There is a belief that business closure orders by civil authorities trigger Civil Authority coverage in business income insurance policies if they allege property damage of some kind. This is a misconception that is typical of generalizations about insurance contracts that come from the failure to actually read the policy language.
For example, most of the local and state governmental orders I’ve seen reference property damage as a basis for mandatory business closures or operational changes. Here is one of the eighteen “WHEREAS’s” in the City of Key West State of Local Emergency Directive 2020-03:
“WHEREAS, this order is given because of the propensity of the virus to spread person to person and because the virus physically is causing property damage due to its proclivity to attach to surfaces for prolonged periods of time;”
Dust has a proclivity to attach to surfaces, but does that result in “property damage” if I can remove it with a cloth? If I don’t vacuum my home for a month, have the floors been damaged? Admittedly, a virus can be more problematic than dust for most people, but does it actually cause damage by temporarily residing on the surface of property? These questions were addressed by the first and second articles I wrote about the COVID-19 pandemic. Yes, there is a temporary impairment of the use of the property, but almost certainly no direct physical damage and likely no real damage at all.
In addition, if we’re being honest about these government-mandated business interruptions, we would admit that their purpose is to prevent or minimize the spread of disease from one person to another. Surface contamination is simply one means of this occurring. These orders really aren’t issued to prevent or minimize property damage because, realistically, there is no real property damage.
So, why do these orders include the “property damage” references? Legal gamesmanship. Well-intentioned perhaps, but an attempt to impact insurance coverage based on a generalized comprehension of what is and isn’t covered under many, if not most, business income insurance forms. For example, following up on the Key West directive above, consider this excerpt from a local publication citing attorney Darren Horan:
“Both types of coverage – and people can have one, both or neither – but they both require physical damage to the property, which is why it was so important for the city to include specific language in its emergency declaration stating that the virus causes physical property damage. That can only help business owners with these types of coverage. Of course, it’s always a fight when dealing with insurance companies, but I’m glad Commissioner Clayton Lopez was at the meeting when I mentioned this needed language and brought it back to City Attorney Shawn Smith for inclusion in the city directive.”
Based on this narrative, the inclusion of a reference to property damage in the directive was for the purpose of triggering insurance coverage, not because of any real or perceived property damage. In fact, there was no citation of any actual property damage at all. If anything, such orders are issued to PREVENT “property damage,” something that does little or nothing to actually trigger most business income coverage forms. For example, take this language from the Civil Authority Additional Coverage in the ISO CP 00 30 10 12 business income form:
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;
Let’s parse this language phrase by phrase to illustrate why simply placing a “property damage” statement in a civil authority directive is almost certainly insufficient to trigger coverage.
“causes damage to property other than property at the described premises”
There is no allegation of any real, existing damage to any property. The policy language indicates that the viral contamination (IF a covered peril) must have actually caused damage to property. Directives like this are preventative, not remedial.
“that prohibits access to the described premises”
Nothing in this directive actually prohibits access to any premises. The directive prohibits conducting business as usual with the public. It does not forbid, for example, a property owner from physically accessing his building or business. In fact, for many businesses, they can continue operating in a modified way, such as a restaurant providing carryout or delivery of food. In situations like that, certainly the employees have access to the premises.
“Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage”
There are three points to make about this last policy language excerpt:
First, there is no identification of any “damaged property.” Again, the directive is largely preventative.
Second, the directive doesn’t appear to prohibit access to the area. A business may be closed entirely to the public, but that doesn’t mean someone can’t walk or drive down the street immediately adjacent to the business. The reason for this reference to the surrounding area in the policy language is to express the intent of the coverage which is, for example, when a hurricane or tornado impacts a neighborhood or business district, with extensive debris, downed power lines, etc. access is limited only to necessary emergency personnel. This coverage was never intended for an exposure like a viral pandemic that largely impacts individual facilities and not widespread areas.
Third, IF there was a prohibition against accessing the immediate area, it would have to be “as a result of the damage.” What damage? No actual damage is cited or known, much less proven, to exist.
The reason the “property damage” directive language doesn’t accomplish, in this example, what the attorney thought it did is because the basis for the language was a generalization of coverage and not what the cited policy language actually says. Unfortunately, the media, government officials, politicians and others pick up only on the generalization and not the actual contract language.
Game over.
Bill Wilson
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Bill, my theory has always been if we had 10% fewer attorneys and 10% more engineers, we would enhance the quality of life by 20%. It’s just a math problem of too much and too little of a species in our ecosystem.
David, funny you should say that…I have a BS degree in engineering. Thanks!
And, since you mentioned “math,” check out this very cool web site that has nothing to do with COVID-19:
https://www.wolframalpha.com/
I would like to see the civil authority endorsement in it;s entirety. The action of the civil authority adds to the perils insured against subject to policy terms and conditions. The act then constitutes direct loss to the property. It is my understanding ISO has added some exclusionary wording that eliminates coverage for direct loss at the premises due to acts of civil authority if bacteria or virus are present. It is my understanding it is silent on those premises closed by such acts do not contain the virus. It is also my opinion this triggers coverage because the act if the damage and no virus is present.
An example of loss by another peril may suffice. When a hurricane approaches the civil authorities often act and close all businesses as part of an evacuation. This act constitutes coverage whether the premises is damaged or not. Remember the insurer wrote the policy and any ambiguity escheats to the insured. I will not even go into a public policy argument.
Game on not over.
It’s not an endorsement in the ISO CP 00 30, it’s an “Additional Coverage” that stands on its own. On the issue of government ordered evacuations, there is usually no coverage for that because there has been no actual damage at the premises yet, nor for civil authority coverage, within 1 mile.
The correct link for the City of Key West directive is https://www.cityofkeywest-fl.gov/egov/documents/1584822002_20507.pdf
Paul, thanks…I didn’t realize I had linked to an extension.
Hi Bill thanks for your recent reason. Response I appreciate it the key to your response is the phrase additional coverage additional coverage includes making the act of the Civil Authority a covered cause of loss under business income it no longer is restricted to damage to your property if access to your property or your business is interrupted and there’s court cases Galore the confirm this are stop by actions of a civil Authority and you have business income coverage under these circumstances you have coverage.
if you have the virus or bacteria at your premises the form excludes coverage it does not do so if you are under an act of civil Authority and have no damage to your premises caused by virus or bacteria therein lies the problem for the industry going forward on the claims that our arise out this red virus