Coronavirus and Commercial Business Shutdown… Covered or Not?
By Irene Morrill, CPCU, CIC, ARM, CRM, LIA, CRIS, CPIW — VP of Technical Affairs
With growing concerns about the COVID-19 coronavirus, agents have been getting coverage questions about business income and business interruption in the case of a local government-mandated areawide shutdown to contain a community spread of the coronavirus.
- One agent was asked by a customer in the tuxedo rental business whether their business income loss would be covered if the virus caused schools to close and therefore there were no proms.
- Another agent was asked about “stay home” mandates, and if businesses couldn’t open, would civil authority or some other type of coverage trigger payment for the business loss of income?
Standard ISO Policies
The following are excerpts from the most recent ISO form editions. The language is fairly consistent over the last few policy edition changes for both the ISO Businessowners Policy (BOP) and Commercial Property (CP) forms.
CP 00 30 Business Income (and Extra Expense) Coverage
We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of such premises.
Businessowners policy BP 00 03
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the "period of restoration". The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of the site at which the described premises are located.
Business Income Coverage Activation
The problem is that the business suspension MUST BE “caused by direct physical loss of or damage to property at the described premises.” In most cases there’s no way of knowing if the virus was “caught in” or “spread from” your client’s business location. Even if it was known to be spread from your client’s location, did your client’s business, contaminated with the coronavirus germs, suffer direct physical loss?
Good question. Numerous court cases involving carbon monoxide and other noxious odors have been litigated across the country debating “direct physical loss.”
That means if the carrier denies the claim, your client has to sue the insurance company and prove to the court that they did suffer “direct physical loss/damage.” That takes time and money.
Remember, direct physical loss needs to be caused by a covered cause of loss.
What Was the Covered Cause of Loss?
Will the carrier invoke the exclusion for “Fungus, Wet Rot, Dry Rot, and Bacteria”? The purpose of this exclusion was to eradicate direct physical loss due to mold, unless it was a result of certain specified causes of loss.
Will the carrier use the following exclusion?
- We will not pay for loss or damage caused by or resulting from any of the following:
- Delay, loss of use or loss of market.
What About Civil Authority Coverage in the BOP Or CP 00 30?
If the Business Income coverage itself can’t be activated, what about the Additional
Coverage, Civil Authority?
The most recent BOP/CP edition language states:
a. 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.
There you are again. Direct physical damage by a covered cause of loss is now required of a neighboring premises. The last couple editions of BOP and CP narrowed down neighboring premises to one (1) mile.
One way or another the sticking point is, “What is direct physical loss?” and “Do we have it?” The general consensus in the insurance industry is… “NO.
More Specific Coverage Is Necessary
Could some companies have provided some kind of special language? Of course, but most probably not for the bulk of your clients. After the E. coli and hepatitis outbreaks in food industry businesses, endorsements were created to alleviate the business loss due to food contamination. ISO created food contamination endorsements for Business Income Coverage and the BOP.
Another organization created “Trade Name Restoration” coverage. Will either of those products work for your clients that have them on their policies?
ISO’s food contamination endorsement requires food contamination and defines the term as:
... an outbreak of food poisoning or food-related illness of one or more persons arising out of:
The coronavirus might spread because a contaminated employee touched food or materials handed to the customer, but did the infected consumer suffer food poisoning or a food-related illness?
I haven’t read the “Trade Name Restoration” coverage policies or endorsements so I can’t speak to coverage. If I were you, I’d call the company and ask.
ISO creates new advisory endorsements to provide BII coverage resulting from coronavirus
I have an article from FCS Insurance discussing new advisory endorsements written by ISO to provide loss of business income coverage resulting from the coronavirus.
ISO is NOT filing them on a national basis. They wrote them should specific carriers want to file and use them. ISO’s website also mentions that they have done this. The two endorsements were NOT provided form numbers, since ISO is NOT “generically” filing them. The FCS article describes these endorsements as:
- Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus and
- Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus (Including Orders Restricting Some Modes of Public Transportation). Neither form is numbered.
The following article from PropertyCasualty360.com has additional information: Coronavirus Spurs ISO to Provide Business Interruption Endorsement
You might want to contact your carrier and ask if they have any intentions of filing these endorsements and what the premium would be. At least you will have tried to find coverage.
Without specific coverage endorsements I expect insurance carriers using the standard ISO Business Income or Businessowners policies will deny the claim. Your insured can then decide if suing the company to determine whether they suffered a covered direct physical loss is worth the cost and battle.
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