On March 20, I published this article:
“Business Income Insurance…Does It Cover Coronavirus Shutdowns?”
It explains why I believe that there is likely little or no coverage under the ISO CP 00 30 business income form for business income losses attributed to the COVID-19 pandemic. But let’s say hypothetically that I’m wrong or that a court ultimately decides that there IS coverage.
There are two main sources of business income coverage in the ISO CP 00 30 form. The first primary source arises if YOUR business is shutdown or curtailed by a covered peril due to direct physical loss to property on your premises. For the purposes of this article, we’ll say that the existence of the coronavirus on property at the premises can be proven and that it is deemed to be direct physical loss, triggering the insuring agreement in the form, and that coverage continues because there is no specific exclusion that applies in the CP 10 30 Special Causes Of Loss form.
The second additional source of business income coverage in the ISO CP 00 30 arises from an order of civil authority that prohibits access to the area where your business is located because of property “damage” (not necessarily “direct physical” damage) to neighboring premises within one mile. In the article cited above, I explain why a literal reading of the policy language makes that highly unlikely, but let’s pretend that there is proven property “damage” by viral contamination at neighboring premises AND that’s the reason for the governmental order. In other words, with regard to the rationale for the prohibited access, the order is based on property damage and not on minimizing the opportunity for spreading the virus.
So, now let’s review the CP 00 30 on the basis that there IS coverage. The question is, how much coverage? Is there coverage for the duration of the government mandated shutdown or curtailment? Is there going to be as much coverage as business owners and politicians think? In the CP 00 30, the answer to these questions is almost certainly, “No.” Here’s why.
First of all, “business income” is effectively defined as follows:
Business Income means the:
a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and
b. Continuing normal operating expenses incurred, including payroll.
Many people think that “business income” refers to revenue. Not so. Business income is the sum of the profit and any continuing expenses that likely would have been earned if there was no shutdown or curtailment of operations.
How long does payment for the loss of business income last? Here is the applicable policy language:
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.
The key term in this insuring agreement is the “period of restoration.” This term is defined in the form as follows:
“Period of restoration” means the period of time that:
(1) 72 hours after the time of direct physical loss or damage for Business Income Coverage; or
(2) Immediately after the time of direct physical loss or damage for Extra Expense Coverage;
caused by or resulting from any Covered Cause of Loss at the described premises; and
b. Ends on the earlier of:
(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
(2) The date when business is resumed at a new permanent location.
Note that coverage does not begin for 72 hours and it usually ends when the property could reasonably be “repaired” or remediated. According to the experts, the coronavirus can be cleaned with soap and water or other disinfectants. For most businesses, the viral contamination can probably be cleaned from surfaces easily within 3 days. If so, at that point, there is no longer any “damage” and, thus, no coverage is actually triggered.
It’s possible that it could take more than 3 days to disinfect HVAC systems (or the 72 hours could have been optionally reduced) but, again, according to the experts, it’s believed that the lifespan of the virus is probably no more than 3 days. So, even if the businessowner did nothing, the damage would remediate itself before the business income coverage begins.
If not, we’re still looking at only a few days of coverage for most businesses. The length of the governmental shutdown or curtailment order is immaterial for this primary coverage that is triggered by direct physical loss on the insured premises.
That brings us to the Additional Coverage – Civil Authority in the CP 00 30….
As stated earlier and in my prior article referenced above, I don’t believe a literal reading of the civil authority form language reveals that coverage applies to the COVID-19 pandemic. If you examine this coverage historically, it was introduced for area-wide catastrophes like tornados and hurricanes where government authorities prohibit access to entire neighborhoods and business districts because of damage (e.g., downed power lines) that creates a life safety danger.
That’s why the form language requires that the civil authority prohibits access to the “area” where the damage exists and that such prohibition is the result of the damage itself and not for the purpose of minimizing the transmission of a communicable disease. The coverage is not triggered by orders that prohibit access to specific businesses, but to the general area where those businesses are located. This is simply not the case with the governmental orders we’ve seen so far, even the ones that include a reference to “damage,” most likely at the insistence of an attorney familiar with policy language.
However, let’s once again pretend that the civil authority coverage IS triggered. The coverage that is available is governed by this language in the ISO form:
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.
After the 72-hour waiting period, the business has a maximum period of recovery of “actual loss sustained” of 4 weeks. In earlier editions of this form that may still be used by some insurers or in some non-ISO forms, this time period might only be 2 weeks. There is certainly not coverage for anything beyond that period of time and, in the case of coverage under the primary source of business income coverage for direct physical damage on the insured premises, there is almost certainly far less coverage.
The bottom line is, even if someone can make a far-fetched case for coverage under the ISO form language, there is still very minimal coverage because this is not the type of loss scenario contemplated by this type of coverage.
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Thanks for the great Business Income and Civil Authority coverage analysis of the ISO Commercial Property Policy(CP). As you have instructed over the years, it is important to read the contract carefully and not assume how coverage will apply. Before reading your article, I re-read the ISO Businessowners Policy and concluded that it too mirrors the coverage grant in the CP policy.
It is my impression that this exposure is just too catastrophic and unquantifiable to insure just like the excluded perils of war, nuclear, flood, or earthquake. Will be interesting to see if the feds adopt some type of TRIA solution to this pandemic.
Thanks again for your continued analysis of the Covid related insurance issues.
Thanks, John. This issue is where an historical perspective of business income coverage (and insurance in general) is critical for understanding why most policies don’t cover pandemics. Too many policyholder attorneys and government officials don’t have this knowledge, nor are many of them really, REALLY studying the contract language.
Bill, Are you saying that the policyholder attorneys et al should RTFP?
I know that’s controversial. Some do, but many, especially those whose practice is not limited primarily to insurance cases, just generalize. Generalization, presumption and wishful thinking don’t make a claim covered.
The standard off the shelf form has no coverage. It gets a bit more complicated if you purchased acts of a civil authority. True that endorsement specifically excludes virus and bacteria but that may not be as clear cut as teh wording suggests. The ISO form requires direct damage to covered property to trigger loss of use. Purchasing civil authority adds a new cause of loss and brings coverage as an exception for businesses closed by such acts that have no damage. It is the act that caused the loss. If the business is found to be dirty then there is no coverage but if the business is not contaminated the exclusion in the endorsement may have a bit of ambiguity in that it was the act not the virus that caused the loss. There was no direct connection or direct damage by the virus. May be a reach but I see courts looking favorably on this argument. ISO might have been better served to treat it as an absolute pollution exclusion form instead of Gerry rigging it into acts of civil authority endorsement. They have a very clean looking exclusion on the property forms. I think this will be seriously looked at before we reach the end.