Author: Chris Boggs
Following a business-closing loss, insureds suffer two income loss periods. Obviously, income is lost during the period the business is shut down or slowed down because of the property loss. But less obvious is the fact that income is or may continue to be lost AFTER the operations resume.
Business income responds to the first loss period referred to as the “period of restoration" in the business income policy. The period of restoration begins 72 hours after the suspension of operations (unless the time period is endorsed down by attachment of the CP 15 56) and ends when the insured should return to operational capability (the ABILITY to operate at pre-loss levels). But the ability to operate at pre-loss income levels does not guarantee the insured WILL operate at the same income levels that might have been enjoyed had there been no business-closing loss.
The difference between the business income that could or should have been earned had there been no loss and the amount actually earned once the business is operational is the second loss period. Within the business income form this is referred to as the extended business income.
Visually, these loss periods look like this:
COVID-19 and the Two Loss Periods
Business Income / Period of Restoration / First Loss Period:
Given a clear interpretation of the business income policy language, COVID-19 business income claims do not trigger the policy to respond. Neither is there coverage for civil authority claims. Articles detailing the reasons these claims are not covered include:
Extended Business Income / Second Loss Period:
Because the business income coverage is not triggered, the extended business income protection is not triggered. Extended business income's “insurance agreement" requires a business income loss be paid before any payout can be garnered under extended business income. So initially, the answer is easy, when/if there is no business income payment/loss, there is no extended business income coverage.
Let's assume for sake of the argument courts decide presence of the coronavirus does create property damage, triggering the business income policy to respond. If this view is adopted, the primary question becomes, how long does “damage" from coronavirus last?
Why does it matter how long the virus lives or is viable? With this information, the end of the first loss period, the period of restoration, can be determined.
Business income payments end when the damaged property should be repaired or replaced. If Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America and similar cases are applied, the damage ceases to exist when the virus is cleaned up or is no longer viable (no longer dangerous). According to a University of Alabama study published in the New England Journal of Medicine, the maximum amount of time the virus can live on certain surfaces is three days – which is 72 hours. Most surfaces see the virus dying within 24 hours states the report.
The waiting period for most business income policies is 72 hours – so no business income payment is triggered. If/when there is no business income payment, there is no extended business income payment.
But let's add one more assumption. Let's assume the waiting period is reduced to 24 hours or even to a 0-hour waiting period by attachment of the CP 15 56. Business income payments are required for as long as the is virus is “causing damage" or can be proven to cause damage – two or three days maximum. Granted, the policy requires the insured to attempt to repair damage as quickly as possible (one day for cleaning), but that's irrelevant for this conversation.
If the business income section pays, is Extended Business Income coverage triggered? ISO's extended business income provision reads:
c. Extended Business Income
(1) Business Income Other Than "Rental Value"
If the necessary "suspension" of your "operations" produces a Business Income loss payable under this policy, we will pay for the actual loss of Business Income you incur during the period that:
(a) Begins on the date property (except "finished stock") is actually repaired, rebuilt or replaced and "operations" are resumed; and
(b) Ends on the earlier of:
(i) The date you could restore your "operations", with reasonable speed, to the level which would generate the business income amount that would have existed if no direct physical loss or damage had occurred; or
(ii) 60 consecutive days after the date determined in (1)(a) above.
However, Extended Business Income does not apply to loss of Business Income incurred as a result of unfavorable business conditions caused by the impact of the Covered Cause of Loss in the area where the described premises are located.
Loss of Business Income must be caused by direct physical loss or damage at the described premises caused by or resulting from any Covered Cause of Loss.
Of utmost importance is the point at which extended business income payments begin as enumerated in c.(1)(a) – when operations ARE resumed, NOT when they COULD be resumed. If the operation can't resume because the government has shut the business down, the operations haven't reached the point of “are resumed" yet. They are still idle even after the “damage" no longer exists. If there is a loss of income once they ARE able to resume operations, the argument could be made that extended business income will pay the loss of income from that point.
But the “However" in the last paragraph of the extended business income provision may limit or negate the amount of coverage for the additional loss once the business operations HAVE resumed. The policy won't pay for income lost as a result of unfavorable business conditions. Couple the government action with fear and the combination can or may result in unfavorable business conditions.
Put this all together, even if extended business income is triggered, the amount of payout should be negligible. Most likely, no circumstance will or can trigger an extended business income payment.
Last Updated: April 14, 2020