be tested over time given the nature and scope of this pandemic.  Further, we believe there will be some form of governmental intervention or that some relief may be offered in the coming months.  

Business Income: A Closer Look at Underwriting

Any claim scenario follows a logical path. That path starts with a question. Is the proximate cause of the loss created by a covered peril?

We start from the position that all losses are covered unless they are specially excluded. To that end, we will now outline the exclusions that seemingly apply from two policy perspectives:

• Business Owner’s Policy (BOP)
• Commercial Policy

The exclusions that we detail are standard ISO exclusion that will apply to virtually all property policies.

BOP (ISO Form C003)

Virus Or Bacteria

(1) Any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.

(2) However, the exclusion in Paragraph (1) does not apply to loss or damage caused by or resulting from “fungi,” wet rot or dry rot. Such loss or damage is addressed in Exclusion i.

(3) With respect to any loss or damage subject to the exclusion in Paragraph (1), such exclusion supersedes any exclusion relating to “pollutants”.

Commercial Policy  (CP 01 40 07 06)

EXCLUSION OF LOSS DUE TO VIRUS OR BACTERIA

CP 01 40 07 06

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.

This endorsement modifies insurance provided under the following:

COMMERCIAL PROPERTY COVERAGE PART

STANDARD PROPERTY POLICY

1. The exclusion set forth in Paragraph B. applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.
2. We will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.

However, this exclusion does not apply to loss or damage caused by or resulting from “fungus”, wet rot or dry rot. Such loss or damage is addressed in a separate exclusion in this Coverage Part or Policy.

1. With respect to any loss or damage subject to the exclusion in Paragraph B., such exclusion supersedes any exclusion relating to “pollutants”.
2. The following provisions in this Coverage Part or Policy are hereby amended to remove reference to bacteria:
3. Exclusion of “Fungus”, Wet Rot, Dry Rot And Bacteria; and
4. Additional Coverage — Limited Coverage for “Fungus”, Wet Rot, Dry Rot And Bacteria, including any endorsement increasing the scope or amount of coverage.
5. The terms of the exclusion in Paragraph B., or the inapplicability of this exclusion to a particular loss, do not serve to create coverage for any loss that would otherwise be excluded under this Coverage Part or Policy.

The exclusions are intended to remove coverage for incidents relating to illness caused by a virus which would seemingly apply to Corvid 19 pandemic.   We believe that carriers will point specifically to this exclusion as it relates to business income and its corresponding coverage extension.

The second area that is being evaluated is losses relating to “Civil Authority” as the governor has imposed restrictions that relate specifically to the Corvid 19 pandemic.

BOP  (CP 003)

Civil Authority

When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:

1. Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage and the described premises are within that area but are not more than five miles from the damaged property; and
2. The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.  For Business Income, this Additional Coverage will begin immediately after the time of the first action of civil authority that prohibits access to the described premises, unless one of the optional waiting period endorsements is attached to this policy and will apply for a period of up to 30 consecutive days from the date on which such coverage begins.

For extra expense, this Additional Coverage will begin immediately after the time of the first action of civil authority that prohibits access to the described premises and will end:

1. Four consecutive weeks after the date of that action; or
2. When your Civil Authority Coverage for Business Income ends; whichever is later.

Commercial Policy CP 15 32 06 07

Civil Authority

In this Additional Coverage, Civil Authority, the described premises are premises to which this Coverage Form applies, as shown in the Declarations.

When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:

(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and

(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken

to enable a civil authority to have unimpeded access to the damaged property. Civil Authority Coverage for Business Income will begin 72 hours after the time of the first action of civil authority that prohibits access to the described premises and will apply for a period of up to four consecutive weeks from the date on which such coverage began.

Civil Authority Coverage for Extra Expense will begin immediately after the time of the first action of civil authority that prohibits access to the described premises and will end:

(1) Four consecutive weeks after the date of that action; or

(2) When your Civil Authority Coverage for Business Income ends; whichever is later. 

Coverage Period

Under the Additional Coverage — Civil Authority, the four-week coverage period is replaced by the number of days indicated in Part A of the Schedule, subject to all other provisions of that Additional Coverage. If there is no entry in Part A of the Schedule, the four-week coverage period continues to apply, subject to all other provisions of the Additional Coverage — Civil Authority.

Radius

The Additional Coverage — Civil Authority includes a requirement that the described premises are not more than one mile from the damaged property. Such one-mile radius is replaced by the number of miles indicated in Part B of the Schedule, subject to all other provisions of that Additional Coverage. If there is no entry in Part B of the Schedule, the one-mile radius continues to apply, subject to all other provisions of the Additional Coverage — Civil Authority.

The coverage provided under this endorsement does not increase the applicable Limit of Insurance.

As you can see from the policy language that there is a 4-week minimum period of coverage or a specified number of days that relate to civil authority outage subject to a covered cause of loss which leads us back to the exclusions detailed relating to the virus and bacteria exclusions referenced above.