Summary: Following any major catastrophe there are invariably many businesses that are affected by interruption of business activities. Aside from those businesses that have direct physical damage losses, there are also losses due to supply chain disruptions from affected manufacturers, distributors, suppliers, dependent operations, tiered operations, retailers, and the list goes on and on. Most major catastrophes affect the economy of not only the area where the damage occurred, but can sometimes affect the entire state or even the country as a whole. Such is the potential case with the Baltimore Francis Scott Key Bridge collapse.
Our article, Baltimore Bridge Collapse – A Look at Coverage Implications took a broad look at exposures, potential liabilities and coverage implications of that catastrophic event. Here we look at just business interruption from contingent and non-contingent entities.
Business Interruption
First, we look strictly at business interruption coverage as provided in the standard ISO policies. Commercial property policies provide for business income and/or extra expense losses as a result of direct physical damage to covered property from a covered cause of loss under the policy. For example, a building is damaged by a lightning strike that sparked a fire and the building will need to be gutted and rebuilt. The business income coverage with extra expense would provide for loss of income during the "period of restoration", following a 72-hour waiting period deductible from the time of direct damage. Extra expense coverage would be available for increased expenses that reduce the time for the building to be gutted and rebuilt. This might include the extra expense for overnighting parts, or expediting delivery of building materials, as examples. The key here is that the extra expense must result in reducing the amount of time needed to restore the property from what it would have been without those extra expenditures.
But what happens if there is no direct physical damage to the insured's building, yet the damage that occurred elsewhere resulted in an insured's loss of income from other factors, such as the insured or others not having access to their business, supplies not being able to be delivered to the business, the business not being able to export or deliver their product, or supply constraints, just to name a few. Perhaps some of these circumstances can be overcome at by alternative means, such as changing delivery methods or taking alternative routes, but those methods may take additional time or increased expense to implement.
Civil Authority
Business income policies provide what is typically coined 'ingress/egress' coverage, titled Civil Authority coverage in the ISO forms. This coverage applies if there is property damaged from a covered cause of loss that is off the insured's premises. Limited coverage is provided for up to four weeks if access to the insured's property or the surrounding area within one mile is prohibited by civil authority for any of three reasons: 1) because of dangerous physical conditions due to the damage; 2) if there is a continuation of the covered cause of loss that caused the damage; or 3) to grant the civil authority unimpeded access to the damaged property. The coverage begins 72 hours from the time the civil authority action is taken and continues for the longest period of either when the four weeks is up or the civil authority coverage ends.
There are two important keys to applying this coverage; first, that there must be physical damage from a covered cause of loss, and second, that access must be prohibited by a civil authority.
The damage must be physical and tangible. This was clearly established by the findings of numerous court cases based on prohibited access to establishments during Covid-19 shutdowns.
The physical damage cannot be at the insured's premises, but access to the insured's premises within a mile of the surrounding area must be prohibited. Using a standard desk reference, Merriam Webster defines prohibit as:
1: to forbid by authority : ENJOIN
2 a: to prevent from doing something b: PRECLUDE
Where action of a civil authority merely hindered access to the covered premises, without completely prohibiting access, federal courts have held that such action is not covered. Therefore, if there is an alternate route that can be taken, or a different mode of transportation used to reach the insured's premises, regardless of inconvenience of time or expense, the civil authority coverage will not apply. This may be the case for a number of businesses affected by the temporary closure of the Baltimore port and loss of the Key Bridge. Those with standard policies will likely not be eligible for civil authority coverage because alternate routes are available, and other transportation means can be utilized, albeit these options may be more time-consuming and expensive.
Dependent Properties
Two coverage options exist for business income from dependent properties:
- Business Income from Dependent Properties – Broad Form, CP 15 08
- Business Income from Dependent Properties – Limited Form, CP 15 09
These endorsements are used to provide coverage for loss of business income due to the necessary suspension of the insured's operations as a result of loss by a covered cause of loss to dependent property. Dependent property is that property not owned, operated, or controlled by the insured on which the insured is dependent in any way for continuation of the insured's normal business operation. Coverage does not apply if the only loss to dependent property is loss or damage to electronic data.
Dependent properties are locations that the insured relies on to: (1) deliver materials or services to the insured or to others for the insured's account (a contributing location); (2) accept the insured's products or services (a recipient location); (3) manufacture products for delivery to customers of the insured under contract of sale (a manufacturing location); or (4) attract customers to the insured's business (a leader location).
Each location that is to be covered as a dependent property must be scheduled on the endorsement or on the declarations. The definition of dependent property clearly states that services provided by a contributing location do not include utility services such as water, communications, or power supply. Communications services include services providing Internet or electronic network access. Questions have arisen as to whether the Key Bridge could be a dependent property, based on businesses' reliance on it. This would not apply to a transportation mode, and it is doubtful that a company would schedule the bridge as a dependent property.
The 2012 revision added coverage for secondary dependencies. For secondary contributing locations, coverage is available for loss of business income due to a suspension of operations as a result of direct physical loss or damage at a secondary contributing location. The damage to the secondary contributing location must cause a partial or complete interruption of the materials or services provided by the dependent property and result in a suspension of operations. A secondary contributing location is not identified in the schedule, not owned or operated by the contributing location identified in the schedule, and delivers materials or services to the contributing location.
For secondary recipient locations, coverage is available for loss of business income due to a suspension of operations as a result of direct physical loss or damage at a secondary recipient location. The damage to the secondary recipient location must result in partial or complete interruption of the acceptance of the insured's material or services by the dependent property.
The Key Bridge would not qualify as a secondary location or a secondary recipient location, as it was simply a means of transport, and did not deliver or accept any materials or services.
Coverage under the dependent property endorsements is provided during the period of restoration, which is the time it should take the dependent property to effect repairs or restoration with reasonable speed and similar quality and resume normal operation. The period of restoration does not refer to any additional time it takes the insured to resume normal operations after the dependent location has resumed its normal operations.
The current form includes a time deductible in that the period of restoration begins 72 hours after the time of direct physical loss or damage caused by or resulting from any covered cause of loss at the premises of the dependent property. The period of restoration does not include any increased period required due to the enforcement of any ordinance or law governing repair, reconstruction, or pollution testing or cleanup. The expiration of the policy does not cut short the period of restoration.
CP 15 08 10 12 and CP 15 09 10 12 are used under different circumstances. The broad form version (CP 15 08) is used to provide coverage subject to the same limit of insurance, coinsurance percentage, and coverage options as is found on the business income (and extra expense) coverage form, CP 00 30 10 12, or the business income (without extra expense) coverage form, CP 00 32 10 12. The limited form version of business income coverage from dependent properties (CP 15 09) is used when direct business income coverage under CP 00 30 or CP 00 32 at the insured's own premises is not provided or when the limits of insurance selected by the insured for the dependent properties differ from the direct business income limit of insurance or differ among the various dependent properties themselves.
Both endorsements are subject in other details to the provisions of business income coverage form CP 00 30 or CP 00 32. Both endorsements also provide a small amount of coverage for business income loss stemming from covered damage to miscellaneous locations—up to .03 percent (three-one-hundredths of one percent) of the limit of insurance (on the limited form, .03 percent of the sum of all the limits) that applies for each day's suspension of operations due to loss arising from any one location. These miscellaneous locations do not include roads, bridges, tunnels, waterways, airfields, pipelines, or any other similar areas or structures. This additional coverage does not apply to secondary contributing or secondary recipient locations.
Neither of these endorsements may be used with the agreed value option of form CP 00 30 or CP 00 32.
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