Often Misunderstood Business Interruption Coverages

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  • 22 Jul 2015
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Interruption by Civil Authority; Mandatory Evacuations; Ingress/ Egress; Off Premises Power: Is there coverage? It depends.

from the Willis Group

With the current issues that surround the cities of Baltimore (riot and civil commotion, civil authority, ingress/egress), Houston (flooding, ingress/egress, mandatory evacuations), Oklahoma/ Texas (tornado damages, service interruption, ingress/egress), insureds need to understand their policies even more when their property does not sustain physical damage.

Coverage for Time Element loss may still be available. Insureds need to review their policies if their operations are affected by covered perils (riot and civil commotion, flood, tornado, wind) that result in civil authority mandates, ingress/egress and service interruption issues that may have affected their property. We explore below some important but often misunderstood property Business Interruption coverages or coverage extensions typically found in most commercial property insurance policies. PLEASE READ YOUR OWN POLICY FOR COVERAGES THAT MAY APPLY IN YOUR CIRCUMSTANCES.

CIVIL OR MILITARY AUTHORITY

How does it work?

  • Must be an order of civil or military authority that Prohibits access to an insured location…
  • …as a result of physical damage of the type insured at the location suffering the Time Element loss

AND

  • Damage must occur within a five-mile radius of the insured location suffering the Time Element loss

Then, coverage is afforded per the Time Element policy provisions subject to policy deductible for 30 consecutive days.

Example: A large chemical plant has an explosion with a resultant hazardous chemical release. The facility is within the five-mile radius of your apartment complex. The local civil authority evacuates the entire area and prohibits access to your building for the next 10 days until the chemical release is deemed harmless. There is no physical damage to your property other than the lack of access in compliance with the civil authority order. The resultant Time Element loss is covered subject to policy deductible and any sub-limits that may apply.

PROTECTION AND PRESERVATION OF PROPERTY TIME ELEMENT (MANDATORY EVACUATION FROM IMPENDING HURRICANE OR FLOOD)

How does it work?

Policy will provide coverage for 48 hours before and 48 hours after the insured first taking reasonable action for the temporary protection and preservation of property insured by the policy, provided such action is necessary to prevent immediately impending insured physical loss or damage to such property.

This will be subject to the deductible provisions that would have applied had the physical loss or damage happened and provide limited Time Element coverage (96 hours) if the hurricane did not hit or the flooding did not materialize. However, the deductible would be applied as if it were a hurricane or flood (percentage wind deductibles and or higher flood deductibles).

Example: A hurricane is bearing down on Virginia Beach where you have a large apartment complex. It is predicted to pass through Virginia Beach on Wednesday at 12:00 PM. A day before, Tuesday at 12:00 PM (24 hours prior to storm predicated to hit), you board up windows and sand bag doors in anticipation of the storm. However, on Wednesday, the storm turns and heads back out to sea. Virginia Beach is spared and no damage is sustained at all. The above coverage will look at any Time Element loss that was incurred starting Sunday at 12:00 PM (48 hours prior to taking initial action) to protect and preserve your property from impending damages. However, one must factor in the applicable deductible as if the storm had hit.

INGRESS/EGRESS

How does it work?

  • Must have interruption of the insured’s business due to
    • Partial or total physical prevention of ingress or egress from an insured location…
    • …whether or not premises of the insured is damaged
  • Provide that such prevention is a direct result of physical damage of the type insured to property of the type insured

However, there is no coverage for:

  • Lack of incoming service consisting of electric, fuel, gas, water, steam refrigerant, sewerage and voice, data, or video (these services are covered under Service Interruption coverages)
  • Picketing or other action by strikers except for physical damage not excluded by this
  • Loss caused by terrorism

Then coverage is afforded per the Time Element policy provisions subject to policy deductible for 30 consecutive days not to exceed a $10 million sub-limit. Note that Extended Period of Liability (EPL) coverage does not attach to Ingress/Egress coverage.

Example: Your apartment complex is located at the end of a road. There is only one road in and out, with multiple high rise buildings on either side of the road. One of the buildings is engulfed in fire. The road is closed for several weeks for firefighting and debris removal. Your apartment building is un-damaged and open, but no one can get to or from the building. Time Element coverage would be afforded until the road is reopened or 30 days of coverage or sub-limit of $10 million is exceeded, whichever is less.

OFF PREMISES SERVICE INTERRUPTION (SERVICE INTERRUPTION TIME ELEMENT)

How does it work?

  • Policy covers Time Element loss during a period of service interruption when the loss is caused by the interruption of incoming services consisting of…
  • Electricity, gas, fuel, steam, water, refrigeration or lack of outgoing sewerage services…
  • …by reason of any accidental event at the facilities of the supplier of such services within the policy territory…
  • …that immediately prevents in whole or in part the delivery of such services

There is a 24-hour qualifier for coverage to be afforded. Then the proper deductible would apply to a sub-limit of $10 million.

Note: No physical damage need be demonstrated for this coverage to be afforded as long as there was an accidental event (relay tripped causing black out, value shuts down to prevent incoming water, etc.).

The policy excludes loss or damage directly or indirectly caused by or resulting from Earth Movement and Terrorism regardless of any other cause or event, whether or not insured under this policy, contributing concurrently or in any other sequence to the loss.

The period of interruption starts when an interruption of specified services occurs (must exceed stipulated qualifying period, then loss is measured from when the service was first interrupted) and ends when service could be wholly restored and the location receiving such service could or would have resumed normal operations following the restoration of service under the same or equivalent physical and operating conditions.

Example: A fire occurs in a transformer located at the local power company, cutting electrical power to the shopping center. It takes seven days for a replacement transformer to be shipped, placed and hooked up before power is restored. The seven days without power exceeds the 24-hour qualifier; the loss is measured from the start of the power outage until power is restored.

This loss is subject to applicable policy deductibles and sub-limits. However, say the repairs to the transformer took only 22 hours. Power was restored to your shopping center one hour later. The total outage was only 23 hours. Since the 24-hour qualifier was not exceeded, there is no Service Interruption coverage.

For any questions regarding this article, or with risk management and insurance related queries, please contact Thomas Price at 804-527-2304 (thomas.price@willis.com), or John Wyatt at 804-527-2324 (john.wyatt@willis.com). You can visit Willis’ website at www.willis.com.

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