Riots and Loss of Business Income

From our friends at FC&S:

Not quite three years ago, violence broke out in Charlottesville Virginia, at a Unite the Right rally over the removal of confederate monuments. This weekend rioting broke out in several cities over the murder of George Floyd; shops have been broken into, windows have been broken, and significant damage has been done.

The deadly violence that erupted in Charlottesville, VA generated any number of comments and questions, not the least of which is what happens when businesses lose customers not just from closing their doors during an event, but in the aftermath when patrons may either be too afraid to frequent the area or are just simply put off by it and don’t want to be anywhere near it.

We anticipate questions once again around damages that have occurred during this time, so we are updating our article to reflect current form language. Unfortunately, violence can happen anywhere, anytime and can affect any type of business continuity, depending upon the circumstances and devastation associated with the violence.

So let’s take a look at what coverages are provided by the Businessowners and Commercial Property coverage forms for business income loss and civil authority actions.

Under the Businessowners Coverage Form, BP 00 03 07 13, the insuring agreement from the portion pertaining to business income states, “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 insuring agreement in the Business Income Coverage Form CP 00 32 10 12 states, “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.”

Both forms define “business income” as “net income (Net Profit or Loss before Income Taxes) that would have been earned or incurred if no physical loss or damage had occurred.” The policies provide for the loss of income only during the period of restoration, which is the period that begins seventy-two hours after the time of loss and ends when the property should be repaired or replaced with reasonable speed and similar quality or when business resumes, whichever comes first.

In both of the coverage forms, the policy insures against loss of business income only if the insured’s operations are suspended due to “direct physical loss or damage to property” at the insured premises. Absent physical damage, there is no coverage for suspension of operations caused by threats or fright. Therefore, when no direct loss is sustained, no business income loss is payable.

What about coverage for loss due to civil authority? For civil authority coverage to apply, there must be loss or damage to property other than at the described premises. Access to the area immediately surrounding the damaged property must be prohibited by civil authority as a result of the damage, and the insured’s described premises must be within a mile of the damaged property. The action of civil authority must be 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. If there is no damage to the property, only dangerous conditions, the coverage would not apply. Further, the damage must be at premises other than the described premises. For example, if there was actual damage to or on the roads that caused the sheriff to shut down the roads leading to the insured’s business; or the damage to premises on the same street as the insured’s business were damaged and the sheriff blocked off entry impeding access to the insured’s premises; then the civil authority coverage could respond to these actions (after the seventy-two hour waiting period), for four consecutive weeks. If such coverage applies, civil authority coverage provides for necessary extra expense beginning immediately after the time of the first action of civil authority that prohibits access to the described premises and ends at the earliest of either four consecutive weeks after the date of that action or when the civil authority coverage for business income ends.

Under both the BOP and the Commercial Property Causes of Loss – Special Form CP 10 30 09 17, “specified causes of loss” include (but are not limited to) loss from fire, explosion, aircraft or vehicles, riot or civil commotion. These perils would be covered causes of loss that could trigger the above described Civil Authority coverage.

 As for coverage for business income from loss of patrons because there was deadly violence in the area, that just simply doesn’t exist.