Especially for small businesses, these are uncertain times. Many employers may turn to their insurers to assist in the losses of business income. But without fortuity, is it covered?
Loss of Business Income (LOBI) coverage provides that the carrier will pay for actual loss of business income an insured suffers due to necessary suspension of operations during a “period of restoration.” The suspension of operations must be caused by direct physical loss of or physical damage to property at the premises on the policy caused by or resulting from a covered cause of loss. (Business Income Loss: COVID-19 and Direct Physical Losses) The standard formula for calculating business income loss applies: Net income that would have been earned or incurred absent the event plus continuing normal operating expenses actually incurred, including payroll.
For most policies, the insurance is extended to apply to actual loss of business income sustained when the scheduled premises is specifically prohibited by order of a civil authority as the direct result of a covered cause of loss to property in the immediate area of the scheduled premises. A covered cause of loss is typically defined as direct physical loss unless excluded or limited.
Without actual physical damage to a business’ property that leads to a municipality condemning access to a business, it is unlikely that a business could use civil authority coverage to recover loss business income … even if the government shutdown of a business is the reason for the lost income. The majority of legal interpretation of civil authority coverage pertains to weather events such as hurricanes or condemnations of property due to fire damage or sewage inundation. For example, government-mandated interruptions to a commercial airline’s business following the September 11, 2001 terrorist attacks were held not covered as they were not the direct result of damage to the airline’s covered premises.
Because civil authority actions directly impacting businesses have been so unpredictable in the past, they’ve typically not been insurable. Litigation surrounding this coverage increased in the late 1960s when businesses were interrupted by curfews imposed from civil rights riots. Courts interpreted the language narrowly, failing to find coverage where the civil authority action did not arise from physical damage. But courts also held that there was no coverage when the policy was silent about the physical injury trigger.
After 9/11, courts again began looking at civil authority coverage, but still, most courts refused to find coverage for the policyholder. Many businesses who lost income after the Federal Aviation Administration grounded flights and the evacuation of Manhattan looked to their insurance carriers to make up for the loss. Claimants were not limited to the areas directly affected by the attacks as the ripple effects from same were far-reaching.
A hotel in New Orleans, claiming lost business after a significant number of guests cancelled reservations due to the grounding, was denied coverage based on the fact that the civil authority order did not prohibit access to the hotel. Several other courts followed, finding that indirectly restricting or hampering access to business by a governmental authority did not result in a covered claim.
Whether a covered peril caused the order was also closely examined. In one case, the policy language provided that coverage would be extended if the order was the direct result of damage to adjacent premises. The court found that there was no coverage as the grounding order was the result of a future threat of terrorist attacks to locations not adjacent to the premises, and found there was no nexus between the order and a covered loss under the policy.
Generally, coverage for civil authority actually became more restrictive after the attacks as so many courts were narrowly interpreting specific parts of the policy language. These cases emphasized that the language of the governmental orders resulting in a business loss has a direct effect on whether there is coverage. As such, it is important to examine the language of the order alongside the coverage language.