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How Does the Business Income Policy Respond to a Concurrent Covered Loss?

Author: Chris Boggs

An agent posed to me this question: Several of my clients' have suffered damage as a result of the riots in the area. However, prior to the riots they were already closed as a result of state-wide COVID-19 closures. How will the business income policy respond? Will loss payment be affected by the previous closure order?

My answer is unfortunately, yes, the business income payment IS affected by the COVID-19 closures. When and if business income coverage is written using Insurance Services Office (ISO) or language similar to the CP 00 30 10 12 - Business Income Coverage Form-With Extra Expense or CP 00 32 10 12 - Business Income Coverage Form-Without Extra Expense, the same methodology for determining business income loss payments is applied. These and similar business income forms determine the amount of loss as follows:

3. Loss Determination

a. The amount of Business Income loss will be determined based on:

(1) The Net Income of the business before the direct physical loss or damage occurred;

(2) The likely Net Income of the business if no physical loss or damage had occurred, but not including any Net Income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses;

(3) The operating expenses, including payroll expenses, necessary to resume "operations" with the same quality of service that existed just before the direct physical loss or damage; and

(4) Other relevant sources of information, including:

(a) Your financial records and accounting procedures;

(b) Bills, invoices and other vouchers; and

(c) Deeds, liens or contracts.

Paragraph 3.a.(2) is the key in both ISO's business income policies. Both apply the LIKELY Net Income to determine the amount of business income loss. If the business was considered “non-essential" and was thus closed as a result of the state's COVID-19 orders, the likely Net Income is zero. No dollars were being earned.

Looking at the real scenario addressed in the question, the operation was forced by governmental decree to close for a specified time; obviously, the business is losing revenue during the government shutdown but there is no coverage for the loss of income. As if that's not problematic enough, let's add damage caused by rioters and looters.  

How will the required shutdown affect loss settlement?

As per policy wording, the loss is adjusted based on “The likely net income" had no loss occurred. The “likely net income" during the government decreed shut down is zero. Because the “likely net income" is zero during the government-forced shutdown, the insured did not suffer and is thus not due any business income payment. The unrealized revenue results from an excluded cause of loss. The proximate cause of the lost revenue is the government shutdown not the damage caused by the rioters.  

Efficient proximate cause is the basis of business income claim payments. If the efficient proximate cause of lost revenue is a covered cause of loss, the lost revenue is covered. If the efficient proximate cause is an excluded cause of loss, there is no coverage for the lost revenue. If an excluded cause and a covered loss “cross over," the excluded cause takes precedence. Concurrent causation wording in the special cause of loss form excludes loss for acts or decisions of a governmental body. There is no coverage during the governmental shutdown period. 

But there is a “however." However, if the period required to repair the damage caused by the rioters extends beyond the time of the government-mandated shutdown, the loss of revenue during the additional time period IS covered by the business income policy.

Last Updated:  June 17, 2020

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