Author: Chris Boggs
City officials in Corpus Christi, Texas, recently announced a ban on the use of the city's drinking water. Reportedly between three and 24 gallons of an asphalt emulsifying agent leached into the water system due to "a recent backflow incident in the industrial district."
Several schools closed and store shelves quickly emptied of bottled water. Kids were thrilled and their parents waited in lines for water supplies to be restocked.
What are the business income insurance implications of this event, or any similar event? Do your insureds have coverage for any loss of income (certainly there is business income coverage in place) if the business cannot operate because of water contamination, frozen or otherwise impassable roads, or any other "indirect" factor causing the business to lose income due to closure or reduced traffic?
What the BI Policy Says
Four key coverage triggers found in the insuring agreements of both Insurance Services Office (ISO) business income forms (CP 00 30 and CP 00 32) and ISO's Businessowners' Policy (BOP) apply to such "indirect" losses. These business income coverage forms respond only when:
- The insured suffers a "suspension" of "operations;"
- Income is lost during the "period of restoration;"
- The "suspension" results from direct physical loss to property at the insured premises; and
- The direct physical damage is caused by a covered cause of loss.
(Note: An insuring agreement in any form is the broadest coverage is ever going to be – before endorsements.)
Five terms and concepts require explanation before digging deeper into the coverage question:
- "Suspension": ISO defines this to mean a slowdown or cessation of the insureds business activities;
- "Operations": Simply means the business activities;
- "Period of Restoration" (POR): Unendorsed BI forms define the POR as the period beginning 72 hours after the direct physical loss and ending when the property SHOULD be repaired or replaced. The timing and meaning of "should" is a whole separate discussion;
- Direct physical loss: While this seems self-evident, explanation is required. Direct physical loss means that the insured property (real or personal) was actually damaged; and
- Covered Cause of Loss: Means the direct physical loss is caused by an event or act specifically listed in or not excluded from the insured's policy (the attached cause of loss form).
To the 'Corpus Christi' Example
Compare the contaminated water incident in Corpus Christi to the four initial requirements. Is business income coverage available?
Assume, for sake of this discussion, an insured is unable to operate for three weeks as a direct result of the contamination; whether coverage might exist to reimburse their loss of income is based on the answers to several questions:
- Is there a suspension of operations? Yes, by definition, there is a cessation of business activities due to the water pollution;
- Is the loss within the period of restoration? For sake of the discussion, yes;
- Did the suspension result from direct physical loss to the insured premises? No! This is where the possibility of coverage ceases to exist. There is no damage to the insured premises so there is no business income protection available; and
- Was the suspension the result of a covered cause of loss? No! Backup (or "backflow" as characterized by the news reports) is generally not a covered cause of loss.
Based on the known facts, business income coverage is not available for an insured unable to operate because of this water ban. Any hope for coverage rests in additional coverages already extended by the policy or through endorsements to the policy.
Additional Coverages and Endorsements
At least three additional coverages or endorsements may alter the "no coverage" answer:
- Additional Coverage – Civil Authority;
- Dependent Property coverage; and/or the
- Utility Services – Time Element endorsement.
Essentially, the 'Civil Authority' additional coverage extends business income to the insured when any authority having jurisdiction (the civil authority) blocks or forbids access to the insured's property for a period of time. If such civil action results in a loss of business income, the loss is covered - even though there was no direct damage to the insured property.
However, isn't there always a "however" in insurance, there are three limitations on this extension of coverage:
- The damage leading the civil authority to forbid access must result from a covered cause of loss;
- The damaged property must be within one mile of the insured location; and
- Coverage ends after four consecutive weeks.
Given these requirements, this additional coverage grants no coverage to any Corpus Christi business unable to operate due to the water contamination. First, the backup (backflow) is not a covered cause of loss; and most businesses suffering loss are likely more than one mile from the incident.
Although Civil Authority extends business income protection to loss arising out of damage to buildings not directly insured by the policy, the coverage limitations preclude coverage in the example situation and others like it.
Dependent Property Endorsements
Remember, the unendorsed business income policy respond only when damage occurs at the premises listed in the declarations. But many businesses depend on external operations (those outside of their "family") in order to accomplish their goals. If these "outside" operations are unable to operate for some reason, the undamaged, and operational, insured business could suffer a loss (sometimes major) of revenue.
Businesses whose income depends on the existence of non-owned business operations have the option to insure those exposures by attaching Dependent Property coverage endorsements. Five dependent property endorsements trigger BI coverage when losses occur at an off-premises, unrelated location:
- CP 15 01 – Business Income From Dependent Properties – Limited International Coverage
- CP 15 02 – Extra Expense From Dependent Properties – Limited International Coverage
- CP 15 08 – Business Income From Dependent Properties – Broad Form
- CP 15 09 – Business Income From Dependent Properties – Limited Form
- CP 15 34 – Extra Expense From Dependent Properties
Like all other BI forms and endorsements, certain conditions must be satisfied before any of the five dependent property forms respond. Each form's insuring agreement (whether business income or extra expense is extended) requires:
- The insured to suffer a "suspension" of "operations;"
- That loss of income (or extra expense) be paid only during the "period of restoration;"
- The "suspension" to result from direct physical loss to property at the listed dependent premises (there is a provision for secondary dependencies); and
- The direct physical damage must be caused by a covered cause of loss that would be covered if it happened to the named insured.
If these requirements look familiar, they should, they are essentially the same triggers as those required for the insured's own business income coverage. Because the conditions are essentially the same, there is no coverage from any of these endorsements because conditions "3." and "4." are again violated.
Beyond the obvious issues with coverage conditions, there exists one definition that does not help any insured following a Corpus Christi-type loss, the definition of a "dependent property":
"Dependent property" means property operated by others whom you depend on to:
a. Deliver materials or services to you, or to others for your account (Contributing Locations). But any property which delivers any of the following services is not a Contributing Location with respect to such services:
(1) Water supply services;
(2) Power supply services;
(3) Wastewater removal services; or
(4) Communication supply services, including services relating to Internet access or access to any electronic network;
b. Accept your products or services (Recipient Locations);
c. Manufacture products for delivery to your customers under contract of sale (Manufacturing Locations); or
d. Attract customers to your business (Leader Locations).
Dependent property endorsements can provide protection against financial losses suffered by an insured caused by a loss occurring at a "buyer," "supplier," "provider" or "driver" (non-ISO terminology, but easier to remember) location. However, utility service suppliers are not considered dependent properties.
Dependent property coverage does not help the insured in Corpus Christi.
Utility Service – Time Element
For insureds in Corpus Christi, the last possibility for business income coverage is the Utility Services – Time Element (CP 15 45) endorsement. Again, certain conditions must be met before coverage applies:
- There must be a "suspension" of "operations;"
- The "suspension" must be at the described (insured) premises;
- The "suspension" must be caused by an interruption in utility services at that insured's premises;
- The interruption of service must result from direct loss or damage at the utility service's premises;
- The direct loss must be caused by a covered cause of loss (one that would be covered if it happened to the named insured); and
- The specific utility service must be a covered utility service. The insured can choose any or all of the following:
- Water supply plants;
- Waste water plants;
- Communication suppliers (including or excluding overhead transmission lines); and/or
- Power suppliers (including or excluding overhead transmission lines).
As before, contaminated water does not trigger this endorsement to extend business income coverage. While water supply can be a covered utility, there was no interruption of water supply (it was simply contaminated); and there was no physical damage to the water supply facility cutting off or interrupting the water supply.
Just Because There is Loss of Income…
Loss of income does not always trigger the business income policy. Business income coverage responds only when there is a "qualifying" event – meaning all policy conditions are met.
When the insured calls to ask, "I lost money because of (whatever they say); do I have coverage?" remember the key business income coverage conditions:
- There must a "suspension" of "operations;"
- The "suspension" must result from direct physical loss to property (either at the insured premises or elsewhere if the proper additional coverages and/or endorsements apply);
- The policy pays only during the defined "period of restoration;"
- The direct physical damage must be caused by a covered cause of loss (if off-premises property, the damage must be caused by a loss that would be covered if it happened to the insured); and
- All specific conditions applicable to any additional coverage or attached endorsement must be met.
Notice the use of the conjunction, "and." If any of these requirements isn't met, there is no coverage.
(End Note: Some carriers may have proprietary forms that provide some level of coverage for these types of loss. Further, some specific operations may "find" some level of protection from specialty endorsements (i.e. CP 15 05 Food Contamination), but even this may be a stretch).
Last updated: December 20, 2016