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By: Shawn Bingham
Over the past couple weeks, our screens have displayed images of anguish and anger in reaction to the tragedy in Minneapolis and the related spectrum of issues. Some of these images show extensive damage to business property, raising concerns whether the businesses can afford to continue operating. Various curfews and other government orders are also affecting businesses. Some estimates anticipate property damage and business losses in the billions of dollars. How might commercial property insurance respond to the expected flood of claims?
Most such policies cover “direct physical loss of or damage to Covered Property” at the insured premises “caused by or resulting from any Covered Cause of Loss.” The covered causes of loss are set forth in a special “Causes of Loss” coverage form, which may provide coverage for “all risks” or name covered perils. Even where a policy does not cover all risks, damages resulting from riot, civil commotion, or vandalism are often named perils. But if the damage is carried out by employees or agents of the insured, it may be excluded as a “dishonest or criminal act” done by the insured.
In addition to property damage, commercial property policies also insure against the loss of business income. The typical form covers suspension of operations that results from “direct physical loss of or damage to” the insured property from a “Covered Cause of Loss.” If a store window is broken during a riot and the inventory is looted, causing the store to cease operations temporarily, the resulting loss of income may be covered.
What if a business has not sustained damage to its property, but lost income because it shut down in compliance with local government orders, such as curfews? Such losses would not be covered under the typical policy because they do not result from direct physical loss of or damage to property. In addition, most policies exclude loss or damage caused by compliance with a governmental “ordinance or law” that regulates the “use” of the property, which might apply to a curfew mandate.
Under the circumstances, business owners and insurers should review the property policy’s civil authority coverage. Commercial property policies may cover business income losses that result when a civil authority prohibits access to insured premises because of damage to neighboring property that does not belong to the insured.
This coverage is specific to the affected business and would not apply to a general curfew that affects all businesses within a municipality, or to business interruption claims where the government has blocked access to the property simply as a crowd control measure. For example, in Syufy Enters. v. Home Ins. Co., 1995 U.S. Dist. LEXIS 3771 at *5, 1995 WL 129229 (1995), a theater chain sued its insurer under a business interruption policy for income lost due to compliance with a dusk-to-dawn curfew imposed by the cities of Los Angeles, San Francisco, and Las Vegas following the Rodney King protests. The theater chain argued that the losses should be covered under the “civil authorities” provision of the policy because the cities had prohibited access to the theaters. The court rejected these arguments and found no coverage because the civil authorities had merely imposed a general curfew. They had not specifically blocked access to the business because of damage to adjacent properties.
One of the key requirements to establish that a property insurance policy covers damage or loss is damage to property. Physical loss or damage caused by, for example, “rioting,” would likely be covered, but business losses that result only from a general environment created by the protests, or generally applicable government action to manage the protests, are unlikely to be covered.
In areas where the National Guard was called up, or where President Trump actually deploys military forces, policyholders and insurers (and courts) may be analyzing policy language that excludes:
Even where a loss is covered, other policy provisions, such as deductibles, waiting periods, and conditions, will affect the availability and extent of coverage for the loss. For example, urban small businesses have been among the hardest hit in the recent protests. These businesses often carry higher deductibles for property damage and longer waiting periods for business interruption coverage and are usually less able to sustain these costs than large chain retailers.
Likewise, all insurance policies have numerous conditions to coverage. For instance, commercial property policies may have a “Protective Safeguards” endorsement that requires the insured to maintain protective devices, such as sprinkler systems, security systems, and fire alarms. Where a policy has such an endorsement, failure to install and properly maintain such systems is typically a condition precedent to coverage. Thus, where a policy requires functioning safeguards, coverage for damages resulting from civil disturbance, such as property damage, vandalism, or looting might depend on whether the business met these requirements.
If you have questions or would like more information, please contact Shawn Bingham at [email protected].