Our insured is a retail fish market located on Main St. On 12/31/01 a water main broke which flooded a number of businesses located on the opposite side of the street. Our insured did not suffer any direct physical loss to his building from the broken pipe. However, the city shut down the street for three weeks to repair the broken pipe, which caused an interruption of sales, resulting in a loss of income. The insurance company has determined that the cause of the loss was due to the pipe wearing out—therefore not considered a covered cause of loss—and denied the claim. My contention is the pipe burst causing the flood which in turn caused the city to shut the street for repairs. Therefore, the company should reimburse the insured for the loss of income due to the civil authority's action. Is the company correct in their decision to deny coverage?
Massachusetts Subscriber
The form you sent is very similar to the commercial property form with special causes of loss, CP 10 30 (06 95). In the situation you present, the company is denying the claim based on the wear and tear exclusion, which is exclusion B. 2. d. (1) and/or the rust, corrosion, etc., exclusion B. 2. d. (2) on the form you submitted. Our thinking is as follows:
First, exclusions B. 2. d. (1) and (2) are among the exclusions that end with the phrase "But if an excluded cause of loss that is listed in 2. d. (1) … results in a 'specified cause of loss' or building glass breakage, we will pay for the loss or damage caused by that 'specified cause of loss.'"
Second, you did not include the definition of "specified cause of loss" that is contained on the form in question. However, the form CP 10 30 includes water damage within the definition of "specified cause of loss." CP 10 30 defines water damage as "accidental discharge or leakage of water or steam as the direct result of the breaking apart or cracking of any part of a system or appliance (other than a sump system) containing water or steam." It appears that the pipe either broke apart or cracked, leading to a discharge of water, which would meet this definition of water damage. You need to check the policy in question before proceeding further. If it does not match this definition, the answer could change.
Third, the business income civil authority clause on the form you submitted states that coverage is triggered if loss or damage that is within the jurisdiction of the civil authority (the area where the pipe broke) is caused by a covered cause of loss.
Fourth, if points one and two above are consistent with your policy, water damage to buildings (and within the jurisdiction of the civil authority) would have been caused by the "breaking apart or cracking of…part of a system…containing water." Therefore, if water damage is a specified cause of loss in your form, and if the definition of water damage on the form conforms with item two above, we believe the business income by action of civil authority coverage should be triggered for your client.
Note, though, that if water damage as defined in two above is not in the form in question we would have to rethink this response.