Business Interruption Coverage vs. Civil Authority Coverage
CBI’s November update of COVID-19 business income coverage rulings is available here.
Businesses of all types have filed claims with their insurers seeking to recover lost business income resulting from COVID-19 lockdown orders. It may seem curious that nearly every coverage ruling so far has discussed standard business interruption coverage while few explore the intriguingly entitled Civil Authority coverage. After all, a pandemic lockdown order certainly sounds like it involves an action of a civil authority.
So, why haven’t policyholders steered their claims toward Civil Authority Coverage? Let’s take a look.
Standard Business Interruption Coverage
Under standard business interruption coverage, the insurance company promises to pay for loss of business income due to a slowdown or stoppage of business operations at an insured location if:
- The suspension was caused by direct physical loss of or damage to property at an insured location; and
- The loss or damage was caused by a covered cause of loss.
Civil Authority Coverage
Under the Civil Authority coverage, the insurance company promises to pay business income loss due to the prohibition of access to an insured location if:
- The prohibition of access was caused by an action of a civil authority;
- The civil authority acted in response to damage to property away from but within 1 mile of the insured location; and
- This damage was caused by a covered cause of loss.
The most obvious difference between these two coverages is that standard business interruption coverage applies if the loss or damage is at the insured location while Civil Authority coverage applies if the damage takes place away from the insured location. While this difference may be important for selecting the right coverage for loss events such as a fire or collapse, for a pandemic the distinction is less relevant because the same conditions likely exist at the insured location as exist at locations in the surrounding area.
While both coverages might be available, policyholders would prefer to position their claims for business income loss under standard business interruption coverage rather than Civil Authority coverage for a few reasons.
First, standard business interruption coverage offers far greater limits than are available under Civil Authority coverage. While standard business interruption coverage may cover business income losses incurred for up to 12 or even 24 months, Civil Authority coverage is often limited to as few as 3 or 4 weeks. Given that we are approaching our 9th month under some sort of lockdown order, the coverage with the longer period has obvious appeal.
Second, Civil Authority coverage is only available if the policyholder can point to “damage to property”. Standard business interruption coverage requires a showing of either “physical loss of or damage to property”. While policyholders have often struggled to convince courts of a distinction, this alternative of “physical loss” implies standard business interruption coverage encompasses something broader than the more limited “damage to property” trigger contemplated under Civil Authority coverage.
Third, Civil Authority coverage responds only if access to the insured location has been prohibited. Standard business interruption coverage responds to a necessary slowdown or cessation of business activity at the insured location. It would seem any prohibition of access would necessarily slow or (more likely) stop business activity at the location. In contrast, business activity may have slowed or stopped sufficiently to trigger standard business interruption coverage even if access to the insured location remains permissible.
On the surface, Civil Authority coverage sounds like the natural go-to for policyholders seeking coverage for business income losses from COVID-19 lockdown orders. A closer examination reveals Civil Authority coverage is narrower than standard business interruption coverage with respect to key coverage issues and offers far less protection. Accordingly, we should expect standard business interruption coverage will remain the focus of disputes between businesses suffering COVID-19 losses and their insurers.
Note: This analysis references ISO’s CP 00 30 10 12. Always read the policy for the exact wording of coverage.
