Editor's Note: Mark Garbowski is anattorney in the Insurance Recovery group in Anderson Kill's NewYork office.

The federal government is in a partial shutdown, and whileessential functions are operating, certain areas such as nationalparks are completely closed.

See Related: From NAPSLO: Ben Stein on the Government Shutdown

While this partial shutdown does not threaten the validity offederal debt, some fear that a similar impasse regarding the debtceiling could trigger a partial or full federal default. Theseevents pose varied risks for businesses. A variety of insurance andother risk mitigation products may cover some losses.

Government Contractors

Depending on the nature of the services that a company performsfor the government, it may be possible and indeed necessary forgovernment contractors to buy special policies that cover thepotential elimination or disruption of an underlying governmentproject. For example, if a company is going to spend significantsums for a project whose only potential client is thegovernment—building, for example, an aerospace vehicle—it may bepossible to purchase a specialized policy that would protect thecompany in the event that the government cancels the program.

Whether a presumably temporary, partial shutdown would triggercoverage under any such policies currently in force of coursedepends upon the specific coverage grant, terms and conditions ofeach policy. By their nature such policies tend to be specificallywritten for particular risks, so there is very limited precedentand experience. In addition, insurance companies are usuallyreluctant to insure against ordinary business risks such as theloss of a client or the cancellation of a project. Absentcompelling circumstance such as the development costs for a spaceexploration or military project, it might be difficult to purchasesuch coverage, but when available in the appropriate situation itcan save a company.

Contingent Business Interruption

Companies that do not directly contract with the government canstill suffer a loss due to a shutdown. For example, the closing ofnational parks will affect tour companies, hotels and other travelbusinesses. The most likely source of coverage here would becontingent business interruption insurance, but again, there areobstacles to coverage.

Business interruption coverage is normally triggered by propertydamage to the policyholder's own property, and that is unlikely tobe applicable here. Contingent business interruption coverage canprovide coverage without physical damage to your own property, butalmost always requires physical damage to a third party whoseoperations are necessary to your business, such as an entity inyour supply chain. Typically, that party must suffer a physicalloss that would be covered if it happened to your business. Forexample, if an earthquake incapacitates a company's key supplier,contingent business interruption may kick in if the company inquestion itself has earthquake coverage. In the current impasse,the government is not shutting down operations because of aphysical loss but because of a political standoff, an occurrencenot covered by most business-income provisions. Still, it is worthchecking your coverage, as policies vary.

Political Risk Insurance

Since this is a political event, it is natural to considerwhether political-risk coverage might apply. Most companies in theUnited States that purchase political risk insurance do so to coverforeign political risks. In fact, the U.S. government has an agencythat sells insurance to U.S. businesses and other entities coveringinvestments and activities in 150 developing countries. Theseoverseas political-risk policies, whether sold by this governmentagency or in the private insurance market, usually cover risks suchas limits on currency conversion, appropriation of cash or assets,and political violence.

There is no reason why a U.S. business could not purchasepolitical-risk insurance for domestic contingencies. In fact, theaerospace example discussed above is a form of political-riskinsurance. Policyholders should be aware, however, that suchpolicies usually require a waiting period, often as long as 90days, before coverage is triggered. If the government action orpolitical situation does not last that long, there will often be nocoverage.

Other Insurance Possibilities

Other connections between insurance coverage and the shutdownare perhaps more attenuated. A company that suffers significantlosses due to the shutdown could face investor suits and shouldmake sure its D&O coverage is adequate for such a possibility.A federal contractor that loses government funding may be forced tolay off or furlough employees. Any such measure could give rise toa variety of employment-related claims, to which employmentpractice liability insurance (EPLI) may respond. Delayed EPAapprovals could increase the costs of ongoing environmentalremediation, which could lead to faster erosion of CGL limits forenvironmental claims. Finally, regarding the possibility of afederal debt default, the loss mitigation tool most likely toaddress such a possibility, however remote, is probably a creditdefault swap. Those instruments would typically pay after anyfailure to make a single due payment that lasts only three businessdays.

While insurance is far from certain to cover the negativeconsequences of a federal government shutdown, now is the time toreview your policies and find out, and to plan ahead for the nextpotential stand-off.