Business Income Insurance and COVID-19…What If There IS Coverage?

On March 20, I published this article:

“Business Income Insurance…Does It Cover Coronavirus Shutdowns?”

It explains why I believe that there is likely little or no coverage under the ISO CP 00 30 business income form for business income losses attributed to the COVID-19 pandemic. But let’s say hypothetically that I’m wrong or that a court ultimately decides that there IS coverage.

There are two main sources of business income coverage in the ISO CP 00 30 form. The first primary source arises if YOUR business is shutdown or curtailed by a covered peril due to direct physical loss to property on your premises. For the purposes of this article, we’ll say that the existence of the coronavirus on property at the premises can be proven and that it is deemed to be direct physical loss, triggering the insuring agreement in the form, and that coverage continues because there is no specific exclusion that applies in the CP 10 30 Special Causes Of Loss form.

The second additional source of business income coverage in the ISO CP 00 30 arises from an order of civil authority that prohibits access to the area where your business is located because of property “damage” (not necessarily “direct physical” damage) to neighboring premises within one mile. In the article cited above, I explain why a literal reading of the policy language makes that highly unlikely, but let’s pretend that there is proven property “damage” by viral contamination at neighboring premises AND that’s the reason for the governmental order. In other words, with regard to the rationale for the prohibited access, the order is based on property damage and not on minimizing the opportunity for spreading the virus.

So, now let’s review the CP 00 30 on the basis that there IS coverage. The question is, how much coverage? Is there coverage for the duration of the government mandated shutdown or curtailment? Is there going to be as much coverage as business owners and politicians think? In the CP 00 30, the answer to these questions is almost certainly, “No.” Here’s why.

First of all, “business income” is effectively defined as follows:

Business Income

Business Income means the:

a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and

b. Continuing normal operating expenses incurred, including payroll.

Many people think that “business income” refers to revenue. Not so. Business income is the sum of the profit and any continuing expenses that likely would have been earned if there was no shutdown or curtailment of operations.

How long does payment for the loss of business income last? Here is the applicable policy language:

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.

The key term in this insuring agreement is the “period of restoration.” This term is defined in the form as follows:

"Period of restoration" means the period of time that:

a. Begins:

(1) 72 hours after the time of direct physical loss or damage for Business Income Coverage; or

(2) Immediately after the time of direct physical loss or damage for Extra Expense Coverage;

caused by or resulting from any Covered Cause of Loss at the described premises; and

b. Ends on the earlier of:

(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or

(2) The date when business is resumed at a new permanent location.

Note that coverage does not begin for 72 hours and it usually ends when the property could reasonably be “repaired” or remediated. According to the experts, the coronavirus can be cleaned with soap and water or other disinfectants. For most businesses, the viral contamination can probably be cleaned from surfaces easily within 3 days. If so, at that point, there is no longer any “damage” and, thus, no coverage is actually triggered.

It's possible that it could take more than 3 days to disinfect HVAC systems (or the 72 hours could have been optionally reduced) but, again, according to the experts, it’s believed that the lifespan of the virus is probably no more than 3 days. So, even if the businessowner did nothing, the damage would remediate itself before the business income coverage begins.

If not, we’re still looking at only a few days of coverage for most businesses. The length of the governmental shutdown or curtailment order is immaterial for this primary coverage that is triggered by direct physical loss on the insured premises.

That brings us to the Additional Coverage – Civil Authority in the CP 00 30….

As stated earlier and in my prior article referenced above, I don’t believe a literal reading of the civil authority form language reveals that coverage applies to the COVID-19 pandemic. If you examine this coverage historically, it was introduced for area-wide catastrophes like tornados and hurricanes where government authorities prohibit access to entire neighborhoods and business districts because of damage (e.g., downed power lines) that creates a life safety danger.

That’s why the form language requires that the civil authority prohibits access to the “area” where the damage exists and that such prohibition is the result of the damage itself and not for the purpose of minimizing the transmission of a communicable disease. The coverage is not triggered by orders that prohibit access to specific businesses, but to the general area where those businesses are located. This is simply not the case with the governmental orders we’ve seen so far, even the ones that include a reference to “damage,” most likely at the insistence of an attorney familiar with policy language.

However, let’s once again pretend that the civil authority coverage IS triggered. The coverage that is available is governed by this language in the ISO form:

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.

After the 72-hour waiting period, the business has a maximum period of recovery of “actual loss sustained” of 4 weeks. In earlier editions of this form that may still be used by some insurers or in some non-ISO forms, this time period might only be 2 weeks. There is certainly not coverage for anything beyond that period of time and, in the case of coverage under the primary source of business income coverage for direct physical damage on the insured premises, there is almost certainly far less coverage.

The bottom line is, even if someone can make a far-fetched case for coverage under the ISO form language, there is still very minimal coverage because this is not the type of loss scenario contemplated by this type of coverage.

You can read this and other COVID-19 related articles on my blog at www.InsuranceCommentary.com.