The Next Level of Business Income Coverage
November 2011
A critical provision of most business
income and extra expense forms is that, for coverage to apply, the
proximate cause of income loss must be due to direct damage at scheduled
premises.
by Timothy J. King*
Albert Risk
Management Consultants
While this concept may seem intuitive, consider the following
example for which coverage would be expected.
Claims Scenario
A large office building suffers damage during a late summer hurricane.
Although the damage to the building is minimal, the tenants cannot
occupy the building following the loss. The building takes 30 days
to restore, during which time the owner suffers a loss of rental
income. The area surrounding the building also suffers significant
damage, and local authorities prohibit access to the building (and
the surrounding area) for 60 days following the storm. The building
owner submits a claim to recover the lost rental income lost for
all 60 days.
After evaluating the claim, the insurer states that, because
damage to the surrounding area is not an "insured premises," there
would not be coverage for this lost income under the policy, presumably
for days 31 through 60. Somewhat discouraged, the owner is nonetheless
hopeful that at least the loss of income from the first 30 days
when his building was under repair would be paid.
However, the insurer goes on to assert that, regardless of the
damage to the building, tenants would still not have had access
to the building, and the income loss would have been the same whether
the building was damaged or not. The insurer further explains that
a property policy is designed to make the insured whole (citing
the principle of indemnity). By paying for
any of the lost income, the
building owner would be better off because the damage to the surrounding
area would still exist even if the damage to the building had never
occurred. The insurer then denies the entire business income claim.
While policy provisions may dictate whether the insurer can make
such an assertion, it is nonetheless a conceivable scenario. So,
what can be done to ensure that the building owner has sufficient
coverage if such a loss occurs?
Civil Authority Introduction
When civil authority coverage is included within business income/extra
expense insurance forms, income losses arising as a direct result
from actions of local police, fire, etc., may be covered. Orders
made by civil authority must be the cause of the
lack of access to insured premises (or the reason that normal operations
cannot continue) due to damage caused by a peril covered under your
policy. There must be an act of civil authority for coverage to
apply; blocked access to a location alone is insufficient to trigger
coverage. (See section on ingress/egress below.)
The initial solution to the claims scenario above may now appear
obvious. Civil authority coverage (or endorsement) is provided under
most insurer business income and extra expense cover forms, and
the insured would be properly covered. However, the terms of civil
authority coverage may be too restrictive to grant an acceptable
amount of coverage for all policyholders. Four limiting provisions
under standard Insurance Services Office, Inc. (ISO), civil authority
coverage should be completely understood and potentially amended
for your specific situation.
- The proximity requirement stipulating that the
civil authority actions must occur within one mile
of the "insured premises"
- The maximum period that can be collected is
limited to 30 days (after a 3–day deductible).
- Courts have held that access to the premises
must be completely prohibited and not just impaired/limited
in order for coverage to apply.
- There must be damage to property by a covered
peril.
Potential Enhancements
Not every business owner has a compelling need to expand beyond
the standard coverage, but actions of civil authority can nonetheless
have a dramatic impact on income following a catastrophic loss.
If, after evaluating the potential for loss, there is a higher than
normal civil authority exposure, adding ISO form CP 15 32 "Civil
Authority Changes" (or similar) should be considered. This endorsement
allows an insured to expand the mileage radius away from its premises
for which civil authority action will trigger coverage and allows
an increased period for which coverage will apply beyond the standard
30 days. Some insurers will also provide a strict dollar limit of
civil authority coverage that is not subject to a specific time
limit.
Another important consideration to the standard civil authority
coverage is to amend language so that coverage will apply when access
to the insured premises is simply "impaired" and not "denied" or
"prohibited" by actions of civil authority. "Impaired" policy language
considers the broader impact of a civil authority's action in the
surrounding area and does not restrict coverage if access to the
premises is impossible. Typically, this improved language is available
on larger manuscript policies.
Finally, civil authority will only apply if it was caused by
a loss that is otherwise covered under the property policy. Following
the terrorist attacks of September 11, 2001, there were numerous
examples of claims filed by businesses that were dependent on airports
being operational. After the federal government suspended air travel
for an extended period, many of these businesses filed business
income claims due to the act of civil authority. However, these
actions, while certainly the result of the threat of further terrorist
attacks, did not follow a covered loss to the surrounding area (the
airport). Therefore, these claims were denied. This condition emphasizes
the need to not only ensure that catastrophic loss to windstorm,
flood, and earthquake losses are covered but also that civil authority
coverage is included when these perils are added to a standard form
via endorsement. Sometimes insurers will specifically exclude civil
authority coverage when adding certain catastrophic perils.
Ingress/Egress Coverage
Some insurer forms also separately provide protection for loss
of income due to a lack of ingress and egress to/from insured premises.
Like civil authority coverage, ingress/egress coverage is designed
to pay for the loss of income triggered by physical loss or damage
caused by a covered peril to third-party property that prevents
or hinders ingress to or egress from the insured's business. However,
an act of civil authority is not needed to trigger ingress/egress
coverage. Any evaluation of the terms and conditions of civil authority
coverage should be accompanied by a similar review of ingress/egress
coverage as well.
Conclusion
When evaluating potential property and business income loss scenarios,
it is important to consider situations in which an off-premises
event causes direct financial harm to your business. Having proper
coverage for civil authority and ingress/egress can help lessen
the potential for portions of a property claim going uncovered.
*The
Albert Risk
Management Consultants claims management team contributes articles
on claims topics. You can reach Timothy King at .
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