Author: Chris Boggs
During the first few weeks of the COVID crisis, the VU received countless questions concerning COVID-19 (the coronavirus) and the business income policy. As authorities required businesses to limit activities or shut down completely, the fear and reality of the loss of income loomed large.
Insureds called their agents to ask about business income coverage and agents called us. Attorneys began trolling for clients who had suffered income loss due to the forced shut down. The pandemic panic made business income a major topic. It's still a primary topic of conversation within the insurance industry, the courts and regulatory buildings across the country.
Should the business income policy cover the loss of income resulting from business closure or slow down as a result of the coronavirus?
I'm sorry to tell you up front, but the short and simple answer is, no, the business income policy was not desinged to provide coverage for this type of situation. The longer answer is a bit more complicated, even though the ultimate answer is the same – no coverage.
In this short piece explaining why the business income policy was not designed to provide coverage, three business income coverages are reviewed:
- The business income coverage itself;
- The additional coverage for civil authority; and
- Dependent property coverage.
Let's begin with the insuring agreement from the business income coverage. The form 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.
Within this insuring agreement, there are three key coverage triggers to consider, “suspension of…operations," “direct physical loss or damage" and “covered cause of loss." Let's review each trigger.
Suspension of operations. Given the local, state or federal requirements, this condition may apply as the business may be shut down by a regulatory authority. At the height of the pandemic panic all but five states enacted stay-home orders and orders closing restaurants, bars and operations consdiered "non-essential." The longer-term debate may be the necessity of these actions, but government made it necessary, so, this requirement is met.
Direct physical loss or damage: This was the first question that created a problem for whether coverage exists. Does or can a virus cause physical damage?
Physical or property damage as understood and applied in the courts requires physical harm generally evidenced by changes in the physical characteristics that require repair.
Consider an invisible virus on any property or even in the property, does the presence of a virus on a surface or in the air change the physical characteristics such that repair is required? Given the everyday application and meaning of those terms, no, the virus does not result in property damage.
So, there is no property damage as required by the form, and without property damage, business income coverage does not respond.
Covered Cause of Loss: Even if the presence of a virus can be “forced" by the courts to be considered property damage; is the mere presence of the virus a covered cause of loss? This is a longer discussion than the other two triggers discussed above; let's detail this trigger.
Is a Virus a Covered Cause of Loss
Is the presence of the virus a covered cause of loss? Of course, whether it's a covered cause of loss or not matters only if presence of the virus can cause property damage according to the courts. Courts are beginning to weigh in on this topic.
There is a specific exclusion within the policy that may apply in addition to a mandatory exclusionary endorsement. Let's look at both exclusions.
Within ISO's business income policy written on a special cause of loss form, the following is excluded:
l. Discharge, dispersal, seepage, migration, release or escape of "pollutants" unless the discharge, dispersal, seepage, migration, release or escape is itself caused by any of the "specified causes of loss".
A “pollutant" is defined in the form to mean: “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." A contaminate, particularly a biological “contaminant," is defined as a contamination of food or environment with microorganisms such as bacteria, VIRUSES, fungi or parasites.
Based on the policy wording and the applicable meaning of “contaminant," the unendorsed policy excludes coverage for the presence of a virus via the pollution exclusion. But even this isn't going to stop some attorneys from grasping at straws and any possibility of coverage. On March 16, the first business income suit was filed in Louisiana (Cajun Conti, LLC et al DBA Oceana Grill v. Certain Underwriters at Lloyd's (and others including the governor and state)).
But even if the virus is considered property damage AND the pollution exclusion is ignored, how long will the “damage" be present?
- The surface can be disinfected in one day.
- If not taken care of and disinfected by the owner – according to recent scientific research, the virus can live for only a short time:
- Up to four hours in the air depending on the consistency (mist vs. droplets); and
- One to three days on surfaces – depending on the surface
Most Business Income policies have a 72-hour “deductible" or waiting period; so unless the waiting period has been reduced by endorsement (CP 15 56), there won't be qualifying property damage after a maximum of three days for there to be a qualifying loss. But what about recontamination? Every new contamination is a new event and a new waiting period begins.
If the pollution exclusion is ignored, there is a mandatory endorsement attached to ISO property policies that removes all doubts, the CP 01 40. ISO Released the CP 01 40-Exclusion of Loss Due to Virus or Bacteria in 2006 as a mandatory endorsement to specifically exclude loss resulting from a Virus or bacteria.
ISO stated in the initial filing that the presence of viruses was NEVER intended to be covered due to the pollution exclusion, but they anticipated that some would torture the policy. The CP 01 40 was introduced to negate “efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent." (ISO wording in the release.)
Business Income Result
So, what's the result? There is no business income coverage.
- There is no property damage – thus there is no coverage.
- If courts disagree about property damage AND ignore the pollution exclusion, what is the period of damage? According to scientist, a maximum of three days without human intervention. (Remember, there is generally a 72-hour deductible.)
- If CP 01 40 attached, there is no question that there is no coverage.
Ultimately and overall, there is no Business Income Coverage.
Let's go to the policy and look at the wording in regard to civil authority (slightly abridged):
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…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 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.
What are the requirements for there to be coverage? Some look very familiar:
- There must be a covered “cause of loss." The damage, if there is any, is excluded by either the pollution exclusion or the CP 01 40.
- Access to the area must be prohibited by the civil authority. You can still get into the area you just can't go into the building (maybe).
- The property damage must have occurred within 1 mile of insured's premises.
- The civil authority must prohibit access due to dangerous physical conditions. Is it the property or the people that might lead to a civil authority decree? This is a biological condition not a physical condition.
- There is a 72-Hour “deductible."
What is the result of these requirements? There is likely no coverage.
Dependent Property Coverage
Before we look at the coverage, let's first define what qualifies as a dependent property. Dependent properties eligible for coverage in the business income form include:
- Buyers (ISO terminology - Recipient Locations);
- Suppliers (ISO - Contributing Locations);
- Providers (ISO - Manufacturing Locations); and
- Drivers (ISO - Leader Locations).
Let's review the language from one of the four endorsements:
A. 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 "dependent property" at the premises described in the Schedule caused by or resulting from a Covered Cause of Loss.
Note the common requirements found in this language. There must be direct physical loss or damage and the damage must be from a covered cause of loss. Given the similarities, how does this coverage respond? Applying the same reasoning as that found in the other two sections, there is no coverage.
The Moral of the Story
In the business income policy, with or without the CP 01 40, there is no coverage – unless:
- Courts ignore the meaning and reality of property damage;
- Courts ignore the pollution exclusion (in the absence of the CP 01 40); or
- Governmental authorities intervene.
Even if coverage is found – there is generally a 72-hour deductible. Many studies stated that the virus doesn't live in the air on surfaces beyond that amount of time.
Here is the final reality, is it the property or the people that is the problem? Is this a biological issue or a property damage issue? The commercial property policy is not designed to cover biological issues, it is for property issues.
To end this article, given the policy wording and requirements, there is no coverage for a business income loss resulting from the coronavirus. But let me give this final warning – if the insured wants to make a claim, do it and let the carrier decide. However, if the insured is just asking your opinion as to whether coverage exists, you can give it. But don't advise against filing a claim, simply say you don't think it's covered based on policy wording, but that you will still file a claim if the insured wants you to do so.
Last Updated: July 28, 2020