Author: Chris Boggs
Before any insurance policy responds to a claim, the loss must first meet all the requirements of the insuring agreement. The insuring agreement is the broadest the coverage will ever be. If the loss is excluded by the insuring agreement, there is no coverage.
The Business Income insuring agreement reads: 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.
Suspension must be caused by direct physical loss of or damage to property. Direct property damage is required. Damage is generally defined and understood to mean “a distinct, demonstrable, and physical alteration" of a property's structure. A virus cannot cause such damage.
There must be a covered cause of loss. There are two exclusions that disqualify a virus as a covered cause of loss. One is within the policy and the other is found in a mandatory endorsement.
- ISO's business income policy excludes: Discharge, dispersal, seepage, migration, release or escape of "pollutants…."
- A “pollutant" is defined to mean: “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste"
- Contaminant is not a defined term, but it is a biological term of art defined as “a contamination of food or environment with microorganisms such as bacteria, VIRUSES, fungi or parasites."
- A virus is an excluded cause of loss.
- CP 01 40 – Exclusion of Loss Due to Virus or Bacteria endorsement is attached to the policy.
- Introduced by ISO in 2006 as a mandatory endorsement.
- ISO introduced this endorsement to negate “efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent."
- When attached, there is no question coverage is excluded.
Coverage applies only during the Period of Restoration: The business income policy pays during the Period of Restoration, this is the period that the business is shut down and unable to operate due to a covered cause of loss.
- Because there is no property damage as understood by the courts; and because the presence of a virus is excluded, the insured never reaches the period of restoration. However, assume the courts decide the opposite.
- To trigger the Period of Restoration, the courts must decide:
- The presence of a virus does cause direct physical loss or damage; and
- Neither the pollution exclusion nor the CO 01 40 excluded the loss.
- The period of restoration most often begins 72 hours after the business-closing loss (this time period can be endorsed down).
- A University of Alabama study published in the New England Journal of Medicine stated that the maximum amount of time the virus can live on certain surfaces is up to three days – which is 72 hours. The period of restoration does not begin for 72 hours in the unendorsed Business Income form. By the time the POR begins, the virus is no longer causing property damage.
- What about recontamination? That is a new loss and begins a new suspension of operations triggering a new POR.
Result: NO Business Income coverage for COVID-19!
There is one exclusion in all Cause of Loss forms few are discussing. The concurrent causation section specifically excludes governmental actions, including business closures:
- We will not pay for loss or damage caused by or resulting from any of the following: Acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body.
Government shutdowns are specifically excluded. Any discussion of Civil Authority coverage begins with this exclusion.
Civil authority coverage is granted only because of the “Additional Coverage – Civil Authority." This is important to understand because when coverage is given as an exception or in direct response to an exclusion, the carrier gets to control the breadth of coverage granted.
The additional coverage granted by the Civil Authority provision contains three requirements also found in the business income coverage:
- There must be physical damage to property;
- Damage must be caused by a covered cause of loss; and
- Coverage begins 72 hours after the order of the Civil Authority
But Civil Authority is subject to a few unique requirements or rather limitations:
- The damage occurs at premises other than the insured's premises;
- The damage must be within one mile of the insured's premises (unless altered by CP 15 32 Civil Authority Changes – the distance is up to the carrier); and
- Coverage is provided for up to four weeks (unless changed by the CP 15 32 – up to 180 days).
If all the above Civil Authority conditions are met, other coverage triggers still preclude coverage for COVID-19 losses:
- The actions of the civil authority prohibit access to the insured premises. Access to the insured's premises is NOT necessarily prohibited; these are shelter-in-place orders with exceptions;
- Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage. Access to the area is NOT prohibited, people are still in the area – especially if there are “essential" businesses in operation. And if the insured is an “essential" business (like a restaurant), people can still come, they just can't stay. There is no preclusion or prohibition of people in or to the area.
- The action of civil authority is taken in response to dangerous physical conditions…. These aren't dangerous physical conditions, at best (or worst, if you like) these are dangerous biological conditions.
Result: NO Civil Authority coverage.
Last Updated: April 13, 2020