To analyze the company's income policy response to the division of an excluded event and a covered event, we start with the Business Income Insurance Agreement contained in the Insurance Services Office's (ISOs) business policy. The form reads : We will pay for the actual loss of business income that you maintain due to the necessary "suspension" of your "business" during the "recovery period". The "suspension" must be caused by direct physical loss of or damage to property in premises described in the declarations and for which a company income limit for insurance is shown in the declarations. The loss or damage must be caused by or caused by a covered cause of loss.
Several keywords and phrases in the insurance contract are important for all business income losses:
- Actual loss of business income;
- Shutdown of operation;
- Direct physical loss of or damage to property; and
- Covered cause of loss
In the article "Coronavirus: responds to business income", Big I, I addressed the lack of business income coverage for the government-sponsored closure due to COVID (so far courts seem to agree). As the linked article focused on the lack of coverage for COVID-related government suspension, an important topic was not detailed ̵
Both ISO-issued business income forms (CP 00 30 and CP 00 32) provide the same guidance on how the company's loss of income is calculated:
3. Loss determination
a. The amount of loss of business income will be determined on the basis of:
(1) The company's net profit before the direct physical loss or damage occurred.
(2) probable net profit of the business if no physical loss or damage occurred, but excluding net profit that would probably have been earned as a result of an increase in business volume due to favorable business conditions caused by the impact of the covered the cause of loss on customers or other companies;
(3) The operating costs, including labor costs, necessary to resume "business" with the same quality of service that existed just before the direct physical loss or damage; and
(4) Other relevant sources of information, including:
(a) Your financial records and accounting procedures,
(b) Invoices, invoices and other coupons; and
(c) documents, liens or contracts.
During this pandemic panic and the resulting government decided business stops, a key concept for calculating a company's loss of income is the determinant of loss determination found in 3.a. (2). Notice the wording, " The probable net income … if no physical loss or damage had occurred …." Obviously the business loses income during the government-sponsored closure, and as described in the linked article, there is no coverage for this loss of income.
But "what if" there is a loss during the period the business is forced to close by the government, one that would be covered under "normal" conditions? Is there coverage for this loss? How is it calculated?
Assume this scenario, the company was closed on the orders of the state, 30 days before the company could have reopened, it was damaged by a fire. It takes three months to repair the damage and resume operations. How will the necessary suspension affect the loss settlement?
According to the policy formulation, the loss is adjusted on the basis of "The probable net income …". The "probable net income" during the suspension from the government is zero.
Since " probably net income " is zero during the state forced closure, the insured is not liable for any compensation for that period. The unrealized income is the result of an excluded cause of loss. The effective immediate cause of the lost revenue during the first 30 days of this recovery period is the government shutdown – not the fire.
Effective immediate cause is the basis for payments of business income claims. What is the direct or effective immediate cause of the loss of revenue during the suspension period?
If the effective immediate cause of lost revenue is a covered cause of loss, the lost revenue is covered. If the effective immediate cause is an excluded cause of loss, there is no coverage for the lost revenue. If an excluded cause and a covered loss exceed, lost income is not reimbursed during the time that can be attributed to the excluded cause.
Calculations of business income are based on effective related cause. Was the closure of the company and thus the loss of income the result of a covered cause of loss or an excluded cause of loss? If a covered cause of loss occurs during a period created by an excluded cause of loss, the bearer is only liable for what could have been earned when the government closure ended.
In the absence of the fire, which is the covered cause of loss, the insured would not have earned any net income during the state shutdown, which means that the business income policy is not liable for income that would not have earned anyway . Revenue lost directly due to the covered cause of loss (fire) after the government decision was repealed can be replaced by business income – as the continued suspension is directly related to a covered cause of loss.
Business income payments are a function of effective related cause of loss. Why was the business not operational? Adjusting the damages differently would put the insured in a better position than they would have been if there was no covered loss – which is contrary to the principle of compensation around which property insurance is based.
The most important insurance news in your inbox every working day.
Get the Insurance Newsletter Reliable Newsletter